10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended December 31, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-14331

Interstate Hotels & Resorts, Inc.

Delaware	52-2101815
(State of Incorporation)	(IRS Employer Identification No.)

4501 North Fairfax Drive, Ste 500
Arlington, VA 22203
703-387-3100
www.ihrco.com
This Form 10-K can be accessed at no charge through above Web site.

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share and purchase rights for Series A Junior Participating Preferred Stock, par value $0.01 per share	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes  þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes  þ No

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 for which the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes  o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K.  o

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 o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  o Yes  þ No

The aggregate market value of common stock held by non-affiliates of the registrant was $78,697,381 (based on the closing sale price of $2.59 on June 30, 2008 as reported by the New York Stock Exchange). For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant; such exclusion shall not be deemed to constitute an admission that such person is an “affiliate” of the registrant. The number of shares of common stock outstanding at March 15, 2009 was 32,019,920.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement relating to the Registrant’s 2008 Annual Meeting of Stockholders are incorporated by reference into Part III. We expect to file our proxy statement on or about May 1, 2009.

INTERSTATE HOTELS & RESORTS, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2008

INDEX

			Page
PART I
	Item 1.	Business		2
	Item 1A.	Risk Factors		14
	Item 1B.	Unresolved Staff Comments		29
	Item 2.	Properties		29
	Item 3.	Legal Proceedings		29
	Item 4.	Submission of Matters to a Vote of Security Holders		30
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		30
	Item 6.	Selected Financial Data		31
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		55
	Item 8.	Financial Statements and Supplementary Data		57
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		97
	Item 9A.	Controls and Procedures		97
	Item 9B.	Other Information		98
PART IV
	Item 15.	Exhibits and Financial Statement Schedules		99
Signatures				102
EX-10.12.3
EX-10.12.4
EX-10.14
EX-10.14.1
EX-10.15
EX-10.15.1
EX-21
EX-23.1
EX-31.1
EX-31.2
EX-32

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PART I

ITEM 1.   BUSINESS

Overview

We are a leading hotel real estate investor and the nation’s largest independent hotel management company, as measured by number of rooms under management and gross annual revenues of the managed portfolio. We have two reportable operating segments: hotel ownership (through whole-ownership and joint ventures) and hotel management.

Our hotel ownership segment includes our wholly-owned hotels and our minority interest investments in hotel properties through unconsolidated entities. Hotel ownership allows us to participate in operations and potential asset appreciation of the hotel properties. As of December 31, 2008, we wholly-owned and managed seven hotels with 2,051 rooms and held non-controlling equity interests in 18 joint ventures, which owned or held ownership interests in 50 of our managed properties. We manage all of the properties within our hotel ownership segment.

In our hotel management segment, we generate revenues from fees we receive for managing a portfolio of upscale, full-service and premium, select-service hospitality properties. We also generate revenues by providing specialized ancillary services in the hotel, resort, conference center and golf markets, which include insurance and risk management placed through a licensed broker, purchasing and project management, information technology and telecommunications, and centralized accounting functions.

A third reportable operating segment, corporate housing, was disposed of on January 26, 2007, with the sale of BridgeStreet Corporate Housing Worldwide, Inc. and its affiliated subsidiaries, which we refer to as “BridgeStreet.” The operations of BridgeStreet are presented as discontinued operations in our consolidated statement of operations and cash flows for all periods presented. Each segment is reviewed and evaluated by the company’s senior management. For financial information about each segment, see Note 10 to our consolidated financial statements.

As of December 31, 2008, we and our affiliates managed 226 hotel properties with 46,448 rooms and six ancillary service centers (which consist of a convention center, a spa facility, two restaurants and two laundry centers), in 37 states, the District of Columbia, Russia, Mexico, Canada, Belgium and Ireland. Our portfolio of managed properties is diversified by location/market, franchise and brand affiliations, and ownership group(s). We manage hotels represented by more than 30 franchise and brand affiliations in addition to operating 17 independent hotels. Our managed hotels are owned by more than 60 different ownership groups, including individual investors, institutional investors, investment funds, private equity firms and public real estate investment trusts or “REITs”.

In this report, we use the terms “we”, “our”, “us”, “Interstate” and the “Company” to refer to Interstate Hotels & Resorts, Inc. We were formed on August 3, 1998, as MeriStar Hotels & Resorts, Inc., when we were spun off by CapStar Hotel Company, which then changed its name to MeriStar Hospitality Corporation, which we refer to as “MeriStar”. We then became the lessee and primary manager of all of MeriStar’s hotels at the time of the spin-off. On January 1, 2001, in connection with the implementation of new REIT tax laws that permit subsidiaries of a REIT to lease the real estate it owns, we assigned the leases on each of the properties we were leasing from MeriStar to taxable REIT subsidiaries of MeriStar and entered into management contracts with those subsidiaries for each of the hotels owned by MeriStar.

On July 31, 2002, we merged with Interstate Hotels Corporation, which we refer to as “Old Interstate,” and were renamed Interstate Hotels & Resorts, Inc. The transaction was a stock-for-stock merger of Old Interstate into us, in which Old Interstate stockholders received 4.6 shares of our common stock for each equivalent share of Old Interstate. Our stockholders continued to own the same number of shares in new Interstate following the merger. The merger was accounted for as a reverse acquisition, with Old Interstate as the accounting acquirer, and us as the surviving company for legal purposes under our new name of Interstate Hotels & Resorts, Inc. Immediately after the merger, we effected a one-for-five reverse split of our common stock.

Going Concern

On March 12, 2009, our common stock was suspended from trading on the New York Stock Exchange (“NYSE”) and we face potential delisting by NYSE Regulation, Inc., pending an appeal scheduled on June 1, 2009, because we

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have failed to meet the continued listing standard regarding average global market capitalization over a consecutive 30 trading-day period of not less than $15 million. Our senior secured credit facility (as amended from time to time, which we refer to as the “Credit Facility”) includes a debt covenant requiring continued listing on the NYSE. Additionally, there is uncertainty as to whether we will meet one of the financial debt covenants regarding our total leverage ratio for our fourth quarter 2009 calculation period given the extremely challenging economic and operating environment which is depressing our current and projected operating results.

With the potential of these covenant violations through December 31, 2009 and in the absence of information to support our ability to comply with these debt covenants, such as covenant waivers through December 31, 2009 or an amendment revising the covenants, substantial doubt exists about our ability to continue as a going concern and our independent registered public accounting firm, KPMG LLP, has included an explanatory paragraph to describe this material uncertainty in their auditors report on our consolidated financial statements for the year ended December 31, 2008 included in this Annual Report on Form 10-K. Furthermore, our Credit Facility also contains a covenant that requires us to receive an audit report without qualification as to the scope or any other material qualification or exception.

Because we have limited solutions available under the appeal process with the NYSE and the lenders of our Credit Facility may have the right to declare the outstanding debt under the Credit Facility immediately due and payable after the expiration of any applicable notice and/or cure period, we have asked for and received a waiver through June 30, 2009 for the NYSE listing covenant and the covenant relating to the audit report. In obtaining this waiver, we have agreed to permanently increase the spread over the 30-day LIBOR rate to 350 basis points (“bps”) from 275 bps and reduce the capacity under the revolving loan to $60.3 million from $85.0 million, limit our remaining aggregate borrowing capacity under the revolving loan during the waiver period to $6.0 million, and pay up front waiver fees of 50 bps to consenting lenders. If there are instances of non-compliance beyond the term of the existing waiver, the lenders have the right to declare an event of default and accelerate repayment of the outstanding debt under the Credit Facility.

We have already begun discussions with our lenders to amend the terms of the Credit Facility, including extending the maturity date and adjusting the above mentioned covenants such that we can reasonably expect to achieve the covenant thresholds based on our current and projected operating results. However, we can provide no assurances that the existing waiver will be continued, that any of the aforementioned amendments can be obtained, or that the terms under which such continued waivers or amendments obtained would be satisfactory to us. During this amendment process and in the absence of an acceleration of the maturity of our Credit Facility, we believe we will have sufficient liquidity from cash on hand and cash from operations to fund our operating needs in 2009.

Business Strategy

Throughout 2008, we focused on the execution of our business strategy by continuing to build a portfolio of quality management contracts and investing in our wholly-owned hotels and through joint ventures. With the disposition of our corporate housing business in 2007, management was able to focus solely on the hotel industry. We believe this strategic focus will enhance our overall long-term growth by allowing us to deploy all of our resources and expertise to our core area of operations. Our overall strategy to grow our core business in the hotel industry is to recruit and maintain a high quality management team, follow a disciplined investment philosophy, and provide “best in class” service to our customers and owner groups. We believe this strategy will, in turn, provide strong long-term growth opportunities for our stockholders.

Hotel Ownership

In 2005, we began our expansion into hotel real estate with our purchase of the 331-room Hilton Concord, located in the East Bay area of San Francisco, California and the 195-room Hilton Durham, near Duke University, both of which are full-service hotels. In 2006, we purchased the 131-room Hilton Garden Inn Baton Rouge, a select-service hotel in Louisiana and the 308-room Hilton Arlington, a full-service hotel in Texas. In 2007, we acquired the 297-room Hilton Houston Westchase, the 495-room Westin Atlanta Airport and the 288-room Sheraton Columbia in Maryland, all full-service hotels.

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We believe making investments in hotels through joint ventures and selective whole-ownership is a key component to our strategic growth. As of December 31, 2008, we owned seven hotels, and held non-controlling equity interests in 18 joint ventures, 15 of which collectively own 50 hotels located throughout the United States and Mexico.

The following table provides information relating to our investments in unconsolidated entities as of December 31, 2008:

	Number		Our Equity
Name	of Rooms		Participation
Joint Venture Investments:
Amitel Holdings joint venture				15.0	%
Residence Inn Beachwood		174
Residence Inn Cleveland Airport		158
Residence Inn Cleveland Downtown		175
Residence Inn Independence		118
Residence Inn Mentor		96
Residence Inn Westlake		104
Budget Portfolio Properties, LLC				10.0	%
Days Inn Appleton		104
Howard Johnson Austin		89
Days Inn Bridgeview		113
Howard Johnson Cedar Rapids		103
Travelodge Davenport		103
Travelodge Denton		112
Days Inn Eau Claire		100
Days Inn Elk Grove		113
Super 8 Grand Rapids		110
Travelodge Green Bay		104
Howard Johnson La Crosse		101
Baymont Inn & Suites Madison		100
Super 8 Milwaukee-NE		124
Days Inn Milwaukee-South		109
Super 8 Milwaukee-West		122
Super 8 Moline		102
Baymont Inn & Suites Naperville		123
Baymont Inn & Suites O’Hare		123
Super 8 Prospect Heights		123
Days Inn Rockford		100
Super 8 St. Paul		100
Days Inn Wausau		122
Cameron S-Sixteen Broadway, LLC				15.7	%
Boise Courtyard by Marriott		162

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	Number		Our Equity
Name	of Rooms		Participation
Cameron S-Sixteen Hospitality, LLC				10.9	%
Hotel 43		112
Campus Associates, L.P.				12.5	%
Nathan Hale Inn & Conference Center		99
CNL IHC Partners, L.P.				15.0	%
Courtyard Hartford/Manchester		90
Hampton Inn Houston Galleria		176
Residence Inn Hartford/Manchester		96
CapStar Hallmark Company LLC				50.0	%
Crowne Plaza St. Louis Riverfront		440
Cross Keys Hotel Partners, LLC				15.0	%
Radisson Hotel Cross Keys		147
Harte IHR joint venture				20.0	%
Sheraton Frazer Great Valley		198
Sheraton Mahwah		225
Latham Hotel Georgetown		142
Hilton Lafayette		327
IHR Greenbuck joint venture				15.0	%
aloft Ontario-Rancho Cucamonga		136
aloft Nashville-Cool Springs		143
IHR Invest Hospitality Holdings, LLC				15.0	%
Crowne Plaza Madison		226
Hilton Seelbach Louisville		321
IHR/Steadfast Hospitality Management, LLC(1)		—		50.0	%
JHM Interstate Hotels India Ltd.(1)		—		50.0	%
Middletown Hotel Associates, L.P.				12.5	%
Inn at Middletown		100
MPVF IHR Lexington, LLC				5.0	%
Lexington Downtown Hotel & Conference Center		367
RQB Resort/Development Investors, LLC(2)				10.0	%
Sawgrass Marriott Resort and Spa		508
Steadfast Mexico, LLC(3)				10.3	%
Tesoro Cabo San Lucas		286
Tesoro Ixtapa		200
Tesoro Manzanillo		331
True North Tesoro Property Partners, L.P.(4)		—		15.9	%
Total Hotel Rooms — Joint Venture Investments		8,057

(1)	Room number is not listed as this joint venture owns a management company.
(2)	Investment is in the form of preferred equity; our share of equity in the joint venture is limited to a 10 percent annual return on our initial investment.
(3)	In February 2009, our joint venture partners and us agreed to restructure our equity interest in this joint venture from 15.00 percent to 10.25 percent.
(4)	The joint venture sold the Doral Tesoro Hotel & Golf Club in February 2008, however, continues to own a separate entity that holds mineral rights and receives royalties related to gas production activities.

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In February 2008, we realized the successful completion of a joint venture investment cycle when our joint venture that owned the Doral Tesoro Hotel & Golf Club, located in Dallas, Texas, sold the hotel. Our portion of the joint venture’s gain on sale of the hotel was approximately $2.4 million. Proceeds from the sale of the hotel were redeployed through additional investment opportunities during the year. This transaction highlights the upside and success we believe exists through our joint venture investments which range from 5% to 50%. These strategic partnerships and investments enable us to secure longer term management contracts, further align our interests in the hotels that we manage with those of the majority owners and provide us the opportunity to participate in the potential asset appreciation of these properties. We also pursue whole-ownership opportunities when we believe our knowledge of the hotel, or the market in which it operates, will allow us to significantly increase the current value of the hotel. We accomplish this by making prudent capital improvements to the hotel and implementing our management strategies.

Our plan is to continue to expand our portfolio of hotel real estate investments primarily through joint venture ownership opportunities and we may, from time to time, make whole ownership investments. Our joint venture investment strategy is designed, in part, to secure additional full-service and select-service management contracts. We attempt to identify properties that are promising acquisition candidates located in markets with economic, demographic and supply dynamics favorable to hotel owners. Through our vast network of industry contacts, coupled with our due diligence process, we seek to select those acquisition targets where we believe that selected capital improvements and focused management will increase the property’s ability to attract key demand segments, demonstrate better financial performance, and increase long-term value. In order to evaluate the relative merits of each investment opportunity, senior management and individual operations teams create detailed plans covering all areas of renovation and planned operation. These plans serve as the basis for our expansion decisions and guide subsequent renovation and operating plans.

We seek to invest in properties that meet the following market and hotel criteria:

General Market Criteria

•  Economic Growth — We focus on metropolitan areas or resort destinations that are approaching, or have already entered, periods of economic growth. Such areas generally show above average growth in the business community as measured by job creation rates, population growth rates, tourism and convention activity, airport traffic volume, local commercial real estate occupancy, and retail sales volume. Markets that exhibit above average growth in these metrics typically have strong demand for hotel facilities and services.

•  Supply Constraints — We seek lodging markets with favorable supply dynamics. These dynamics include an absence of significant new hotel development, barriers to future development such as zoning constraints, the need to undergo lengthy local development approval processes and a limited number of suitable sites.

•  Geographic Diversification — We seek to maintain a geographically diverse portfolio of properties to reduce the effects of regional economic cycles. We will continue our efforts to expand into international markets as opportunities arise that meet our investment criteria.

Specific Hotel Criteria

•  Location and Market Appeal — We seek to invest in hotels and resorts situated near both business and leisure centers that generate a broad base of demand for hotel accommodations and facilities. These demand generators include airports, convention centers, business parks, shopping centers and other retail areas, sports arenas and stadiums, major highways, tourist destinations, major universities and cultural and entertainment lifestyle centers with nightlife and restaurants. The confluence of nearby business and leisure centers will enable us to attract both weekday business travelers and weekend leisure guests. Attracting a balanced mix of business, group and leisure guests to the hotels helps to maintain stable occupancy rates and high average daily rates or “ADR”.

•  Size and Facilities — We seek to invest in additional select-service hotels with 100 to 200 guest rooms and full-service hotels and resorts with 200 to 500 guest rooms which include accommodations and facilities that are, or can be made, attractive to key demand segments such as business, group and leisure travelers. These facilities

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typically include upscale guest rooms, food and beverage facilities, extensive meeting and banquet space and amenities such as health clubs and swimming pools.

•  Potential Performance Improvements — We target under-performing hotels where intensive management and selective capital improvements can increase revenue and cash flow. These hotels represent opportunities to improve property performance by implementing our systematic management approach and targeted renovations.

•  Return on Investment Opportunities — We give consideration to opportunities which would allow us to enhance a property’s overall performance through expansion and new development.

We expect that our reputation as a leading hotel and hospitality manager combined with our relationships throughout the lodging industry will continue to provide us with a competitive advantage in identifying, evaluating and investing in hotels that meet our criteria. We have a record of successfully managing the renovation and repositioning of hotels in situations with varying levels of service, room rates and market types. We plan to continue to manage such renovation and repositioning programs as we invest in hotels, resorts and conference centers.

Asset Management

We believe we can maximize the value of our hotel portfolio through aggressive asset management. We continue to evaluate key performance indicators against established benchmarks and historical performance to ensure that an appropriate level of assistance is provided to our managers to maximize opportunities and value for each of our owned and managed assets. Areas of focus include enhancing revenue management for rooms, food and beverage and other services, reducing operating and overhead expenses and identifying operating efficiencies through the benchmarking process, all of which improve the long-term profitability of the hotel. We also continuously focus on the guest satisfaction measurement process to ensure that we maintain a balance of profitability and guest satisfaction, further enhancing the long-term asset value of our portfolio.

Our asset management and development professionals work closely with our managers in overseeing capital expenditure budgets to ensure that our hotels are in good physical condition, highly competitive in the market and compliant with brand standards. We also work with our managers to ensure that renewal and replacement expenditures are efficiently spent to maximize the profitability of the hotel. In addition, we pursue opportunities to enhance asset value by completing selective capital improvements outside the scope of the typical renewal and replacement capital expenditures. These capital improvements may include converting under-utilized space to alternative uses, building additional guest rooms, recreational facilities, meeting space or exhibit halls, and installing energy management systems and increasing energy efficiency wherever possible. When appropriate, we also consider the complete repositioning of a hotel in a given market, which often includes a complete renovation of guest rooms, meeting rooms and public space modifications, and can also include a change in brand and name.

Hotel Management

Our portfolio of managed properties is diversified by location/market, franchise and brand affiliations, and ownership group. The hotels managed by us and our affiliates are primarily located throughout the United States, including most major metropolitan areas and rapidly growing secondary cities. We and our affiliates also manage twelve international hotels, including six in Russia, three in Mexico and one each in Canada, Belgium and Ireland. In addition to geographic and market diversity, our managed hotels represent nearly 30 nationally and internationally recognized brand names including Marriott, Hilton, Sheraton, Westin, Renaissance, Radisson, Doubletree, Embassy Suites, Hyatt, Wyndham, and Hampton Inn, as well as 17 independent hotels. Our managed hotels are owned by more than 60 different ownership groups, including individual investors, institutional investors, investment funds, private equity firms, and public real estate investment trusts or “REITS”.

We manage properties and provide related management services primarily within the upscale and mid-priced full-service sectors and the premium select-service sector. We believe the combination of these sectors provides us with a balanced mix of managed assets. The two sectors attract a wide variety of potential customers, including both business and leisure travelers. Our size, as the largest independent manager of hotels in the nation, allows us to provide systems and services to owners on a broad scale, capitalizing on the extensive experience of our corporate operations, sales and support personnel. We believe our independence from any one brand provides us the

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opportunity to be more flexible operationally and to have our interests more closely aligned with those of the owners of the hotels for which we manage.

Our principal operating objectives in our hotel management segment are to generate higher revenue per available room, or RevPAR, control costs and increase the net operating income of the hotels we manage, while providing our guests with high-quality service and value. We believe that skilled management is the most critical element in maximizing revenue and cash flow in hotel properties. Our senior hotel management team has successfully managed hotels in all sectors of the lodging industry. We attribute our management success to our ability to analyze each hotel as a unique property and to identify specific opportunities for RevPAR growth, as well as cash flow growth, available at each hotel. The challenging operating cycles that the hospitality industry encounters make our breadth and depth of experience and application of sound strategies even more valuable to the owners of the hotels we manage.

Our corporate office associates implement financing and investment activities and provide services to support and monitor our on-site hotel operations and executives. Each of our disciplines, including hotel operations, sales and marketing, human resources, food and beverage, technical services, information technology, development, risk management, legal and corporate finance, is staffed by an experienced team with significant expertise in their respective area. These departments support the hotel executives in their day-to-day activities by providing online, real-time financial reporting and review; accounting and budgeting services; sales and revenue management; cost controls; property management tools and other resources that we create, maintain and deliver efficiently and effectively using our centralized corporate office resources.

Key elements of our management programs include the following:

•  Comprehensive Budgeting and Monitoring — Our operating strategy begins with an integrated budget planning process. The budget is implemented by individual property-based managers and monitored by our corporate office. Our corporate office personnel work with the property-based managers to set targets for cost and revenue categories at each of the properties. These targets are based on historical operating performance, planned renovations, planned targeted marketing, operational efficiencies, forecasted economic indicators and local market conditions. Through effective and timely use of our comprehensive online, real-time financial information and reporting systems, we are able to monitor actual performance efficiently. As a result, we can rapidly adjust prices, staffing levels and sales efforts to take advantage of changes in the market and to maximize revenue yield.

•  Targeted Sales and Marketing — We employ a systematic approach toward identifying and targeting demand segments for each property in order to maximize market penetration. Our corporate office team and our property-based managers divide these segments into smaller sub-segments and develop tailored marketing plans to drive market penetration in each sub-segment. We support each property’s local sales efforts with corporate office sales executives who develop and implement new marketing programs and monitor and respond to specific market needs and preferences. We use revenue yield management systems to manage each property’s use of the various distribution channels in the lodging industry. Those channels include franchisor reservation systems and toll-free numbers, websites, travel agent and airline global distribution systems, corporate travel offices and office managers, and convention and visitor bureaus. Our controlled access to these channels enables us to maximize revenue yields on a day-to-day basis. We recruit sales teams locally and their incentive-based compensation is based on revenue produced.

•  Strategic Capital Improvements — We, together with the owners of the properties we manage, plan renovations primarily to enhance a property’s appeal to targeted market segments. These improvements are designed to attract new customers and generate increased revenue and cash flow as well as ensure compliance with brand standards imposed by the hotel brands associated with our managed hotels. For example, in many of our properties, the banquet and meeting spaces have been renovated, and guest rooms have been upgraded with high speed internet access and comfortable work spaces to better accommodate the needs of business travelers so we can increase ADR. We base recommendations on capital spending decisions on both strategic needs and potential rate of return on a given capital investment. While we provide project management services for many capital improvement projects through our purchasing, construction and design subsidiary, the owners of the properties are responsible for funding capital expenditures.

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•  Strategic Use of Brand Names — We believe the selection of an appropriate franchise brand is essential in positioning a hotel property optimally within its local market. We select for the properties we own, or work with the owner to select for the properties we manage, brands based on local market factors such as local presence of the franchisor, brand recognition, target demographics and efficiencies offered by franchisors. We believe our solid relationships with all of the major hotel franchisors place us in a favorable position when dealing with those franchisors and allow us to assist our owners in negotiating favorable franchise agreements with franchisors. We believe our ability to acquire additional management contracts will further strengthen our relationships with franchisors. While we provide market analysis and other strategic support data, the owners of the properties are responsible for deciding upon and implementing a specific brand.

The following chart summarizes information on the national franchise affiliations of the properties we and our affiliates managed as of December 31, 2008:

	Guest				% of
Franchise	Rooms		Hotels		Rooms
Marriott®		6,202		21		13.4	%
Hilton®		4,565		15		9.8	%
Residence Inn by Marriott®		4,145		30		8.9	%
Hampton Inn®		4,137		30		8.9	%
Sheraton®		2,745		8		5.9	%
Courtyard by Marriott®		2,478		16		5.3	%
Crowne Plaza®		2,469		8		5.3	%
Westin®		2,054		3		4.4	%
Holiday Inn®		1,773		6		3.8	%
Doubletree®		1,612		5		3.5	%
Hilton Garden Inn®		1,159		8		2.5	%
Embassy Suites®		1,080		4		2.3	%
Tesoro Resorts ®		817		3		1.8	%
Days Inn®		761		7		1.7	%
Homewood Suites®		736		5		1.6	%
Super 8®		681		6		1.5	%
Renaissance®		548		1		1.2	%
Hyatt Place®		513		4		1.1	%
Holiday Inn Express®		385		3		0.8	%
Baymont Inn and Suites®		346		3		0.8	%
Travelodge®		319		3		0.7	%
Howard Johnson®		293		3		0.6	%
Wyndham®		288		2		0.6	%
Doral®		285		1		0.6	%
aloft®		279		2		0.6	%
Economy Inn and Suites®		271		1		0.6	%
Comfort Inn®		235		2		0.5	%
Best Western®		200		2		0.4	%
Holiday Inn Select®		189		1		0.4	%
Country Inn and Suites®		162		1		0.4	%
Radisson®		147		1		0.3	%
Staybridge Suites®		108		1		0.2	%
TownePlace Suites®		106		1		0.2	%
Quality Inn®		91		1		0.2	%
Fairfield Inn by Marriott®		90		1		0.2	%
Total — Franchise Affiliations		42,269		209		91.0	%
Independent		4,179		17		9.0	%
Total		46,448		226		100.0	%

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•  Emphasis on Food and Beverage — We believe popular food and beverage concepts are a critical component in the overall success of a full-service hospitality property. We utilize the corporate resources of our food and beverage operations to create programs which generate local awareness of our hotel facilities, to improve the profitability of our hotel operations, and to enhance customer satisfaction. We are committed to competing for patrons with restaurants and catering establishments by offering high-quality restaurants that garner positive reviews and strong local and/or national reputations. We operate several well-known restaurant concepts such as “Citronelle,” a nationally renowned restaurant at The Latham Hotel, located in Washington, D.C. We have also successfully placed national food franchises such as the Regatta Restaurant & Bar^®, Pizza Hut^®, Starbuck’s Coffee^® and TCBY^® in several of our hotels. We believe popular food concepts will strengthen our ability to attract business travelers and group meetings and improve the name recognition of our properties.

•  Commitment to Service and Value — We are dedicated to providing consistent, exceptional service and value to our customers. We place significant corporate attention on maintaining guest satisfaction scores in accordance with the standards of the various brands, so our scores are consistently above relevant standards. We conduct employee training programs to ensure high-quality, personalized service. We have created and implemented programs to ensure the effectiveness and uniformity of our employee training through our centralized human resources department at our corporate office. Our practice of tracking customer comments through guest comment cards, and the direct solicitation of guest opinions regarding specific items, allows us to target investments in services and amenities at each hotel across our portfolio. Our focus on these areas has enabled us to attract business.

•  Purchasing — We have invested extensive resources to create efficient purchasing programs that offer the owner of each of the hotels we manage quality products at very competitive pricing. These programs are available to all of the properties we manage. While participation in our purchasing programs is voluntary, we believe they provide each of our managed hotels with a distinct competitive and economic edge. In developing these programs, we seek to obtain the best pricing available for the quality of item or service being sourced in order to minimize the operating expenses of the properties we manage.

•  Project Management for Design, Procurement and Construction — Our size and multiple service offerings are an integral part of what sets us apart from other independent management companies. One of our service offerings is the project management of construction and renovation projects. We offer complete services from design phase, to purchasing, to overall project management of any hotel project. We have proven experience managing from initial development stage to routine renovation projects on existing hotels. Owners have the ability to leverage off of our familiarity with brand standards of all the major brands, as well as our detailed knowledge of their property, if we are already managing it.

•  Insurance and Risk Management — Many of the owners for which we manage own one hotel or a small portfolio (less than five properties). For these owners, procuring the necessary general liability, property, garage keepers, innkeepers, and auto casualty insurance at competitive prices is often difficult. Because of our size, we are able to bundle multiple properties and negotiate attractive pricing, coverage and terms that a single owner would most likely not be able to attain on its own. This program is another key ancillary service allowing owners to consider us a one-stop shop for all of their property needs.

•  Business Intelligence — We employ real-time, web-based reporting systems at each of our properties and at our corporate office to monitor the daily financial and operating performance of each of the properties. We have integrated information technology services through networks at many of the properties. We utilize information systems that track each property’s daily occupancy, average daily rates, and revenue from rooms, food and beverage, as well as quality improvement initiatives and brand standard assurance programs. By having current property operating information available on a timely basis, we are better able to respond quickly and efficiently to changes in the market of each property. Our owner groups, in turn, also have the ability to timely monitor the performance of their hotels through the use of this reporting system.

Corporate Housing

We previously provided short and long-term corporate housing leases and apartment management within 15 major markets in the United States, as well as internationally in London and Paris, through the BridgeStreet^® brand name

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in the extended corporate stay industry. On January 26, 2007, we disposed of BridgeStreet for approximately $42.4 million and redeployed the proceeds into investments in hotel real estate. The operations of our corporate housing segment are reported as discontinued operations in our consolidated statement of operations for all periods presented.

Relationships with Significant Owners

MeriStar/Blackstone — In May 2006, MeriStar, then the owner for which we managed the largest portfolio of hotels (44), was acquired by The Blackstone Group (“Blackstone”). Our management agreements for the 44 hotels Blackstone acquired remained in place after the transaction, although 36 hotels have since been sold, as of December 31, 2008. The total base management fee for each of the hotels we manage for Blackstone is 2.5 percent of total hotel revenue, however with incentive fees, we have the potential to earn up to 4 percent of total revenues. As of December 31, 2008, we continued to manage eight properties for Blackstone. Of the 36 properties which we no longer manage for Blackstone, we have individually acquired four properties, entered into joint ventures to acquire partial ownership of eight properties and retained the management contracts with the new owners for an additional two properties. The total management fees related to all MeriStar/Blackstone properties accounted for $3.5 million, or 5.9 percent, of management fees in 2008 and $8.6 million, or 13.4 percent, of management fees in 2007.

Under the master management agreement that we entered into in 2004 with MeriStar (which has been assumed by Blackstone), we are entitled to a termination fee due to a sale of the property. The termination fees are calculated as the discounted future cash flows under the management agreement through the end of the initial contract term. Similar provisions are also in place in the event the hotel is sold during one of the renewal periods. The termination fees are paid over 48 months or as a discounted one-time payment. MeriStar/Blackstone may terminate management agreements each year, representing up to 600 rooms, with the election of a one-time termination fee payment equal to 18 months of management fees. MeriStar/Blackstone has the right to terminate a management agreement, free of any termination fees, if we make an investment in a hotel that is in the competitive set of any MeriStar/Blackstone hotel (provided that the termination request occurs between 12 and 18 months following the date of our investment). Additionally, Blackstone may also offset any unpaid termination fees due to us with future management fees earned from any new management agreement we would enter into with them. The remaining life under the master management agreement is approximately two years as of December 31, 2008.

During 2008, 2007 and 2006, we recognized $6.6 million, $7.2 million and $24.3 million, respectively, in termination fees related to hotels sold by either Blackstone or MeriStar during their respective period of ownership. Unpaid termination fees due to us from Blackstone as of December 31, 2008 for hotels previously sold by Blackstone are $13.9 million. For the 21 hotels sold and with respect to $12.1 million of the unpaid fees, Blackstone retains the right to replace a terminated management contract during the 48 month payment period with a replacement contract on a different hotel and reduce the amount of any remaining unpaid fees. For the remaining $1.8 million, we have executed notes receivable with Blackstone and will receive these monies over the next 24 months.

See “Risk Factors — Risk Factors Related Specifically to Our Hotel Management Segment — Our management agreements may be terminated or not renewed under various circumstances, including if the properties to which they relate are sold or otherwise disposed of by their owners, which may have a material impact on our results of operations” and “— A large percentage of our managed properties are owned by a small group of owners, which could result in the loss of multiple management agreements in a short period.”

Relationships with Other Significant Owners — In October 2004, we entered into a stock purchase agreement with Sunstone Hotel Investors, which we refer to as “Sunstone REIT,” to acquire Sunstone Hotel Properties, which we refer to as “Sunstone,” a hotel management company. In connection with the acquisition, Sunstone entered into new management contracts with respect to 52 hotels and two ancillary service centers previously managed by Sunstone, 50 of which were owned by Sunstone REIT and its affiliates. The management agreements have an initial term of 20 years, with two extensions of five years each. As of December 31, 2008, our Sunstone subsidiary managed 27 hotels and two ancillary service centers, which accounted for 7,316 rooms, or 15.8 percent of our total managed rooms. Of these 27 hotels managed by our Sunstone subsidiary, 25 were owned by Sunstone REIT. Management fees related to all Sunstone REIT properties managed during 2008 were $7.7 million, or 13.0 percent, of total

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management fees. Management fees for all Sunstone REIT properties managed in 2007 were $8.6 million, or 13.5 percent, of total management fees. Under the termination provisions of our management agreements with Sunstone REIT, we would be entitled to receive a termination fee if a contract is terminated prior to October 2010.

As of December 31, 2008, we managed six hotels in Moscow for a single owner, one of which was an addition in 2008. The management agreements for these six properties expire between 2020 and 2028. These hotels accounted for $12.7 million, or 21.5 percent, of total management fees in 2008 and $12.6 million, or 19.8 percent, of total management fees in 2007.

As of December 31, 2008, we managed 43 hotels owned by Equity Inns, Inc., which accounted for 5,600, or 12.1 percent of total managed rooms. The total management fees related to all Equity Inns, Inc. properties accounted for $3.1 million, or 5.2 percent, of total management fees in 2008 and $3.8 million, or 5.9 percent, of total management fees in 2007.

As of December 31, 2008, we managed eight hotels for three separate independent owners which accounted for 4,197, or 9.0 percent, of total managed rooms. These properties accounted for $9.3 million, or 15.7 percent, of total management fees in 2008, and $9.8 million, or 15.3 percent, of total management fees in 2007.

Intellectual Property and Franchises

We employ a flexible branding strategy based on each particular managed hotel’s market environment and other unique characteristics. Accordingly, a majority of our managed properties operate under various national trade names pursuant to licensing arrangements with national franchisors.

Generally, the third-party owners of our managed hotels, rather than us, are parties to the franchise agreements permitting the use of the trade names under which the hotels are operated. In the case where we are not the owner of the hotels, the hotel owners are required to reimburse us for all costs incurred in connection with these franchise agreements. We are a party, however, to certain franchise agreements with Starwood Hotels & Resorts Worldwide, Inc. and Hilton Hotels Corporation, for the hotels we wholly-own. Our franchise agreements which allow us to use these trade names expire at varying times, generally ranging from 2009 to 2027. We have registered with the United States Patent and Trademark Office the trademarks “Colony^®” and “Doral^®”, which we utilize in connection with managing hotels. We do not believe that the loss or expiration of any or all of our trademarks would have a material adverse effect on our business. The registrations for our marks expire at varying times, generally ranging from 2009 to 2015.

Governmental Regulation

A number of states regulate the licensing of hospitality properties and restaurants, including liquor licensing, by requiring registration, disclosure statements and compliance with specific standards of conduct. We believe that we are substantially in compliance with these requirements. Managers of hospitality properties are also subject to laws governing their relationship with employees, including minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws could reduce the revenue and profitability of our properties and could otherwise adversely affect our operations.

We and our affiliates currently manage 12 international properties and currently have three additional management contracts for international properties under development or construction, two of which will commence operations in 2009. There are risks inherent in conducting business internationally. These include: employment laws and practices in foreign countries; tax laws in foreign countries, which may provide for tax rates that exceed those of the U.S. and which may provide that our foreign earnings are subject to withholding requirements or other restrictions; unexpected changes in regulatory requirements or monetary policy; and other potentially adverse tax consequences.

Americans with Disabilities Act

Under the Americans with Disabilities Act, all public accommodations are required to meet certain requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts of capital have been and continue to be invested by our owners in federally required upgrades to our managed hotel properties, a determination that we or our owners are not in compliance with the Americans with

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Disabilities Act could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. We or our owners are likely to incur additional costs of complying with the Americans with Disabilities Act. However, those costs are not expected to have a material adverse effect on our results of operations or financial condition.

Environmental Law

Under various federal, state and local and foreign environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for noncompliance with applicable environmental, health and safety requirements and for the costs of investigation, monitoring, removal or remediation of hazardous or toxic substances. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of those hazardous or toxic substances on a property could also result in personal injury or property damage or similar claims by private parties. In addition, the presence of contamination, or the failure to report, investigate or properly remediate contaminated property, may adversely affect the operation of the property or the owner’s ability to sell or rent the property or to borrow using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of those substances at the disposal or treatment facility, whether or not that facility is or ever was owned or operated by that person. The operation and removal of underground storage tanks are also regulated by federal and state laws. In connection with the ownership and operation of hotels, the operators, such as us, or the owners of those properties, could be held liable for the costs of remedial action for regulated substances and storage tanks and related claims. Environmental laws and common law principles could also be used to impose liability for releases of hazardous materials, including asbestos-containing materials, into the environment, and third-parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released asbestos-containing materials or other hazardous materials. We are not currently aware of any potential material exposure as a result of any environmental claims.

All of the hotels that we own and the majority of the hotels we manage have undergone Phase I environmental site assessments, which generally provide a non-intrusive physical inspection and database search, but not soil or groundwater analyses, by a qualified independent environmental consultant. The purpose of a Phase I assessment is to identify potential sources of contamination for which the hotel owner or others may be responsible. The Phase I assessments have not revealed, nor are we aware of, any environmental liability or compliance concerns that we believe would have a material adverse effect on our results of operations or financial condition. Nevertheless, it is possible that these environmental site assessments may not have revealed all environmental liabilities or compliance concerns, or that material environmental liabilities or compliance concerns exist of which we are currently unaware.

In addition, a significant number of the hotels that we own or manage have been inspected to determine the presence of asbestos. Federal, state and local environmental laws, ordinances and regulations require containment, abatement or removal of asbestos-containing materials and govern emissions of and exposure to asbestos fibers in the air. Asbestos-containing materials are present in various building materials such as sprayed-on ceiling treatments, roofing materials or floor tiles at some of the hotels. Operations and maintenance programs for maintaining asbestos-containing materials have been or are in the process of being designed and implemented, or the asbestos-containing materials have been scheduled to be or have been abated at these hotels at which we are aware that asbestos-containing materials are present. We are not currently aware of any potential material exposure as a result of any asbestos-related claims for our owned hotels and we are indemnified by our hotel owners for any related claims under our management agreements.

In 2007, we detected the presence of mold at one of our owned hotels and have taken the appropriate measures to remediate. Many of the costs associated with remediation of mold may be excluded from coverage under our property and general liability policies, in which event we would be required to use our own funds to remediate. Further, in the event moisture infiltration and resulting mold is pervasive, we may not be able to rent rooms at that hotel, which could result in a loss of revenue. Liabilities resulting from moisture infiltration and the presence of, or exposure to mold, could have a future material adverse effect on our business, financial condition, results of operations and ability to make distributions to our stockholders.

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Furthermore, various court decisions have established that third-parties may recover damages for injury caused by property contamination or exposure to hazardous substances such as asbestos, lead paint or black mold. In recent years, concern about indoor exposure to mold has been increasing as such exposure has been alleged to have a variety of adverse effects on health. As a result, there has been an increasing number of lawsuits against owners and managers of real property relating to the presence of mold. Damages related to the presence of mold are generally excluded from our insurance coverage. Should an uninsured loss arise against us, we would be required to use our own funds to resolve the issue, which could have an adverse impact on our results of operations or financial condition.

Other Regulatory Issues Related to Corporate Housing

Although we sold BridgeStreet in January 2007, we may be required to indemnify the purchaser to the extent our policies, during the time we owned it, are found not to have been in compliance with local laws. As a former lessee of accommodations through our corporate housing segment, we believed our employees were either outside the purview of, exempt from or in compliance with, laws in the jurisdictions in which we operated, requiring real estate brokers to hold licenses. There however, can be no assurance that our position in any jurisdiction would be upheld if challenged.

Competition

We compete primarily in the following segments of the lodging industry: the upscale and mid-priced sectors of the full-and select-service segments and the luxury segment through resorts. Other hotels compete with our properties in each geographic market in which our properties are located. Competition in the lodging industry is based on a number of factors, most notably convenience of location, brand affiliation, price, range of services and guest amenities or accommodations offered and quality of customer service and overall product.

In addition, we compete for hotel management contracts against numerous competitors, many of which have more financial resources than us. These competitors include the management arms of some of the major hotel brands as well as independent, non-brand- affiliated hotel managers. See “Risk Factors — Risk Factors Related to Our Overall Business — We face significant competition in the lodging industry and in the acquisition of real estate properties.”

Employees

As of December 31, 2008, we employed approximately 19,000 associates, of whom approximately 16,700 were compensated on an hourly basis. We are reimbursed by the hotel owners for wages, benefits and other employee related costs directly related to employees at their respective hotels. Some of the employees at 22 of our managed hotels are represented by labor unions. We believe that labor relations with our employees are generally good.

Seasonality

Generally, hotel revenues are greater in the second and third calendar quarters than in the first and fourth calendar quarters. Hotels in tourist destinations generate greater revenue during their respective tourist season than other times of the year. Seasonal variations in revenue at the hotels we own or manage will cause quarterly fluctuations in revenues.

Website Access to Reports

We will make available, free of charge, access to our Annual Report on Form 10-K, Proxy Statement, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC through our home page at www.ihrco.com.

ITEM 1A.   RISK FACTORS

You should carefully consider the risk factors set forth below as well as the other information contained in this Annual Report on Form 10-K in connection with evaluating us. Additional risks and uncertainties not

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currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, results of operations or financial condition. Certain statements in “Risk Factors” are forward-looking statements. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements” for additional information about our business, results of operations and financial condition.

Risk Factors Related to Our Overall Business

Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern as a result of our non-compliance with certain debt covenants under the Credit Facility, which may result in acceleration of our outstanding indebtedness under the Credit Facility or otherwise hinder our ability to amend our existing Credit Facility and/or obtain additional financing.

On March 12, 2009, our common stock was suspended from trading on the NYSE and we face potential delisting by NYSE Regulation, Inc., pending an appeal scheduled on June 1, 2009, because we have failed to meet the continued listing standard regarding average global market capitalization over a consecutive 30 trading-day period of not less than $15 million. Our Credit Facility includes a debt covenant requiring continued listing on the NYSE. Additionally, there is uncertainty as to whether we will meet one of the financial debt covenants regarding our total leverage ratio for our fourth quarter 2009 calculation period given the extremely challenging economic and operating environment which is depressing our current and projected operating results.

With the potential of these covenant violations through December 31, 2009 and in the absence of information to support our ability to comply with these debt covenants, such as covenant waivers through December 31, 2009 or an amendment revising the covenants, substantial doubt exists about our ability to continue as a going concern and our independent registered public accounting firm, KPMG LLP, has included an explanatory paragraph to describe this material uncertainty in their auditors report on our consolidated financial statements for the year ended December 31, 2008 included in this Annual Report on Form 10-K. Furthermore, our Credit Facility also contains a covenant that requires us to receive an audit report without qualification as to the scope or any other material qualification or exception.

Because we have limited solutions available under the appeal process with the NYSE and the lenders of our Credit Facility may have the right to declare the outstanding debt under the Credit Facility immediately due and payable after the expiration of any applicable notice and/or cure period, we have asked for and received a waiver through June 30, 2009 for the NYSE listing covenant and the covenant relating to the audit report. In obtaining this waiver, we have agreed to permanently increase the spread over the 30-day LIBOR rate to 350 bps from 275 bps and reduce the capacity under the revolving loan to $60.3 million from $85.0 million, limit our remaining aggregate borrowing capacity under the revolving loan during the waiver period to $6.0 million, and pay up front waiver fees of 50 bps to consenting lenders. If there are instances of non-compliance beyond the term of the existing waiver, the lenders have the right to declare an event of default and accelerate repayment of the outstanding debt under the Credit Facility.

We have already begun discussions with our lenders to amend the terms of the Credit Facility, including extending the maturity date and adjusting the above mentioned covenants such that we can reasonably expect to achieve the covenant thresholds based on our current and projected operating results. However, we can provide no assurances that the existing waiver will be continued, that any of the aforementioned amendments can be obtained, or that the terms under which such continued waivers or amendments obtained would be satisfactory to us. In connection with any such amendments, our lenders are likely to condition their agreement with increases in the fees and interest rates applied under the Credit Facility.

In the event that we are unable to obtain additional funding or negotiate a successful amendment to the Credit Facility agreement, the lenders would have the right to demand immediate repayment of any outstanding obligations under the Credit Facility. As of March 30, 2009, we had a total of $161.8 million outstanding under the Credit Facility. A default on our Credit Facility does not cause a default on any of our three non-recourse mortgage loans. Should the lenders of our Credit Facility demand immediate repayment of all outstanding obligations under the Credit Facility, we will likely be unable to pay such obligations. In such event, we may have to

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recapitalize, refinance, raise additional liquidity by selling some or all of our assets or seek to reorganize under Chapter 11 of the United States Bankruptcy Code.

We encounter industry risks related to operating, managing and owning hotels that could cause our results of operations to suffer.

Various factors could adversely affect our ability to generate hotel revenues from our wholly-owned properties and management fees from our managed properties, which are based on hotel revenues. Our business is subject to all of the operating risks inherent in the lodging industry. These risks include, but are not limited to, the following:

•  changes in national, regional and local economic conditions;

•  cyclical overbuilding in the lodging industry;

•  varying levels of demand for rooms and related services;

•  competition from other hotels, resorts and recreational properties, some of which may have greater marketing and financial resources than we or the owners of the properties we manage have;

•  the creditworthiness of the owners of the hotels that we manage and the risk of bankruptcy by hotel owners;

•  uninsured property, casualty and other losses;

•  disruptions due to weather conditions and other calamities, such as hurricanes;

•  labor disturbances or shortages of labor;

•  the ability of any joint ventures in which we invest to service any debt they incur and the risk of foreclosure associated with that debt;

•  our ability to service debt;

•  present or future environmental laws and regulations;

•  dependence on business and commercial travelers and tourism, which may fluctuate and be seasonal;

•  decreases in air travel;

•  fluctuations in operating costs;

•  the effects of owners not funding recurring costs of operations, necessary renovations, refurbishment and improvements of hotel properties;

•  changes in technology which may lead to changes in business, commercial and leisure travel frequency and/or patterns;

•  fluctuations in demand resulting from threatened or actual acts of terrorism or hostilities;

•  changes in governmental regulations that influence or determine wages, prices and construction and maintenance costs;

•  changes in interest rates and the availability of credit to us and owners of the hotels we manage; and

•  demographic, political or other changes in one or more markets could impact the convenience or desirability of the sites of some hotels, which would, in turn, affect the operations of those hotels.

The current general economic recession and the slowdown in the lodging industry will continue to impact our financial results and growth.

The present economic recession and the uncertainty of its depth and duration will continue to have a negative impact on the lodging industry. There is now general consensus among economists that the economies of the U.S., Russia and much of the rest of the world are now in a recession, and we are experiencing reduced demand for our hotel rooms. Accordingly, our financial results have been impacted by the economic slowdown and we expect that our future financial results and growth will be negatively impacted while the recession continues.

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Acts of terrorism, the threat of terrorism, the ongoing war against terrorism and other factors have impacted and will continue to impact the hotel industry and all hotel companies’ results of operations.

The threat of terrorism could have a negative impact on hotel operations, causing lower than expected performance, particularly in weak economic cycles. The threat of terrorism could cause a significant decrease in hotel occupancy and average daily rates and result in disruptions in business and leisure travel patterns due to concerns about travel safety. Future outbreaks of hostilities could have a material negative effect on air travel and on our business. In addition, increased security measures at airports or in major metropolitan areas may also cause disruptions to our operations.

The uncertainty associated with incidents and threats and the possibility of future attacks may hamper business and leisure travel patterns in the future. In addition, potential future outbreaks of contagious diseases and similar disruptive events could have a material adverse effect on our revenues and results of operations due to decreased travel and occupancy, especially in areas affected by such events.

Failure to maintain adequate insurance levels or failure to be reimbursed by our hotel owners for property level insurance coverage or losses could result in significant expenditures.

We maintain insurance coverage at the hotels we own and manage and are the named insured on the workers compensation, general liability, and employment practices insurance policies. We are reimbursed by the hotel owners for the cost of these insurance policies as per our management contracts. We place insurance policies with insurers that are A.M. Best’s rated “A−” or better. We look to maintain adequate coverage to minimize our overall risk exposure. There are losses that may not be covered by these policies and in some cases we may, after reviewing the risks, accept a level of risk on a per claim basis in order to maintain adequate insurance at appropriate premiums. We would be indemnified for these losses assuming the owner is accessible and has the financial ability to compensate us. Losses incurred under these policies may not be reported or settled for several years after the original date of loss. If the insurance company becomes insolvent, we will pursue payment from the hotel owner but may not be successful. We would be liable for any amounts we do not collect from an owner and those amounts could be significant.

We also maintain health and welfare benefit programs for our associates at the hotels we own and manage. For the managed hotels, these costs are also reimbursed to us by the hotel owners. These programs include securing fully insured contracts and administrative services with various carriers for short term disability, medical and dental insurance coverage. We have decided to retain a portion of the risk with respect to certain programs based on our belief that we have a sufficient risk pool to stabilize claim projections, appropriate claims controls and limited overall risk. Regarding the short term disability and dental programs, overall benefit payments are considered low, resulting in overall limited risk exposure. With regard to the medical program, we purchase reinsurance on a specific claim basis so that overall risk is limited on a per occurrence basis. Premiums for the funding of the risk retention programs are determined by outside consultants after carefully reviewing past claim patterns, the population of those we insure both geographically and demographically, as well as other factors to determine a reasonable level of risk. However, to the extent we experience significant losses that are not reimbursed by the hotel owners and exceed our reserves, those losses could have a material adverse effect on our results of operations.

The insurance market has been adversely affected.

Large scale terrorist attacks and hurricanes could result in an increase in premiums and reductions in insurance coverage, especially for terrorism and catastrophic risks such as wind, flood and earthquakes. If we are unable to maintain cost-effective insurance that meets the requirements of our lenders and franchisors, or if we are unable to amend or obtain waivers of those requirements, it could have a material adverse effect on our business.

We may be adversely affected by the limitations in our franchising and licensing agreements.

We are the brand franchisee of record for the hotels we own and for some of the hotels we have interests in or manage. In addition, with respect to hotels for which we are not the franchisee, we may sign a manager acknowledgment agreement with the franchisor that details some of our rights and obligations with respect to the hotel and references the hotel’s franchise agreement. The franchise agreements generally contain specific

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standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor’s system. Those limitations may conflict with our philosophy of creating specific business plans tailored to each hotel and to each market. Standards are often subject to change over time, at the discretion of the franchisor, and may restrict a franchisee’s ability to make improvements or modifications to a hotel without the consent of the franchisor. In addition, compliance with standards could require a hotel owner to incur significant expenses or capital expenditures. Action or inaction by us or by the owner of a hotel we manage could result in a breach of standards or other terms and conditions of the franchise agreements and could result in the loss or cancellation of a franchise license.

Loss of franchise licenses without replacement would likely have an adverse effect on hotel revenues which could result in adverse affects to our overall revenues. In connection with terminating or changing the franchise affiliation of a hotel, the owner of the hotel may be required to incur significant expenses or capital expenditures. Moreover, the loss of a franchise license could have a material adverse effect on the operations or the underlying value of the hotel covered by the franchise due to the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. Franchise agreements covering the hotels we own and manage expire or terminate, without specified renewal rights, at various times and have differing remaining terms. As a condition to renewal, these franchise agreements frequently contemplate a renewal application process. This process may require an owner to make substantial capital improvements to a hotel. Although the management agreements generally require owners to make capital improvements to maintain the quality of a property, we are not able to directly control the timing or amount of those expenditures.

Some of the franchise agreements under which we operate and manage hotels restrict the franchisee’s ability to own or operate another hotel within a specified territory or with regard to specific hotels. These limitations, if found to apply to us, may limit our ability to acquire new management agreements and potentially impair our continued growth.

Costs of compliance with employment laws and regulations could adversely affect operating results.

Union contracts for hotel employees in several major markets will be up for renewal between 2009 and 2010. Although under the terms of the management contracts the employees at our managed hotels are paid by the hotel owners, they are our employees. In addition, we have a significant number of employees working at our wholly-owned hotels. The failure to timely renegotiate the contracts that are expiring could result in labor disruptions, which could adversely affect our revenues and profitability. Labor costs could also escalate beyond our expectations and could have a material adverse effect on our operating margins.

In addition, there are ongoing attempts to unionize at some of those hotels that we own and/or manage which are not currently unionized. To the extent any of our non-unionized properties become unionized, our labor costs would most likely increase and have an adverse effect on our operating margins at our wholly-owned hotels.

Costs of compliance with environmental laws could adversely affect operating results.

Under various federal, state, local and foreign environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for noncompliance with applicable environmental and health and safety requirements for the costs of investigation, monitoring, removal or remediation of hazardous or toxic substances. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. The presence of these hazardous or toxic substances on a property could also result in personal injury or property damage or similar claims by private parties. In addition, the presence of contamination or the failure to report, investigate or properly remediate contaminated property, may adversely affect the operation of the property or the owner’s ability to sell or rent the property or to borrow using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of those substances at the disposal or treatment facility, whether or not that facility is or ever was owned or operated by that person. The operation and removal of underground storage tanks are also regulated by federal and state laws. In connection with the ownership and operation of hotels, the operators, such as us or the owners of those properties could be held liable for the costs of remedial action for regulated substances and storage tanks and related claims.

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All of the hotels that we own and the majority of the hotels we manage have undergone Phase I environmental site assessments, which generally provide a non-intrusive physical inspection and database search, but not soil or groundwater analyses, by a qualified independent environmental consultant. The purpose of a Phase I assessment is to identify potential sources of contamination for which the hotel owner may be responsible. The Phase I assessments have not revealed, nor are we aware of, any environmental liability or compliance concerns that we believe would have a material adverse effect on our results of operations or financial condition. Nevertheless, it is possible that these environmental site assessments did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which we are currently unaware.

In addition, a significant number of the hotels we own or manage have been inspected to determine the presence of asbestos. Federal, state and local environmental laws, ordinances and regulations also require abatement or removal of asbestos-containing materials and govern emissions of and exposure to asbestos fibers in the air. Asbestos-containing materials are present in various building materials such as sprayed-on ceiling treatments, roofing materials or floor tiles at some of the hotels. Operations and maintenance programs for maintaining asbestos-containing materials have been or are in the process of being designed and implemented, or the asbestos-containing materials have been scheduled to be or have been abated, at those hotels at which we are aware that asbestos-containing materials are present. Any liability resulting from non-compliance or other claims relating to environmental matters could have a material adverse effect on our results of operations or financial condition.

In 2007, we detected the presence of mold at one of our wholly-owned hotels and have taken the appropriate measures to remediate. Many of the costs associated with remediation of mold may be excluded from coverage under our property and general liability policies, in which event we would be required to use our own funds to remediate. Further, in the event moisture infiltration and resulting mold is pervasive, we may not be able to rent rooms at that hotel, which could result in a loss of revenue. Liabilities resulting from moisture infiltration and the presence of or exposure to mold could have a future material adverse effect on our business, financial condition, results of operations and ability to make distributions to our stockholders.

Furthermore, various court decisions have established that third-parties may recover damages for injury caused by property contamination or exposure to hazardous substances such as asbestos, lead paint or black mold. In recent years, concern about indoor exposure to mold has been increasing as such exposure has been alleged to have a variety of adverse effects on health. As a result, there has been an increasing number of lawsuits against owners and managers of real property relating to the presence of mold. Damages related to the presence of mold are generally excluded from our insurance coverage. Should an uninsured loss arise against us at one of our wholly-owned hotels, we would be required to use our own funds to resolve the issue, which could have an adverse impact on our results of operations or financial condition.

Aspects of hotel, resort, conference center, and restaurant operations are subject to governmental regulation, and changes in regulations may have significant adverse effects on our business.

A number of states regulate various aspects of hotels, resorts, conference centers and restaurants, including liquor licensing, by requiring registration, disclosure statements and compliance with specific standards of conduct and timely filing of certain sales use or property tax forms, which could result in additional tax payments and fines. Managers of hotels are also subject to employment laws, including minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws could reduce the revenue and profitability of hotels and could otherwise adversely affect our results of operations or financial condition. As an agent for hotels we may be liable for noncompliance.

Under the Americans with Disabilities Act, or ADA, all public accommodations in the United States are required to meet federal requirements related to access and use by disabled persons. These requirements became effective in 1992. A determination that the hotels we own are not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants.

The lodging business is seasonal.

Generally, hotel revenues are greater in the second and third calendar quarters than in the first and fourth calendar quarters, although hotels in tourist destinations generate greater revenue during tourist season than other times of

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the year. Seasonal variations in revenue at the hotels we own or manage will cause quarterly fluctuations in revenues. Events beyond our control, such as extreme weather conditions, economic factors, geopolitical conflicts, actual or potential terrorist attacks, and other considerations affecting travel may also adversely affect our earnings.

Failure to maintain the integrity of internal or customer data could result in faulty business decisions and damage to our reputation, subjecting us to costs, fines or lawsuits.

Our businesses require collection and retention of large volumes of internal and customer data, including credit card numbers and other personally identifiable information of our customers as they are entered into, processed by, summarized by, and reported by our various information systems. We also maintain personally identifiable information about our employees. The integrity and protection of that customer, employee, and company data is critical to us. If that data is not accurate or complete we could make faulty decisions. Our customers also have a high expectation that we will adequately protect their personal information, and the regulatory environment surrounding information security and privacy is increasingly demanding, both in the United States and other international jurisdictions in which we operate. A significant theft, loss or fraudulent use of customer, employee or company data could adversely impact our reputation and could result in remedial and other expenses, fines and litigation.

A material weakness in our internal control over financial reporting could result in a material misstatement in our financial statements not being prevented or detected in a timely manner, which could adversely affect investor confidence in the accuracy and completeness of our financial statements, and could have an adverse effect on the trading price of our common stock.

Through, in part, the documentation, testing and assessment of our internal control over financial reporting pursuant to the rules promulgated by the SEC under Section 404 of the Sarbanes-Oxley Act of 2002 and Item 308 of Regulation S-K, management concluded that we did not maintain effective controls over a change in accounting for the impairment of intangible assets related to terminated management contracts during 2007. Management determined that this control deficiency represented a material weakness as of December 31, 2007. This material weakness was remediated in 2008. Even with the successful remediation in our controls and procedures, such controls and procedures may not be adequate to prevent or identify irregularities or facilitate the fair presentation of our financial statements or SEC reporting in the future. Any material weakness or the unsuccessful remediation thereof could have a material adverse effect on reported results of operations and financial condition, as well as impair our ability to meet our quarterly and annual reporting requirements in a timely manner.

If we fail to retain our executive officers and key personnel, our business could be harmed.

Our ability to maintain our competitive position will depend, to a significant extent, on the efforts and ability of our senior management. Our ability to attract and retain highly qualified personnel is critical to our operations. Competition for personnel is intense, and we may not be successful in attracting and retaining our personnel. Our inability to attract and retain highly qualified personnel may adversely affect our results of operations and financial condition.

Risk Factors Related Specifically to Our Hotel Ownership Segment

We encounter industry-related and other risks related to our investments in and ownership of hotels and other real estate that could adversely impact its value to us.

In addition to the operating risks described above, with respect to hotels and real estate where we hold an ownership interest, we have the following additional risks:

•  ability to obtain financing at acceptable interest rates;

•  changes in local real estate market conditions;

•  changes in the markets for particular types of assets;

•  present or future environmental legislation;

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•  the recurring costs of necessary renovations, refurbishment and improvements of hotel properties;

•  adverse changes in zoning and other laws;

•  adverse changes in real estate tax assessments;

•  eminent domain laws;

•  construction or renovation delays and cost overruns; and

•  limitations on our ability to quickly dispose of investments and respond to changes in the economic or competitive environment due to the relative illiquidity of real estate assets.

Most of these factors are beyond our control. As our company expands through the acquisition and/or development of real estate, the magnitude of these risks will increase. Any of these factors could have a material and adverse impact on the value of our assets or on the revenues that can be generated from those assets. In addition, due to the level of fixed costs required to operate full- and select-service hotels, significant expenditures necessary for the operation of these properties generally cannot be reduced when circumstances cause a reduction in revenue. Therefore, if our properties do not generate revenue sufficient to meet operating expenses, including debt service and capital expenditures, our income will be adversely affected. In addition, as we increase our ownership of hotels, we will be more subject to volatility in our overall revenues, cash flows from operations and net income, as our portfolio of wholly-owned hotels is currently less diversified across markets and asset classes than our portfolio of managed hotels, and the revenues, cash from operations and net income associated with a single wholly-owned hotel will generally be substantially greater than the same from a single managed hotel. Additionally, a reduction in revenues at hotels owned by our joint ventures may lead to impairment charges on the carrying value of our joint venture investments.

If our revenues are negatively affected by one or more particular risks, our wholly-owned hotels’ operating margins could suffer.

We report operating revenues and expenses from our wholly-owned hotels; therefore, we are susceptible to changes in operating revenues and are subject to the risk of fluctuating hotel operating margins at those hotels. Hotel operating expenses include, but are not limited to, wage and benefit costs, energy costs, supplies, repair and maintenance expenses, utilities, insurance and other operating expenses. These operating expenses can be difficult to predict, resulting in unpredictability in our operating margins. Also, due to the level of fixed costs required to operate full- and select-service hotels, we are limited in our ability to reduce significant expenditures when circumstances cause a reduction in revenue.

If we are unable to identify additional appropriate real estate acquisition or development opportunities and to arrange the financing necessary to complete these acquisitions or developments, our continued growth could be impaired.

We continually evaluate potential real estate development and acquisition opportunities. Any future acquisitions or developments will be financed through a combination of internally generated funds, additional bank borrowings from existing or new credit facilities or mortgages, public offerings or private placements of equity or debt securities. The nature of any future financing will depend on factors such as the size of the particular acquisition or development and our capital structure at the time of a project. We may not be able to identify appropriate new acquisition or development opportunities and necessary financing may not be available on suitable terms, if at all.

An important part of our growth strategy will be the investment in, and acquisition of, hotels. Continued industry consolidation and competition for acquisitions could adversely affect our growth prospects going forward. We will compete for hotel and other investment opportunities with other companies, some of which may have greater financial or other resources than we have. Competitors may have a lower cost of capital and may be able to pay higher prices or assume greater risks than would be prudent for us to pay or assume. If we are unable to make real estate investments and acquisitions, our continued growth could be impaired.

Development activities that involve our co-investment with third-parties may further increase completion risk or result in disputes that could increase project costs or impair project operations. Partnerships, joint ventures and

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other business structures involving our co-investment with third-parties generally include some form of shared control over the operations of the business and create additional risks, including the possibility that other investors in such ventures could become bankrupt or otherwise lack the financial resources to meet their obligations, or could have or develop business interests, policies or objectives that are inconsistent with ours. Although we actively seek to minimize such risks before investing in partnerships, joint ventures or similar structures, actions by another investor may present additional risks of project delay, increased project costs, or operational difficulties following project completion.

Investing through partnerships or joint ventures decreases our ability to manage risk.

In addition to acquiring hotels and resorts directly, we have invested and expect to continue to invest in joint ventures. Joint ventures often have shared control over the operation of the joint venture assets. Consequently, actions by a partner may subject hotels and resorts owned by the joint venture to additional risk. As we generally maintain a minority ownership interest in our joint ventures, we are usually unable to take action without the approval of our joint venture partners. Alternatively, our joint venture partners could take actions binding on the joint venture without our consent.

We participate in joint ventures where we may be adversely impacted by the failure of the joint venture or the other partners in the joint venture to fulfill their obligations.

We have investments in and provide advances to certain joint ventures with unrelated strategic partners to acquire and develop hotel properties. To finance these activities, our joint ventures often obtain loans from third-party lenders that are secured by the joint venture’s assets. Because we do not have a controlling interest in these joint ventures, we depend heavily on the other partners in each joint venture to both (i) cooperate and make mutually acceptable decisions regarding the conduct of the business and affairs of the joint venture and (ii) ensure that they, and the joint venture, fulfill their respective obligations to us and to third-parties. If our partners in joint ventures do not provide such cooperation or fulfill these obligations due to their financial condition, strategic business interests (which may be contrary to ours), or otherwise, this could lead to a deterioration of the operations and cash flows of these properties and reduce the value of our investment in these joint ventures. Moreover, our ability to recoup such expenditures and losses by exercising remedies against such partners may be limited due to our minority or limited interests, potential legal defenses our partners may have, their respective financial condition and other circumstances.

The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Because real estate investments are relatively illiquid, the ability to promptly sell one or more properties in response to changing economic, financial and investment conditions is limited. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. In addition, hotel properties may not readily be converted to alternative uses if they were to become unprofitable due to competition, age of improvements, decreased demand or other factors. The conversion of a hotel to alternative uses would also generally require substantial capital expenditures. We may be required to expend funds to correct defects or to make improvements before a property can be sold. We may not have funds available to correct those defects or to make those improvements and as a result our ability to sell the property would be limited. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could significantly harm our financial condition and results of operations.

Uninsured and underinsured losses could adversely affect our financial condition, results of operations and our ability to make distributions to our stockholders.

Various types of catastrophic losses, such as losses due to wars, terrorist acts, earthquakes, floods, hurricanes, pollution, contagious diseases, such as the avian flu and Severe Acute Respiratory Syndrome (SARS), or environmental matters, generally are either uninsurable or not economically insurable, or may be subject to

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insurance coverage limitations, such as large deductibles or co-payments. In the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. In the event of a significant loss that is covered by insurance, our deductible may be high and, as a consequence, it could materially adversely affect our financial condition. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position in the damaged or destroyed property.

We invest in a single industry and are therefore very susceptible to economic fluctuations specific to that industry.

Our current strategy is to acquire interests only in hospitality and lodging. As a result, we are subject to the risks inherent in investing in a single industry. The effects on cash available for distribution resulting from a downturn in the hotel industry may be more pronounced than if we had diversified our investments.

Risk Factors Related Specifically to Our Hotel Management Segment

Changes in ownership of managed hotels could adversely affect the retention of our existing hotel management agreements.

The loss of associated management contracts could have an adverse effect on our revenues to the extent we do not replace lost management contracts with new ones. An economic slowdown may lead to an increased risk of bankruptcy by owners of hotels and/or foreclosures on the hotel properties, which may inhibit our ability to collect fees under our management agreements or may lead to their termination.

A large percentage of our managed properties are owned by a small group of owners, which could result in the loss of multiple management agreements in a short period.

A significant portion of our managed properties and management fees are derived from seven owners. This group of owners represents 90, or 39.8 percent, of our managed properties and 21,477, or 46.2 percent, of our managed rooms as of December 31, 2008. These seven owners also accounted for 61.3 percent of our base and incentive management fees in 2008. Our portfolio of managed properties could be adversely impacted if any of these owners were acquired by another entity, sold their portfolio or entered into a property disposition plan. In addition to lost revenues, the termination of management agreements could result in the impairment of intangible assets and goodwill. See “— Our management agreements may be terminated or not renewed under various circumstances, including if the properties to which they relate are sold or otherwise disposed of by their owners, which may have a material impact on our results of operations.”

Our management agreements may be terminated or not renewed under various circumstances, including if the properties to which they relate are sold or otherwise disposed of by their owners, which may have a material impact on our results of operations.

If the owner of a property we manage disposes of the property, or under certain management agreements, if specified performance standards at the hotel are not met, the owner may cease our management of the property. Similarly, if an owner of properties we manage is acquired, the subsequent owner may have the right to terminate our management agreements. Although the management agreements with two of our most significant owners (Blackstone and Sunstone REIT) contain termination fee provisions, our management agreements with other owners generally have limited or no termination fees payable to us if a hotel is sold and the agreement is terminated. The termination of management contracts as a result of hotel dispositions or other factors could therefore have an adverse effect on our revenues. In addition, hotel owners may choose to allow our management agreements to expire. As of December 31, 2008, 103 of our management agreements had current terms scheduled to expire within two years. In addition, for certain of our owners, we do not have the right to assign a management agreement to an

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unrelated third-party without prior written consent of the relevant hotel owner. A change in control of our Company would require the consent of these owners. The termination of management contracts may result in the write-off of management contract intangible assets or the impairment of our goodwill which could have a material adverse effect on our statement of operations and earnings per share.

A high percentage of the hotels we manage are upscale hotels so we may be particularly susceptible to an economic downturn, which could have a material adverse effect on our results of operation and financial condition.

Approximately 76 percent of the rooms we manage are in hotels that are classified as upscale or upper-upscale hotels. These hotels generally command higher room rates. However, in an economic downturn, these hotels may be more susceptible to a decrease in revenues, as compared to hotels in other categories that have lower room rates. This characteristic results from hotels in this segment generally targeting business and high-end leisure travelers. In periods of economic difficulties, business and leisure travelers may seek to reduce travel costs by limiting trips or seeking to reduce costs on their trips. Adverse changes in economic conditions could have a material adverse effect on our results of operations and financial condition.

We are dependent on the owners of the hotel properties we manage to fund operational expenditures related to those properties, and if such funds are untimely or not paid, we are required to bear the cost.

We incur significant expenditures related to the management of hotel properties, including salary and other benefit related costs and business and employee related insurance costs for which we are reimbursed by the hotel owners. In the normal course of business, we make every effort to pay these costs only after receiving payment from an owner for such costs. However, to the extent an owner would not be able to reimburse these costs, due to a sudden and unexpected insolvency situation or otherwise, we would be legally obligated to pay these costs directly until such time as we could make other arrangements. Although we would make every effort to eliminate these costs prior to the point at which an owner could not reimburse us and we would continue to pursue payment through all available legal means, our results of operations and financial condition could be adversely affected if we were forced to bear those costs.

Our international operations expose us to additional risks, which, if we fail to manage them adequately, may adversely impact our results of operations.

Our management fees earned from hotels located outside of the United States were 23.0 percent, 21.0 percent and 13.7 percent of total management fees for 2008, 2007 and 2006, respectively. At December 31, 2008, we and our affiliates managed 12 international properties. In 2008, we formed a joint venture management company (of which we hold a 50 percent interest) that began seeking management opportunities in India. Simultaneous with the formation of this management company, we also invested in a related private real estate fund that seeks opportunities to purchase and/or develop hotels in India. We expect to begin managing our first hotel in India as well as our seventh hotel in Moscow in 2009. We continue to actively pursue additional international opportunities.

As we continue to grow our international presence, we are subject to various risks. These risks include tax, environmental zoning, employment laws, repatriation of money, liquor license, exposure to currency fluctuations, managing potential difficulties in enforcing contractual obligations and intellectual property rights, other laws in the countries in which we operate, and the effects of potential and actual international terrorism and hostilities. We are particularly sensitive to any factors that may influence international travel. In addition, we cannot be certain of the effect that changing political and economic conditions could have on our international hotel operations and on our ability to collect on loans to third-party owners overseas. Furthermore, the success of our international operations depends on our ability to attract and retain qualified management personnel who are familiar not only with our business and industry but also with the local commercial practices and economic environment.

As a U.S. company operating internationally, we may be subject to inconsistencies between U.S. law and the laws of an international jurisdiction. If taxation authorities in the countries in which we operate interpret our tax position in a manner that is materially different than our assumptions, our tax liabilities could increase which could materially

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adversely impact our financial results. Tax laws in foreign countries may provide for tax rates that exceed those of the U.S. which may provide that our foreign earnings are subject to withholding requirements or other restrictions. In addition, sales and international jurisdictions typically are made in local currencies, which subject us to risks associated with currency fluctuations. Currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions.

The Russian Ruble/USD exchange rate, like foreign exchange rates in general, can be volatile and difficult to predict. This volatility could materially and adversely impact our results of operations or financial condition.

We maintain the results of operations for our Russian office in the local currency, Russian Rubles, and translate these results using the average exchange rates during the period. We translate the assets and liabilities to U.S. dollars using the exchange rate in effect at the balance sheet date. To date, our foreign currency exposure has primarily related to our management and incentive fees from six managed properties in Russia, which are denominated and paid in Rubles. These hotels accounted for $12.7 million, or 21.5 percent, of total management fees in 2008.

In 2008, the exchange rate of Russian Rubles to one U.S. Dollar has ranged from a high of 29.6 to a low of 23.1 and averaged 24.9. For the period January 1, 2009 to March 1, 2009, the exchange rate has ranged from a high of 36.5 to a low of 28.5 and averaged 33.7. Several factors may affect the price of the Russian Rubble, including:

•  Debt level and trade deficit of Russia;

•  Inflation rates in the United States and Russia and investor expectations concerning inflation rates;

•  Interest rates in the United States and Russia and investor expectations concerning interest rates;

•  Investment and trading activities of mutual funds, hedge funds and currency funds; and

•  Global or regional political, economic or financial events and situations.

Foreign exchange rates are influenced by the factors immediately above and may also be influenced by: changing supply and demand for a particular currency; government monetary policies (including exchange control programs, restrictions on local exchanges or markets and limitations on foreign investment in a country or on investment by residents of a country in other countries); changes in trade balances; trade restrictions; and currency devaluations and revaluations. Also, governments from time to time intervene in currency markets, directly or by regulation, in order to influence prices directly. These events and actions are unpredictable and could materially and adversely impact our results of operations or financial condition.

Third-party hotel owners are not required to use the ancillary services we provide, which reduces the revenue we would otherwise receive from them.

In addition to traditional hotel management services, we offer to third-party hotel owners several ancillary services such as purchasing, project management, self-insurance programs and risk management, information technology and telecommunication services, and centralized accounting services. We expect to derive a portion of our revenues from these services. Our management contracts do not obligate third-party hotel owners to utilize these services, and the failure of hotel owners to utilize these services could adversely affect our overall revenues.

Risk Factors Related to Our Capital Structure

We may go into default under our Credit Facility during 2009 if we do not amend or obtain an extension on our existing waiver. We use our Credit Facility to finance our operations. If we are unable to obtain continued waivers relating to the relevant debt covenants, our lenders could accelerate the maturity of these borrowings.

As discussed in “Risk Factors — Risk Factors Related to Our Overall Business” above, we currently have a waiver through June 30, 2009 for two covenants in our Credit Facility: (i) the listing of our common stock on the NYSE and (ii) receiving an audit report without qualification as to scope or any other material qualification or exception. A default under the Credit Facility could result, among other things, in termination of further funds available under our revolving loan or accelerated maturity date for all amounts outstanding under both the term and revolving loan of

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the Credit Facility after any applicable cure and/or notice periods. Additionally, we may be in violation of a financial covenant regarding our leverage ratio in the fourth quarter 2009 based on our current projections. We expect to generate cash flow from operations sufficient to service the debt under the Credit Facility prior to the stated maturity of the facility if there is not an acceleration of the maturity date. However, we will likely not be able to pay such obligations if our lenders require immediate repayment of all of our outstanding debt under the Credit Facility, which may allow them to foreclose on our assets that secure the Credit Facility or exercise other remedies against our assets. We are already in discussions with our lenders to amend the terms of the Credit Facility, including extending the maturity date and adjusting the above mentioned covenants to reduce the risk of default in the near term. There can be no assurances that we will be successful in obtaining continued waivers or amending the terms of our senior secured credit facility agreement. If we are unable to renegotiate acceptable terms, this could have a material adverse effect on our business, financial condition and results of operations.

Restrictions imposed by our debt agreements may limit our ability to execute our business strategy and increase the risk of default under our debt obligations.

Our Credit Facility, which we entered into in March 2007, and our mortgages contain restrictive covenants. These restrictions include requirements to maintain financial ratios, which may significantly limit our ability to, among other things:

•  borrow additional money;

•  make capital expenditures and other investments;

•  pay dividends;

•  merge, consolidate or dispose of assets;

•  acquire assets; and

•  incur additional liens.

A significant decline in our operations could reduce our cash from operations and cause us to be in default under other covenants in our debt agreements. A default would leave us unable to access our Credit Facility, which we depend on to supply the necessary liquidity to continue or to implement new operations and execute on our business strategy.

We will, in the future, be required to repay, refinance or negotiate an extension of the maturity of our debt agreements. Our ability to complete the necessary repayments, refinancing or extensions is subject to a number of conditions, many of which are beyond our control. For example, if there were a disruption in the lodging or financial markets as a result of the occurrence of one of the risks identified above under “Risk Factors Related to Our Overall Business” or any other event, including the current depressed financial markets and global economy decline, we might be unable to access the financial markets. Failure to complete the necessary repayments, refinancing or extensions of our agreements would have a material adverse effect on us.

A default on our secured debt may cause our lenders to foreclose on our hotels.

Three of our seven wholly-owned hotels serve as collateral for mortgage debt under single property first mortgages. In addition, all of our unencumbered properties are pledged as collateral under the Credit Facility. If we default on any of the secured mortgage loans or the Credit Facility, the lender will be able to foreclose on the property pledged to the relevant lender under that loan. Furthermore, a default on any of the secured mortgage loans would also cause a default on the Credit Facility, however, a default under the Credit Facility would not cause a default on any of the secured mortgage loans.

Our leverage could have a material adverse effect on our ability to satisfy our obligations under our indebtedness and place other limitations on the conduct of our business.

As of December 31, 2008, we had total indebtedness of $244.3 million. Our level of indebtedness has important consequences. It currently requires us to dedicate a portion of our cash flow from operations to payments of

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principal and interest on our indebtedness, which reduces the availability of our cash flow to fund working capital, capital expenditures and our business strategy. Additionally, it could:

•  increase our vulnerability to general adverse economic and industry conditions;

•  make it more difficult for us to satisfy our obligations with respect to our indebtedness;

•  limit our ability in the future to refinance our debt or obtain financing for expenditures, acquisitions, development or other general business purposes on terms and conditions acceptable to us, if it is available at all;

•  place us at a competitive disadvantage compared to our competitors that have less debt;

•  prevent us from raising additional capital needed; or

•  limit our access to additional funding or potentially make additional funding inaccessible given the current environment surrounding liquidity within the credit markets.

In addition, despite our current indebtedness levels, we may still be able to incur substantially more debt. This could further exacerbate the risks associated with our leverage.

Our lenders have suffered losses related to the weakening economy and may not be able to fund our borrowings.

Our lenders, including the lenders participating in our Credit Facility, have suffered losses related to their lending and other financial relationships, especially because of the general weakening of the national economy and increased financial instability of many borrowers. As a result, our lenders may become insolvent, choose not to perform their obligations under our Credit Facility, or tighten their lending standards, which could make it more difficult for us to borrow under our Credit Facility or to obtain alternate financing on favorable terms or at all. Our financial condition and results of operations would be adversely affected if we were unable to draw funds under our Credit Facility because of a lender default or to obtain other cost-effective financing.

A deficit in working capital may reduce funds available to us for expansion of our business.

As of December 31, 2008, we had a deficit in working capital of $165.7 million primarily as a result of the full amount outstanding under our Credit Facility being classified as a current liability as the Credit Facility could be subject to accelerated maturity at the lenders option given our potential for non-compliance of certain debt covenants in the Credit Facility. A continued deficit in working capital may require us to make additional borrowings to pay our current obligations. Such borrowings would serve to reduce amounts available to us for pursuit of our business strategy of growing through securing additional management contracts and acquiring additional hotel, resort and conference center properties.

We may not be able to amend our Credit Facility, which matures in March 2010, on terms that are satisfactory to us or at all. A failure to obtain satisfactory terms or to amend the Credit Facility at all could have a material, adverse effect on our business and financial condition.

Our Credit Facility matures in March 2010. We are currently seeking to amend the terms of the Credit Facility agreement; however, because of the current illiquidity in the credit markets we may have difficulty obtaining the necessary amendments. In addition, the current interest rate on our Credit Facility, which is based on a spread over the 30-day LIBOR, was obtained at a point in time when we were able to obtain favorable interest rates and other terms, which we are unlikely to obtain in the amendment process, given the current economic situation. As a result, if we are able to amend the terms of our Credit Facility, we currently expect to pay a greater amount of debt service, which will adversely affect our cash flow, and consequently, our cash available for operations and our net income. If we are unable to amend the terms of our Credit Facility at all, we may be forced to recapitalize, refinance our obligations, sell some or all of our assets or seek to reorganize under Chapter 11 of the United States Bankruptcy Code, potentially resulting in losses that could have a material adverse effect on our business, financial condition and results of operations.

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Declines in our corporate credit ratings could have an adverse effect on us.

Credit rating services assign a rating to us based on their perception of our ability to service debt. In March 2009, Moody’s Investor Services downgraded us from a “B2” rating to a “Caa1” rating and Standard & Poor’s Ratings Services downgraded us from a “B” rating to a “CCC+” rating. Fluctuations in our operating performance or changes in the amount of our debt may result in a change to our rating. A negative change in our ratings could increase the cost of, or prevent us from making future financings.

Impairments of assets or goodwill may increase the risk of default under our debt obligations and have an adverse effect on our stock price.

We are required to evaluate our assets, including goodwill, annually or upon certain trigger events in order to ascertain that the historical carrying value is not less than the fair market value of the asset. Should we determine that an asset’s fair market value is less than its carrying value, the asset would be considered impaired, and we would recognize a write-down of the asset to its current fair value.

Our Credit Facility contains several financial covenants, including a minimum net worth requirement. To the extent an impairment would reduce our asset base, we could fall below the minimum net worth requirement. If we are unable to obtain a waiver or an amendment for the covenant, the resulting default could adversely affect our liquidity.

In addition, because the impairment of long-lived assets or goodwill would be recorded as an operating expense, such a write-down would negatively affect our net income and earnings per share, which could have a negative impact on our stock price.

Anti-takeover defense provisions of our charter documents may deter potential acquirers and depress our stock price.

Provisions of Delaware law and of our charter and bylaws may have the effect of discouraging a third-party from making an acquisition proposal for us. These provisions could delay, defer or prevent a transaction or a change in control of us under circumstances that could otherwise give the holders of our common stock the opportunity to realize a premium over the then-prevailing market price of our common stock. These provisions include the following:

•  our certificate of incorporation prohibits action by written consent of our stockholders, and our stockholders are not able to call special meetings;

•  our certificate of incorporation and bylaws provide for a classified Board of Directors;

•  our directors are subject to removal only for cause and upon the vote of two-thirds of the outstanding shares of our common stock;

•  our bylaws require advance notice for the nomination of directors and for stockholder proposals;

•  we are subject to Section 203 of the Delaware General Corporation Law, which limits our ability to enter into business combination transactions with interested stockholders; and

•  specified provisions of our certificate of incorporation and bylaws may be amended only upon the affirmative vote of two-thirds of the outstanding shares.

Our stock is quoted on the OTC Bulletin Board, which may decrease the liquidity of our common stock.

Prior to the market opening on March 12, 2009, the NYSE suspended our common stock from trading on the exchange as we did not meet the continued listing standard requiring maintenance of a minimum $15 million market capitalization over a consecutive 30 trading-day period. Since that time, our common stock has been trading over-the-counter and is quoted on the OTC Bulletin Board and Pink Sheets under the symbol “IHRI”. Broker-dealers often decline to trade in over-the-counter stocks, given that the market for such securities is often limited, the stocks are more volatile, and the risk to investors is greater than with stocks listed on national securities exchanges. Consequently, selling our common stock can be difficult because smaller quantities of shares can be

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bought and sold, transactions can be delayed, and securities analyst and news media coverage of our Company may be reduced. These factors could result in lower prices, increased volatility and larger spreads in the bid and ask prices for shares of our common stock as well as lower trading volume.

We will appeal the delisting determination on June 1, 2009, as permitted by the NYSE, though there are only limited solutions available. Until the appeal is heard, we will remain listed, but will not trade, on the NYSE. There can be no assurances that we will be successful in these efforts. Furthermore, in the case we are not successful in the appeal process, there can be no assurance that we will be able to regain listing on the NYSE or another national securities exchange in the future.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES

Our corporate headquarters are located in Arlington, Virginia. In 2007, we established our first international office in Moscow, Russia to capitalize on the potential growth in the international markets. In addition, we also maintain corporate offices in Irving, Texas and San Clemente, California.

Our hotel management segment includes the operations related to our managed properties, our purchasing, construction and design subsidiary and our subsidiary that provides self insurance programs. As of December 31, 2008, we owned and/or managed hotels in 37 states, the District of Columbia, Russia, Mexico, Canada, Belgium and Ireland. The following table sets forth operating information with respect to the properties we owned and managed as of December 31,:

Year	Properties		Guest Rooms
2008		226		46,448
2007		191		42,620
2006		223		50,199

Our hotel ownership segment consists of our wholly-owned hotels and joint venture investments. The following table details our seven wholly-owned hotels as of December 31, 2008. These properties have also been included in the table above.

Wholly-Owned Properties	Classification	Acquisition Date	Guest Rooms
Hilton Concord, East Bay area near San Francisco, CA	Full-service	February 2005		331
Hilton Durham, Durham, NC	Full-service	November 2005		195
Hilton Garden Inn Baton Rouge, Baton Rouge, LA	Select-service	June 2006		131
Hilton Arlington, Arlington, TX	Full-service	October 2006		308
Hilton Houston Westchase, Houston, TX	Full-service	February 2007		297
Westin Atlanta Airport, Atlanta, GA	Full-service	May 2007		500
Sheraton Columbia, Columbia, MD	Full-service	November 2007		289

For information on the properties in which we hold a minority interest through unconsolidated entities, see “Business — Hotel Ownership.”

ITEM 3.   LEGAL PROCEEDINGS

In the normal course of business activities, various lawsuits, claims and proceedings have been or may be instituted or asserted against us. Based on currently available facts, we believe that the disposition of matters pending or asserted will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

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ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matters to a vote of security holders during the fourth quarter of 2008.

PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is currently traded over-the-counter (“OTC”) and quoted on the OTC Bulletin Board maintained by the National Association of Securities Dealers, Inc. and Pink Sheets under the symbol “IHRI”. As of March 15, 2009, 32,019,920 shares of our common stock were listed and outstanding which were held by 2,444 holders of record.

Previously, our common stock was listed and traded on the NYSE under the ticker-symbol “IHR.” Prior to the market opening on March 12, 2009, our ticker-symbol was suspended from trading on the NYSE as we did not meet the continued listing standard requiring maintenance of a minimum $15 million market capitalization over a consecutive 30 trading-day period. We will appeal the delisting determination on June 1, 2009, as permitted by the NYSE. Until the appeal is heard, we will remain listed, but will not trade, on the NYSE.

The following table lists, for the fiscal quarters indicated, the range of high and low closing prices per share of our common stock in U.S. dollars, as reported on the NYSE Composite Transaction Tape.

	Stock Price
	High		Low
Fiscal 2008:
Fourth Quarter	$	2.13	$	0.52
Third Quarter		2.92		2.04
Second Quarter		4.90		2.59
First Quarter		5.30		3.39
Fiscal 2007:
Fourth Quarter	$	5.27	$	3.67
Third Quarter		5.02		3.57
Second Quarter		6.15		5.17
First Quarter		7.85		5.94

We have not paid any cash dividends on our common stock, and we do not anticipate that we will do so in the foreseeable future. We intend to retain earnings, if any, to provide funds for the continued growth and development of our business. Any determination to pay cash dividends in the future will be at the discretion of the Board of Directors and will be dependent upon lender approval as well as our results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors.

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ITEM 6.   SELECTED FINANCIAL DATA

Set forth in the following tables are summary historical consolidated financial and other data as of and for each of the last five fiscal years.

Selected Financial and Other Data
(Dollars in Thousands, Except Per Share Data)

	Year Ended December 31,
	2008			2007		2006		2005		2004
Statement of Operations Data:
Revenue:
Lodging	$	94,072		$	74,198	$	27,927	$	12,638	$	—
Management fees		59,321			63,712		75,305		70,674		59,651
Termination fees		6,896			8,597		25,881		7,199		4,294
Other		9,891			9,526		11,568		11,140		14,146
		170,180			156,033		140,681		101,651		78,091
Other revenue from managed properties(1)		609,273			644,098		834,484		893,760		751,892
Total revenue	$	779,453		$	800,131	$	975,165	$	995,411	$	829,983
(Loss) income from continuing operations	$	(18,023	)	$	2,464	$	26,716	$	8,786	$	(1,584	)
Income (loss) from discontinued operations(2)		—			20,364		3,063		4,091		(4,079	)
Net (loss) income		(18,023	)		22,828		29,779		12,877		(5,663	)
Weighted average number of basic shares outstanding (in thousands):		31,802			31,640		31,105		30,505		30,311
Basic (loss) earnings per share from continuing operations	$	(0.57	)	$	0.08	$	0.86	$	0.29	$	(0.05	)
Basic (loss) earnings per share from discontinued operations		—			0.64		0.10		0.13		(0.14	)
Basic (loss) earnings per share	$	(0.57	)	$	0.72	$	0.96	$	0.42	$	(0.19	)
Weighted average number of diluted shares outstanding (in thousands)		31,802			31,963		31,542		30,809		30,311
Diluted (loss) earnings per share from continuing operations	$	(0.57	)	$	0.08	$	0.85	$	0.29	$	(0.05	)
Diluted (loss) earnings per share from discontinued operations		—			0.63		0.09		0.13		(0.14	)
Diluted (loss) earnings per share	$	(0.57	)	$	0.71	$	0.94	$	0.42	$	(0.19	)
Cash dividends declared per share	$	0.00		$	0.00	$	0.00	$	0.00	$	0.00
Balance Sheet Data (At End of Period):
Cash and cash equivalents	$	22,924		$	9,775	$	23,989	$	11,657	$	15,207
Total assets		489,819			470,878		333,690		293,080		275,822
Debt		244,283			211,663		84,226		85,052		89,197
Total equity		171,622			189,506		166,696		130,640		117,335
Total Hotel Data (unaudited):
Number of wholly-owned properties		7			7		4		2		1
Number of managed properties		226			191		223		286		306
Number of managed rooms		46,448			42,620		50,199		65,293		68,242

(1)	Other revenue from managed properties include payroll and certain other costs of the hotel’s operations that are contractually reimbursed to us by the hotel owners. Our payment of these costs are recorded as “other expense from managed properties.”
(2)	Discontinued operations reflect the operations of (i) BridgeStreet Canada, Inc., which was disposed of in June 2004, (ii) the Residence Inn by Marriott Pittsburgh Airport, which was sold in September 2005 and (iii) BridgeStreet Corporate Housing Worldwide, Inc. and affiliated subsidiaries, which was sold in January 2007.

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand Interstate, our operations and our present business environment. MD&A is provided as a supplement to — and should be read in conjunction with — our consolidated financial statements and the accompanying notes. MD&A is organized into the following sections:

•  Overview and Outlook — A general description of our business and the hospitality industry; our strategic initiatives; the significant challenges, risks and opportunities of our business; and a summary of financial highlights and significant events.

•  Recently Issued Accounting Pronouncements — A summary of accounting pronouncements which have been issued by relevant accounting standards.

•  Critical Accounting Policies and Estimates — A discussion of accounting policies that require critical judgments and estimates.

•  Results of Operations — An analysis of our consolidated results of operations for the three years presented in our consolidated financial statements.

•  Liquidity, Capital Resources and Financial Position — An analysis of our cash flows, sources and uses of cash, contractual obligations and an overview of financial position.

Overview and Outlook

Our Business

We are a leading hotel real estate investor and the nation’s largest independent hotel management company, as measured by number of rooms under management and gross annual revenues of the managed portfolio. We have two reportable operating segments: hotel ownership (through whole-ownership and joint ventures) and hotel management. A third reportable operating segment, corporate housing, was disposed of on January 26, 2007 with the sale of BridgeStreet, our corporate housing subsidiary. The results of this segment are reported as discontinued operations in our consolidated financial statements for the years ended December 31, 2007 and 2006.

On March 12, 2009, our common stock was suspended from trading on the NYSE and we face potential delisting by NYSE Regulation, Inc., pending an appeal scheduled on June 1, 2009, because we have failed to meet the continued listing standard regarding average global market capitalization over a consecutive 30 trading-day period of not less than $15 million. Our Credit Facility includes a debt covenant requiring continued listing on the NYSE. Additionally, there is uncertainty as to whether we will meet one of the financial debt covenants regarding our total leverage ratio for our fourth quarter 2009 calculation period given the extremely challenging economic and operating environment which is depressing our current and projected operating results.

With the potential of these covenant violations through December 31, 2009 and in the absence of information to support our ability to comply with these debt covenants, such as covenant waivers through December 31, 2009 or an amendment revising the covenants, substantial doubt exists about our ability to continue as a going concern and our independent registered public accounting firm, KPMG LLP, has included an explanatory paragraph with respect to this uncertainty in their auditors report on our consolidated financial statements for the year ended December 31, 2008 included in this Annual Report on Form 10-K. Furthermore, our Credit Facility also contains a covenant that requires us to receive an audit report without qualification as to the scope or any other material qualification or exception.

Because we have limited solutions available under the appeal process with the NYSE and the lenders of our Credit Facility may have the right to declare the outstanding debt under the Credit Facility immediately due and payable after the expiration of any applicable notice and/or cure period, we have asked for and received a waiver through June 30, 2009 for the NYSE listing covenant and the covenant relating to the audit report. In obtaining this waiver, we have agreed to permanently increase the spread over the 30-day LIBOR rate to 350 bps from 275 bps and reduce the capacity under the revolving loan to $60.3 million from $85.0 million, limit our remaining aggregate borrowing capacity under the revolving loan during the waiver period to $6.0 million, and pay up front waiver fees of 50 bps to

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consenting lenders. If there are instances of non-compliance beyond the term of the existing waiver, the lenders have the right to declare an event of default and accelerate repayment of the outstanding debt under the Credit Facility.

We have already begun discussions with our lenders to amend the terms of the Credit Facility, including extending the maturity date and adjusting the above mentioned covenants such that we can reasonably expect to achieve the covenant thresholds based on our current and projected operating results. However, we can provide no assurances that the existing waiver will be continued, that any of the aforementioned amendments can be obtained, or that the terms under which such continued waivers or amendments obtained would be satisfactory to us. During this amendment process and in the absence of an acceleration of the maturity of our Credit Facility, we believe we will have sufficient liquidity from cash on hand and cash from operations to fund our operating needs in 2009.

Our revenues consist primarily of the following (percentages of total revenues do not include “other revenue from managed properties”):

•  Lodging revenue — This consists of rooms, food and beverage and other department revenues from our seven wholly-owned hotels. This revenue accounted for approximately 55.3 percent of total revenue for the year ended December 31, 2008.

•  Management fee revenue — This consists of fees, which include base management and incentive fees, received by our hotel management segment under our management agreements as they are earned. These fees accounted for approximately 34.9 percent of total revenue for the year ended December 31, 2008.

•  Termination fee revenue — This consists of fees received by our hotel management segment under our management agreements for management contracts terminated by the owner without cause. These fees accounted for approximately 4.0 percent of total revenue for the year ended December 31, 2008.

•  Other revenue — This consists of purchasing revenue, accounting fees, technical services revenue, information technology support fees, self-insurance revenue and other fees. This revenue accounted for approximately 5.8 percent of total revenue for the year ended December 31, 2008.

•  Other revenue from managed properties — We employ the staff at our managed properties. Under our management agreements, the hotel owners reimburse us for payroll, benefits, and certain other costs related to the operations of the managed properties. This revenue is completely offset by a corresponding expense in our consolidated statements of operations, referred to as “other expenses from managed properties”.

Our operating expenses consist primarily of the following (percentages of total operating expenses do not include “other expenses from managed properties”):

•  Lodging expenses — This includes costs associated with rooms, food and beverage and other department expenses and property operating costs related to our seven wholly-owned hotels. These costs accounted for approximately 42.0 percent of total operating expenses for the year ended December 31, 2008.

•  Administrative and general expenses — These costs are associated with the management and ownership of hotels and consist primarily of expenses such as corporate payroll and related benefits for our operations management, sales and marketing, finance, legal, information technology support, human resources and other support services, as well as general corporate and public company expenses. These costs accounted for approximately 38.7 percent of total operating expenses for the year ended December 31, 2008.

•  Depreciation and amortization expenses — These costs relate to the depreciation of property and equipment and amortization of intangible assets and accounted for approximately 11.5 percent of total operating expenses for the year ended December 31, 2008.

•  Other expenses — These costs include asset impairment and write-off costs. These costs accounted for approximately 7.8 percent of operating expenses for the year ended December 31, 2008.

•  Other expenses from managed properties — We employ the staff at our managed properties. Under our management agreements, the hotel owners reimburse us for payroll, benefits, and certain other costs related to the operations of the managed properties. This is offset with corresponding revenue, “other revenue from managed properties”, in our consolidated statements of operations.

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Hotel Ownership — As of December 31, 2008, we wholly-owned seven hotels with 2,051 rooms and held non-controlling joint venture equity interests in 18 joint ventures, which hold ownership interests in 50 of our managed properties.

In 2008, we focused on a key part of our ownership strategy of investing capital to upgrade our wholly-owned hotels to allow us to reposition the hotels and create value. We successfully completed the $18.0 million comprehensive renovation program at the Westin Atlanta Airport in the fourth quarter. We also substantially completed the $12.0 million comprehensive renovation program at the Sheraton Columbia in early 2009 which included significant upgrades to all guest rooms and public spaces. Due to the magnitude of the renovations at both of these properties, there was displacement during the year, although we were able to manage the process to minimize disruption to our guests. In addition, we completed the final phase of an $11.0 million comprehensive renovation program at the Hilton Houston Westchase in early 2008 that was started and significantly completed by the previous owner prior to our purchase of the hotel in February 2007. With the completion or significant progress towards the renovation programs at these three hotels purchased in 2007 and the strategic capital improvements made at our four other wholly-owned hotels, we believe that our entire wholly-owned portfolio is in a strong competitive position within their respective markets for 2009 and beyond.

Although the economic environment impacted lodging demand throughout 2008, most notably in the fourth quarter, our wholly-owned hotel portfolio, excluding those two undergoing significant renovation programs, had an increase in RevPAR of 0.1 percent while the industry experienced a decline of 1.9 percent in RevPAR compared to 2007, as reported by Smith Travel Research.

In 2008, we continued to implement our growth strategy of selective hotel ownership exclusively through joint venture investments. We contributed a total of $20.4 million during the year to either new or existing joint ventures and increased the number of hotels in which we held a non-controlling equity interest from 22 as of December 31, 2007 to 50 as of December 31, 2008. Our joint venture investments at year-end also include one property currently under development.

The significant joint venture activity in 2008 related to the following investments:

•  February 2008 — Our joint venture with Barry Harte Holdings Ltd. closed on the purchase of a four property portfolio from affiliates of The Blackstone Group for an aggregate price of $208.7 million. We invested $11.6 million, representing our 20 percent equity interest in the portfolio. At the time of our investment, we managed three of the properties and had previously managed the fourth. The four properties included in the joint venture acquisition were as follows:

Property	Location	Guest Rooms
Sheraton Frazer Great Valley	Frazer, PA		198
Sheraton Mahwah	Mahwah, NJ		225
Latham Hotel Georgetown	Washington, DC		142
Hilton Lafayette	Lafayette, LA		327

•  February 2008 — Our joint venture, Budget Portfolio Properties, LLC, acquired a portfolio of 22 properties located throughout the Midwest in Illinois, Iowa, Michigan, Minnesota, Wisconsin and Texas. We invested $1.7 million, representing our 10 percent equity interest in the portfolio. Upon closing, all 22 properties, representing 2,397 rooms, were converted to various Wyndham Worldwide brands. The properties are located along major interstates and proximate to major commercial and leisure demand generators. Our investment includes our share of planned capital improvements to re-brand, re-image, and reposition the hotels. We currently manage all 22 properties.

•  February 2008 — True North Tesoro Property Partners, L.P., a joint venture in which we hold a 15.9 percent equity interest, sold the Doral Tesoro Hotel & Golf Club, located near Dallas, Texas. Our portion of the joint venture’s gain on sale of the hotel was approximately $2.4 million before post-closing adjustments. The joint venture also owns a separate entity that holds mineral rights and receives royalties related to gas production activities, which was not marketed in the sale of the hotel. We continue to own this entity and periodically receive royalty payments.

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•  February 2008 — We continued our international expansion by forming a joint venture management company with JHM Hotels, LLC (“JHM”) in which we hold a 50 percent ownership interest. The joint venture, JHM Interstate Hotels India Ltd, will serve as our platform for all hospitality-related activities in India, primarily focusing on securing management agreements on existing and to-be-built hotels. JHM Interstate Hotels India Ltd. signed its first management agreement in April 2008, with management of the hotel expected to commence in the first half of 2009. The joint venture has also established an office in New Delhi, India. We provided to our partner, JHM, $0.5 million and $0.3 million in March 2008 and January 2009, respectively, in the form of convertible notes towards the working capital of the joint venture, both of which are expected to convert to an equity interest in the joint venture in 2009. Simultaneous with the formation of this management company, we and JHM each invested $6.25 million in the Duet Hotel Investment Fund (“Duet Fund”), a U.K.-based real estate investment fund. The Duet Fund’s mission is to purchase and/or develop approximately 25 hotels in India in the three- and four-star categories targeted at business travelers and located in secondary and tertiary cities, as well as satellite townships outside major urban centers. In return for our investment, the Duet Fund will give our joint venture management company the right of first look to manage all hotels that it invests which are not already encumbered by an existing management contract. As of December 31, 2008, the Duet Fund made investments totaling $31 million in four developments projects across India, one of which is expected to commence operations in 2009. Our joint venture management company with JHM expects to manage all four of these properties upon commencement of operations.

•  June and September 2008 — We were also active in investing in joint ventures focused on new development. The IHR Greenbuck joint venture, in which we hold a 15 percent equity interest, opened the first aloft branded hotel in the United States in June 2008. Intended to be similar to the W Hotel brand, aloft is the new premium select-service hotel brand being introduced by Starwood Hotels & Resorts Worldwide, Inc. The hotel has 136 rooms and is located in Rancho Cucamonga, California. In September 2008, the joint venture opened its second aloft hotel with 143 rooms in Cool Springs, Tennessee. We currently manage both newly built hotels.

•  July 2008 — We formed a joint venture with an affiliate of Madison W Properties, LLC to recapitalize the existing ownership of the 367-room Radisson Plaza Hotel Lexington and adjacent 234,000 square foot class A office building in Lexington, Kentucky. Upon transition, the hotel was renamed and re-branded as the Lexington Downtown Hotel & Conference Center, a Hilton Affiliate Hotel. We invested $1.0 million for a 5 percent equity interest in the joint venture. The hotel is undergoing a comprehensive, $13 million renovation encompassing guest rooms and public spaces, as well as a restaurant.

Hotel Management — As of December 31, 2008, we and our affiliates managed 226 hotel properties with 46,448 rooms and six ancillary service centers, in 37 states, the District of Columbia, Russia, Mexico, Canada, Belgium and Ireland.

In 2008, we expanded our management portfolio by a net 35 properties and 3,828 rooms, an increase of 18.3 percent and 9.0 percent, respectively, compared to 2007. Our management contract losses were significant between 2005 and 2007, principally due to Blackstone’s disposition of substantially all of the hotel assets they acquired from MeriStar Hospitality and the increased hotel purchase and sale transactions within the real estate market. However, due to the tightening of the credit markets and the reduction in transaction activity in 2008, the attrition within our managed portfolio has leveled-off and allowed us to expand our portfolio once again. In addition, we have an active pipeline of 16 new management contracts for properties under construction or development that will further add to our portfolio in 2009 and 2010.

The following table highlights the contract activity in our managed portfolio:

	Number of			Number of
	Properties			Rooms
As of December 31, 2007		191			42,620
New contracts		55			8,111
Lost contracts		(20	)		(4,283	)
As of December 31, 2008		226			46,448

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We ceased managing a total of 20 hotels with combined rooms of 4,283 during 2008 from various owners, however, the most lost from a single owner was three hotels with a combined 436 rooms. Management fees earned for these 20 management contracts lost in 2008 totaled $0.8 million and $2.7 million for the years ended December 31, 2008 and 2007, respectively.

Although the total number of hotel properties we manage increased during 2008, our portfolio mix shifted to more select-service properties as many of the properties lost during the year were full-service properties, while many of the new contracts added were select-service properties. The decline in number of full-service properties, which yield a higher management fee, led to a decrease in management fees of $4.4 million as compared to 2007. Incentive fees, which are included within management fees and are tied directly to the operating performance of the hotels we manage, were $19.2 million in 2008, a decrease of $2.0 million, or 9.6 percent, compared to 2007. However, we were able to increase RevPAR by 0.2 percent in 2008 compared to 2007. While our management fees have decreased, our operating expenditures are lower for the management of select-service properties which allowed us to maintain the earnings stream from this business segment.

Industry Overview, 2009 Outlook and Challenges and Risks

Industry Overview — The lodging industry began to experience a slowdown in RevPAR growth in early 2008 as a result of the slowdown in the economy coupled with the rising costs of fuel prices and airline travel. During the third quarter of 2008, conditions in our industry further decelerated with the sharp decline in the economy and collapse of the financial markets. The combination of a deteriorating economy, turbulent financial and credit markets, and rising unemployment eroded consumer confidence and spending, particularly on discretionary spending, such as travel. Likewise, companies reduced or limited travel spending which contributed to significant contraction in hotel room demand in the third and fourth quarters of 2008. These events led to RevPAR growth of 0.2 percent in 2008 as compared to RevPAR growths of 9.1 percent and 9.6 percent in 2007 and 2006, respectively, for our managed properties. We anticipate lodging demand will not improve, and will likely weaken further, until the current economic trends reverse course, particularly the contraction in GDP, rising unemployment and the lack of liquidity in the credit markets.

2009 Outlook — Over the last two years, we continued to execute on our three prong growth strategy of investing in hotels through direct acquisition of properties, participating in joint ventures to acquire or develop properties and managing a portfolio of properties for third-parties. We have been successful in stabilizing and growing our management contract portfolio, showing a net positive contract growth of 35 contracts in 2008. In early 2008, we recognized the accelerating industry downturn and in response, we shifted our strategic focus from expansion of our hotel ownership portfolio to an emphasis on cash preservation and cost containment in order to maximize profitability across all of the properties that we own and manage as well as corporate operations. These cost containment measures included right-sizing the work force to the amount of business being generated, not filling vacant positions, reducing discretionary spending, delaying the implementation of brand standards, and closing restaurant outlets or modifying hours of operations. In January 2009, we took further measures by implementing a cost-savings program that is expected to reduce 2009 corporate overhead by $13 million. The cost-savings program consisted of eliminating 45 corporate positions, reducing pay up to 10 percent for senior management, placing a freeze on merit increases for all corporate employees, suspending the company match for 401(K) and non-qualified deferred compensation plans for 2009, restructuring the corporate bonus plan, reducing the annual fee by 25 percent and eliminating restricted stock grants during 2009 for the company’s board of directors, and reducing all other corporate expenses, including advertising, travel, training, and employee relations expenses.

As we enter into 2009, the U.S. economy remains in a severe recession and we expect our operating environment to become significantly more challenging. PKF Hospitality Research has predicted a 9.8% RevPAR decline in 2009 which, if it materializes, will be the fourth steepest decline in annual RevPAR in the history of the hotel industry. Most hotel operators, including us, are seeing larger-than-predicted RevPAR declines in the first part of 2009. While we believe that long-term fundamentals for the industry remain strong, and current negative conditions will stabilize over time, we cannot predict when a meaningful recovery will occur.

Our highest priority in 2009 is to maintain a strong cash position and strengthen our balance sheet in anticipation of amending our credit facility agreement which matures in March 2010. Consistent with this goal, beginning in the

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fall of 2008, we have built up and conserved our cash, ending 2008 with a cash balance of $22.9 million. We have also begun to minimize our cash outflows by implementing a cost-savings program in January 2009 that is designed to reduce 2009 corporate overhead by approximately $13 million. All of our wholly-owned and managed properties have taken similar initiatives to reduce costs to offset declines in revenues. We expect to make minimal capital expenditures in 2009 other than fulfilling our remaining commitment to complete the renovation of the Sheraton Columbia hotel. We remain committed to sustaining the positive growth of our management contracts that was seen in 2008 and will be aggressive in procuring additional management contracts throughout the economic downturn. On the joint venture side, we will continue to be opportunistic and selective in participating in joint ventures only if it enhances our hotel management business. In order to obtain the most favorable terms available leading up to the amendment of our credit facility agreement, we anticipate paying down debt to the extent possible.

Opportunities, Challenges and Risks — The majority of our current debt outstanding is in our Credit Facility which will mature in March 2010, in the absence of an acceleration of the maturity date due to our potential for non-compliance with certain debt covenants during 2009. We have asked for and received a waiver through June 30, 2009 for the NYSE listing covenant and the covenant relating to the audit report. However, we can give no assurances that we will continue to receive this waiver through maturity. We have already begun discussions with our lenders to amend the terms of this facility. Given the current lending environment, our access to additional funding is limited and the new terms of our amended credit facility may be more restrictive, including an interest rate that will almost certainly increase, possibly significantly. Currently, we see no immediate need to obtain additional capital to fund our operational and limited strategic growth plans for 2009. However, should a need arise for us to obtain additional capital funding for operations or growth opportunities prior to amending the terms of our current Credit Facility, our ability, or inability to do so, may require the restructuring of certain debt and the amendment of certain covenants which would be difficult at this time. Our ability and willingness to accept market terms may significantly affect our ability to obtain additional capital funding. Also, an increase in our cost of capital may cause us to delay, restructure or not commence future investments, which could limit our ability to grow our business. In addition, the market value of our common stock could make financing through an equity offering a less attractive option. See “Liquidity, Capital Resources and Financial Position.”

Our ability to achieve our expected financial results through the implementation of our cost-savings program and operating strategies could be affected by various challenges and risks which include overall domestic and international economic factors, including industry-related factors and other factors which are more specific to us, all of which are discussed in more detail in the “Risk Factors” section. Having implemented our growth strategy through hotel ownership in the recent past, we are now provided with more direct exposure to specific hospitality and lodging economic risk, including but not limited to reductions in demand for hotel rooms and the illiquidity of hotel real estate assets.

A significant portion of our managed properties and management fees are derived from seven owners. This group of owners represents 90, or 39.8 percent, of our managed properties as of December 31, 2008, and 61.3 percent of our base and incentive management fees for the year ended December 31, 2008. If these owners sell their hotels, enter into a property disposition plan, declare bankruptcy or become insolvent, or are acquired, as we have seen with MeriStar in 2006 and CNL Hotel & Resorts, Inc. in 2007, we may be at risk of losing a large percentage of our management contracts and related revenues. We would be entitled to receive approximately $5.5 million in termination fees assuming the eight remaining Blackstone properties were terminated on January 1, 2009 in addition to approximately $13.9 million due from properties terminated prior to December 31, 2008. If the remaining 25 management contracts with Sunstone REIT were terminated as of January 1, 2009, we would be entitled to approximately $5.8 million in termination fees. For the majority of our other owners, termination fees would not be significant.

Recently Issued Accounting Pronouncements

In December 2007, FASB Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements” (“SFAS 160”) was issued. SFAS 160 establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation. The statement also requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interest of the non-controlling owners of the subsidiary. SFAS 160 is effective for fiscal years

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beginning after December 15, 2008. We believe the adoption of this statement will not have a material impact on our financial statements.

In December 2007, FASB Statement No. 141R, “Business Combinations” (“SFAS 141R”) was issued. SFAS 141R revises SFAS 141, “Business Combinations” (“SFAS 141”), but it retains a number of fundamental requirements of SFAS 141. SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, in-process research and development costs, and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141R, will be applied prospectively to business combinations for which the acquisition dates are after January 1, 2009.

In February 2008, the FASB issued FSP SFAS 157-2 which delayed the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. We have not yet conclusively determined the impact that the implementation of SFAS 157 will have on our non-financial assets and liabilities; however we do not anticipate it will significantly impact our consolidated financial statements.

In March 2008, FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”) was issued. SFAS 161 amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and requires enhanced disclosure regarding an entity’s derivative and hedging activities. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We currently have only four derivative instruments and expect the impact of the adoption of this statement to add minimally to our current disclosures.

Critical Accounting Polices and 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 about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience, industry data and other factors, including the current economic development, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Our significant accounting policies are disclosed in the notes to our consolidated financial statements. We believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results as they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has discussed the selection of these critical accounting policies and the effect of estimates with the Audit Committee of our Board of Directors.

Going Concern

A fundamental principle of the preparation of financial statements in accordance with GAAP is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate. As a result of the potential for default in the near future of debt covenants under our Credit Facility, our independent registered public accounting firm has expressed that there is substantial doubt about our ability to continue as a going concern. While we have prepared

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our consolidated financial statements on a going concern basis, if we are unable to obtain continued waivers or successfully amend the terms of our Credit Facility, our ability to continue as a going concern may be materially and adversely impacted. Therefore, we may not be able to realize our assets and settle our liabilities in the ordinary course of business. Our consolidated financial statements included in this Annual Report on Form 10-K do not reflect any adjustments that might specifically result from the outcome of this uncertainty or our debt refinancing activities.

Revenue Recognition

We earn revenue from hotel management contracts and related services and operations of our wholly-owned hotels. Generally, revenues are recognized when services have been rendered. Given the nature of our business, revenue recognition practices do not contain estimates that materially affect results of operations. The following is a description of the composition of our revenues:

•  Hotel Ownership — Lodging revenue consists of amounts primarily derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary amenities. Revenue is recognized when rooms are occupied and services have been rendered. As with management fees discussed below, these revenue sources are affected by conditions impacting the travel and hospitality industry as well as competition from other hotels and businesses in similar markets.

•  Hotel Management — Our management and other fees consist of base and incentive management fees received from third-party owners of hotel properties and fees for other related services we provide. Management fees are comprised of a base fee, which is generally based on a percentage of gross revenues, and an incentive fee, which is generally based on the property’s profitability. We record the incentive management fees in the period that it is certain the incentive management fees will be earned, which for annual incentive fee measurements is typically in the last month of the annual contract period. These revenue sources are affected by conditions impacting the travel and hospitality industry as well as competition from other hotel management companies. Termination fees are also included in these amounts. These amounts are typically generated as a result of the sale of the hotel to a third-party, if the hotel is destroyed and not rebuilt after a casualty or if we are removed as manager of the property for any other reason. Termination fees are recorded as revenue in the period they are earned. Typically, this is upon loss of the contract unless a contingency such as the right of replacement of the management contract by the owner exists. If a contingency exists, termination fee revenues are recognized when the contingency expires.

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” whenever events or changes in circumstances indicate that the carrying values of long-lived assets (which consist of our wholly-owned hotels and intangible assets with determinable useful lives) may not be recoverable, we perform separate analyses to determine the recoverability of the related asset’s carrying value. These events or circumstances may include, but are not limited to: projected cash flows which are significantly less than the most recent historical cash flows; a significant loss of management contracts without the realistic expectation of a replacement; and economic events which could cause significant adverse changes and uncertainty in business and leisure travel patterns.

When evaluating long-lived assets for potential impairment, we make estimates of the undiscounted cash flows from the expected future operations of the asset. If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated discounted future cash flows. We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis.

Our impairment evaluations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives for the assets and selecting the discount rate that reflects the risk inherent in future cash flows. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to evaluate long-

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lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.

Property and Equipment

We allocate the purchase price of hotels based on the fair value of the acquired real estate, building, furniture fixture and equipment, liabilities assumed and identified intangible assets. The purchase price represents cash and other assets exchanged or liabilities assumed. The estimates of fair value used to allocate the purchase price is based upon appraisals and valuations performed by management and independent third-parties. Property and equipment are carried at cost and are depreciated using the straight-line method over the expected useful lives of the assets (generally 40 years for buildings, seven years for furniture, fixtures and equipment, and three years for computer equipment). Renovations and replacements that improve or extend the life of an asset are capitalized and depreciated over its expected useful life. Our assessments of the fair value allocated and expected useful life of assets acquired are subjective. A change in our estimates will affect depreciation expense and net income.

For properties acquired from Blackstone that we managed prior to the purchase, we were entitled to termination fees pursuant to the preexisting management agreements for those properties. Under Emerging Issues Task Force Issue 04-1, “Accounting for Preexisting Relationships between the Parties to a Business Combination” (“EITF 04-1”), the settlement of the preexisting management agreements (including the payment of the termination fees) requires accounting separate from the acquisition of the properties. Under EITF 04-1, the effective settlement of a management agreement with respect to an acquired property is required to be measured at the lesser of (x) the amount by which the agreement is favorable or unfavorable from our perspective when compared to pricing for current market transactions for the same or similar management agreements and, (y) the stated settlement provisions that are unfavorable to the seller. Therefore, in connection with the purchase of a hotel being managed by us, we will evaluate the terms of the contract and record the lesser amount, if any, as income from the settlement of the management contract and a corresponding increase in the recorded purchase price.

Impairment of Goodwill

We evaluate goodwill to assess potential impairments on an annual basis, or more frequently if events or other circumstances indicate that the carrying value of goodwill may not be recoverable. We evaluate the fair value of goodwill at the reporting unit level and make that determination based upon future cash flow projections. All of our goodwill resides with our hotel management segment. Assumptions used in these projections, such as forecasted growth rates, cost of capital and multiples to determine the terminal value of the reporting units, are consistent with internal projections and operating plans. We record an impairment loss when the implied fair value of the goodwill assigned to the reporting unit is less than the carrying value of the reporting unit, including goodwill. We completed, with the assistance of a third-party valuation firm, our annual impairment testing of goodwill as of October 31, 2008 and at December 31, 2008 and determined there was no impairment. Given current market conditions, we will continue to monitor the value of our goodwill on a quarterly basis.

We determine fair value using widely accepted valuation techniques, which contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for goodwill impairment losses. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to an impairment charge that could be material.

Income Taxes

We make certain estimates and judgments in determining our income tax expense, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets for financial statement purposes. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities. The tax rates used to determine deferred tax assets or liabilities are the enacted tax rates in effect for the year in which the differences are expected to reverse. Realization of certain deferred tax assets is dependent upon generating sufficient taxable income prior to the expiration of the carryforward periods. A

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valuation allowance is required to be established against deferred tax assets unless we determine that it is more likely than not that we will ultimately realize the tax benefit associated with a deferred tax asset.

At December 31, 2008, we have a valuation allowance of $38.1 million to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. This is an allowance against some, but not all, of our recorded deferred tax assets. The valuation allowance we recorded includes the effect of the limitations on our deferred tax assets arising from net operating loss carryforwards. The utilization of our net operating loss carryforwards will be limited by the provisions of the Internal Revenue Code. We have considered estimated future taxable income and prudent and feasible ongoing tax planning strategies in assessing the need for a valuation allowance. Our estimates of taxable income require us to make assumptions about various factors that affect our operating results, such as economic conditions, consumer demand, competition and other factors. Our actual results may differ from these estimates. Based on actual results or a revision in future estimates, we may determine that we are not able to realize additional portions of our net deferred tax assets in the future; if that occurred, we would record a charge to the income tax provision in that period.

Depreciation and Amortization Expense

Depreciation expense is based on the estimated useful lives of our assets, which are generally the following: buildings and improvements, 40 years or less; furniture and fixtures, five to seven years; computer equipment, three years; and software, five years. If an owned hotel is undergoing a significant renovation, we will shorten the useful lives of the assets affected by the renovation to a period which corresponds to the renovation period.

Amortization expense for our intangible assets is based on the estimated useful life of the underlying future benefit of the intangible asset. The useful lives of our intangible assets are based upon the length or expected term of their associated management, franchise, or financing agreements. These lives are determined at the onset of the management contract or the franchise or financing agreement. However, as certain circumstances arise, such as a disposition plan by the owner, the estimated future benefit of the contract or agreement may change.

While management believes its estimates are reasonable, a change in circumstances could require us to revise the estimated useful lives related to our property and equipment and intangible assets. If we revised the useful lives of these assets, we could be exposed to material changes in the depreciation and amortization expense which we record.

Joint Venture Investments

Judgment is required with respect to the consolidation of our joint venture investments in the evaluation of financial interests and control, including the assessment of the adequacy of the equity invested in the joint venture, the proportionality of financial interests and voting interests, as well as the importance of rights and privileges of the joint venture partners based on voting rights. Currently, we have investments in joint ventures that own, operate or develop hotel properties, which we record using the equity or cost method of accounting. We are not the primary beneficiary in any variable interest entities. We do not guarantee debt held by the joint ventures and the debt is non-recourse to us, other than for customary non-recourse carveout provisions. While we do not believe we are required to consolidate any of our current joint ventures, if we were required to do so, then all of the results of operations and the assets and liabilities would be included in our financial statements.

We evaluate our investments in joint ventures for impairment during each reporting period in accordance with APB No. 18, “The Equity Method of Accounting for Investments in Common Stock.” A series of operating losses of the property held by the joint venture or other factors may indicate that a decrease in the value of our investment in the joint venture has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value. Additionally, we consider various qualitative factors to determine if a decrease in the value of our investment is other-than-temporary. These factors include intent and ability for us to retain our investment in the entity, financial condition and long-term prospects of the properties, the ability of the entity to meet or refinance its debt obligations, and relationships with our other partners. If we believe that the decline in the fair value of the investment is temporary, then no impairment is recorded.

If there are indicators of impairment, we determine whether the carrying value of our joint venture interests exceeds its estimated fair value using the discounted cash flow valuation model. The determination of estimated fair value

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using the discounted cash flow analysis includes certain assumptions such as projected future operating results, discount rate, terminal growth rates, and industry and economic trends. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the joint venture interest, the amount of the impairment charge, or both.

Results of Operations

Operating Statistics

Statistics related to our wholly-owned properties and managed hotel properties include:

	As of December 31,						Percent Change
	2008		2007		2006		‘08 vs. ‘07			‘07 vs. ‘06
Hotel Ownership
Number of properties		7		7		4		—			75.0	%
Number of rooms		2,051		2,045		963		0.3	%		>100.0	%
Hotel Management(1)
Properties managed		226		191		223		18.3	%		(14.3	)%
Number of rooms		46,448		42,620		50,199		9.0	%		(15.1	)%

(1) Statistics related to hotels in which we hold a partial ownership interest through a joint venture or wholly-owned have been included in hotel management.

Hotels under management increased by a net of 35 properties as of December 31, 2008 compared to December 31, 2007, due to the following:

•  We acquired 22 management contracts through our investment in the Budget Portfolio Properties, LLC joint venture in February 2008.

•  We obtained management contracts for 2 newly built aloft branded hotels developed by our joint venture, IHR Greenbuck Hotel Venture.

•  We signed 7 new management contracts with Equity Inns, Inc.

•  We secured 7 additional management contracts with FFC Capital Corporation.

•  We obtained 17 additional management contracts, including one internationally, with various other owners. These additional contracts were offset by the loss of 20 management contracts from various owners during the year.

Hotels under management decreased by a net of 32 properties as of December 31, 2007 compared to December 31, 2006, due to the following:

•  Blackstone sold 25 properties, 17 of which we no longer manage. We either purchased or were retained as manager by the new owners for the 8 remaining properties.

•  Sunstone REIT sold 8 properties which we no longer manage.

•  CNL sold 22 properties, 17 of which we no longer manage. We continue to manage 5 of the properties for the new owners.

•  We transitioned 18 properties out of our system from various other owners.

•  These losses were offset with the addition of 28 new management contracts from various owners.

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The operating statistics related to our wholly-owned hotels on a same store basis(2) were as follows:

	As of December 31,						Percent Change
	2008			2007			‘08 vs. ‘07
Hotel Ownership
RevPAR	$	84.55		$	84.45			0.1	%
ADR	$	123.97		$	121.25			2.2	%
Occupancy		68.2	%		69.7	%		(2.2	)%

	As of December 31,						Percent Change
	2007			2006			‘07 vs. ‘06
RevPAR	$	82.85		$	78.50			5.5	%
ADR	$	117.21		$	111.75			4.9	%
Occupancy		70.7	%		70.2	%		0.7	%

(2) The operating statistics related to our wholly-owned hotels include periods prior to our ownership. The Hilton Garden Inn in Baton Rouge was purchased in June 2006, the Hilton Arlington was purchased in October 2006, the Hilton Houston Westchase was purchased in February 2007, the Westin Atlanta Airport was purchased in May 2007 and the Sheraton Columbia was purchased in November 2007. The Westin Atlanta Airport and the Sheraton Columbia are excluded from these statistics as they were undergoing significant renovations during the periods presented herein. Statistics for our wholly-owned hotels are also included in the operating statistics related to our managed hotels.

The operating statistics related to our managed hotels on a same store basis(3) were as follows:

	As of December 31,						Percent Change
	2008			2007			‘08 vs. ‘07
Hotel Management
RevPAR	$	95.57		$	95.35			0.2	%
ADR	$	137.87		$	132.80			3.8	%
Occupancy		69.3	%		71.8	%		(3.5	)%

	As of December 31,						Percent Change
	2007			2006			‘07 vs. ‘06
RevPAR	$	99.45		$	91.17			9.1	%
ADR	$	134.33		$	124.40			8.0	%
Occupancy		74.0	%		73.3	%		1.0	%

(3) We present these operating statistics for the periods included in this report on a same-store hotel basis. We define our same-store hotels as those which (i) are managed by us for the entirety of the reporting periods being compared or have been managed by us for part of the reporting periods compared and we have been able to obtain operating statistics for the period of time in which we did not manage the hotel, and (ii) have not sustained substantial property damage, business interruption or undergone large-scale capital projects during the periods being reported. In addition, the operating results of hotels for which we no longer managed as of December 31, 2008 are also not included in same-store hotel results for the periods presented herein. Of the 226 properties that we managed as of December 31, 2008, 194 hotels have been classified as same-store hotels. Of the 191 properties that we managed as of December 31, 2007, 169 hotels have been classified as same-store hotels.

Revenues

The significant components of total revenue were as follows (in thousands):

	As of December 31,						Percent Change
	2008		2007		2006		‘08 vs. ‘07		‘07 vs. ‘06
Lodging	$	94,072	$	74,198	$	27,927		26.8%		>100%
Management fees		59,321		63,712		75,305		(6.9)%		(15.4)%
Termination fees		6,896		8,597		25,881		(19.8)%		(66.8)%
Other		9,891		9,526		11,568		3.8%		(17.7)%
Other revenue from managed properties		609,273		644,098		834,484		(5.4)%		(22.8)%
Total revenue	$	779,453	$	800,131	$	975,165		(2.6)%		(17.9)%

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  Lodging

•  Lodging revenue increased $19.9 million in 2008 compared to 2007, primarily due to the inclusion of $11.4 million in additional revenue from the Sheraton Columbia, which was purchased in November 2007, $6.6 million in additional revenue from the Westin Atlanta Airport, which was purchased in May 2007, and $2.7 million in additional revenue from the Hilton Houston Westchase, which was purchased in February 2007.

•  Lodging revenue increased $46.3 million in 2007 compared to 2006, primarily due to the inclusion of $44.3 million in additional revenue from the Hilton Garden Inn Baton Rouge, which was purchased in June 2006, the Hilton Arlington, which was purchased in October 2006, and the three hotels purchased in 2007: the Hilton Houston Westchase, the Westin Atlanta Airport and the Sheraton Columbia. In addition, revenue from the Hilton Concord increased $1.6 million, or 10.1 percent.

  Management Fees

•  Although the number of hotel properties we manage increased during 2008, our portfolio mix shifted to more select-service properties as many of the properties lost during the year were full-service properties, while many of the new contracts added were select-service properties. The decline in number of full-service properties, which yield a higher management fee, led to a decrease in management fees of $4.4 million in 2008 as compared to 2007. Incentive fees, which are included within management fees and are tied directly to the operating performance of the hotels we manage, were $19.2 million in 2008, a decrease of $2.0 million, or 9.6 percent, compared to 2007. However, we were able to increase RevPAR by 0.2 percent in 2008 compared to 2007.

•  Management fee revenue decreased $11.6 million in 2007 compared to 2006. The decrease is due in part to the non-recurrence of $3.2 million in business interruption proceeds for lost management fees that we received during the first quarter of 2006 associated with eight MeriStar properties that were damaged or closed due to hurricanes in 2004. Excluding the one time payment of $3.2 million, management fees declined 11.2 percent, which is directly attributed to the net decline in the number of properties under management. Many of the lost properties have been full service properties which, on average, yield a higher management fee than select-service properties. We have been able to partially offset these losses through operational and economic gains and have recognized RevPAR growth of 9.1 percent in 2007. Our positive operating performance led to an increase in our incentive fees of $3.8 million, or 22.0 percent.

  Termination fees

•  Termination fee revenue decreased $1.7 million in 2008 compared to 2007, primarily due to the stabilization of the management contract attrition experienced in 2007. In 2008, we recognized $6.5 million in termination fees from Blackstone, of which $1.4 million related to three properties sold by Blackstone to our Harte IHR Joint Venture and $0.2 million for one property sold by Blackstone to our MPVF IHR Lexington, LLC joint venture. For the three hotels purchased by our joint venture with Harte, Blackstone has waived the right to replace the management contract with another contract. As all contingencies have been removed, we recognized the full amount of the termination fees related to these three hotels. In 2007, termination fees primarily relate to the recognition of $7.2 million of fees related to the termination of properties managed for Blackstone, three of which were purchased by us, and $1.4 million related to the loss of management contracts from various other owners.

•  Termination fee revenue decreased $17.3 million in 2007 compared to 2006, primarily due to the recognition of $15.1 million of termination fees from Blackstone in the third quarter of 2006, in respect of management contracts terminated on or before October 1, 2006. In 2006, Blackstone agreed to waive its right of replacement with respect to all hotels terminated prior to October 1, 2006. As the contingency was removed, we recognized the remaining termination fees due to us. During the first quarter of 2006, we also received one-time termination fees totaling $4.1 million from MeriStar due to its sale of ten properties.

•  In connection with the purchase from Blackstone in 2007 of the Westin Atlanta Airport, the Hilton Houston Westchase and the Sheraton Columbia, all of which were hotels we managed at the time of the purchase, we recognized settlement gains under EITF 04-1 with respect to the termination fees received and an increase to the purchase prices of the relevant properties. Under EITF 04-1, the effective settlement of a management

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agreement with respect to an acquired property is required to be measured at the lesser of (x) the amount by which the agreement is favorable or unfavorable from our perspective when compared to pricing for current market transactions for the same or similar management agreements and (y) the stated settlement provisions that are unfavorable to the seller. We determined that the contractual termination fees due to us were less than the off-market pricing of the related management contracts for the Westin Atlanta Airport, the Hilton Houston Westchase, and the Sheraton Columbia purchases in 2007. As a result, we recorded termination fees in 2007 of $3.1 million and the corresponding amount as an increase to the purchase prices of the related properties.

  Other

•  Other revenue increased $0.4 million in 2008 compared to 2007, primarily due to increases of $1.0 million in capital project management revenue and $0.5 million in accounting fees, partially offset by decreases of $0.6 million in purchasing fees and $0.5 million in insurance revenue.

•  Other revenue decreased $2.0 million in 2007 compared to 2006, primarily due to a decrease of $1.0 million in accounting fees as a result of managing fewer properties. In addition, we realized a decrease in insurance revenue of $0.4 million. Purchasing fees and revenue from capital project management decreased $0.7 million as a result of additional time spent on property improvements related to our wholly-owned hotels.

  Other Revenue from Managed Properties

•  These amounts represent the payroll and related costs, and certain other costs of the hotel’s operations that are contractually reimbursed to us by the hotel owners. Our payments of these costs are recorded at the same amount as part of “other expenses from managed properties.” The decrease of $34.8 million in other revenue from managed properties is primarily due to the net loss of full-service properties.

•  Other revenue from managed properties decreased $190.4 million in 2007 compared to 2006 primarily due to the decrease in the number of managed hotels and a corresponding decrease in the number of hotel employees and related reimbursable salaries, benefits and other expenses.

Operating Expenses

The significant components of operating expenses were as follows (in thousands):

	As of December 31,						Percent Change
	2008		2007		2006		‘08 vs. ‘07			‘07 vs. ‘06
Lodging	$	67,286	$	52,281	$	20,768		28.7	%		>100	%
Administrative and general		61,910		65,937		59,327		(6.1	)%		11.1	%
Depreciation and amortization		18,322		14,475		6,721		26.6	%		>100	%
Asset impairments and write-offs		12,537		11,127		13,214		12.7	%		(15.8	)%
Other expenses from managed properties		609,273		644,098		834,484		(5.4	)%		(22.8	)%
Total operating expenses	$	769,328	$	787,918	$	934,514		(2.4	)%		(15.7	)%

  Lodging

•  Lodging expense increased $15.0 million in 2008 compared to 2007, primarily due to the inclusion of $8.3 million in additional expense from the Sheraton Columbia, which was purchased in November 2007, $6.1 million in additional expense from the Westin Atlanta Airport, which was purchased in May 2007, and $1.3 million in additional expense from the Hilton Houston Westchase, which was purchased in February 2007. Our wholly-owned hotels had a gross margin of 28.5 percent in 2008 compared to 29.5 percent in 2007.

•  Lodging expense increased $31.5 million in 2007 compared to 2006, primarily due to the inclusion of additional expense related to the three hotels we acquired in 2007 and the two hotels we acquired in 2006, which have been included in 2007 for a full year. Our wholly-owned hotels had a gross margin of 29.5 percent in 2007 compared to 25.6 percent in 2006.

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  Administrative and General

•  Administrative and general expense consists of payroll and related benefits for employees in operations management, sales and marketing, finance, legal, information technology support, human resources and other support services, as well as general corporate and public company expense. Administrative and general expense decreased $4.0 million in 2008 compared to 2007, primarily due to a reduction of $6.4 million in payroll related expense partially offset by increased legal fees of $1.6 million and an increase in bad debt expense of $1.4 million.

•  Administrative and general expense increased $6.6 million in 2007 compared to 2006, due to higher legal and professional fees, severance costs, acquisition and other deal related costs. Also, included in general and administrative costs for 2007 is $2.9 million of bad debt reserves for a note receivable we hold with an owner of one of our joint ventures.

  Depreciation and Amortization

•  Depreciation and amortization expense increased $3.8 million in 2008 compared to 2007. We had a significant increase in depreciable assets due to the increase in our wholly-owned portfolio to seven. The Sheraton Columbia, Westin Atlanta Airport, and Hilton Houston Westchase, all of which were acquired in 2007, resulted in additional depreciation expense of $2.7 million, $2.5 million and $0.2 million, respectively, in 2008. These changes were offset by a decrease in scheduled amortization expense for our management contracts by approximately $1.7 million as a result of the significant decrease in intangible assets during 2007 resulting from the write-off of properties as they were terminated.

•  Depreciation and amortization expense increased $7.8 million in 2007 compared to 2006, as a result of a significant increase in depreciable assets due to the acquisition of the three hotels we acquired in 2007 and the two hotels we acquired in 2006, which have been included in 2007 for a full year. These five hotels contributed additional depreciation expense of $5.6 million. In addition, scheduled amortization expense for our management contracts increased by $2.0 million, as a result of revising the estimated economic lives of the management contracts for the remaining Blackstone properties to approximately four years, due to Blackstone’s plans to sell most of the portfolio within four years.

  Asset Impairment and Write-offs

•  The sharp contraction in economic activity required that we assess the recoverability of our hotels during the fourth quarter of 2008. As a result, we recorded an $11.0 million write-down of the carrying value of our Hilton Arlington hotel as we determined the future undiscounted cash flows associated with the hotel were insufficient to recover its carrying value. There were no similar charges recognized in 2007 or 2006.

•  When a management contract is terminated, we write-off the remaining carrying value of the contract which we record in asset impairment and write-offs. In 2008, we recognized impairment losses of $1.5 million related to management contracts for 11 properties that were sold during the year, four of which were sold by Blackstone to two of our joint ventures. In 2007, we recognized impairment losses of $11.1 million, related specifically to management contracts for 38 properties that were terminated during the year and in 2006, $13.2 million of asset impairments were recorded related to the termination of 49 management contracts.

Other Income and Expenses

The significant components of other income and expenses, were as follows (in thousands):

	As of December 31,							Percent Change
	2008			2007		2006		‘08 vs. ‘07			‘07 vs. ‘06
Interest expense, net	$	13,485		$	11,630	$	6,461		16.0	%		80.0	%
Equity in (losses) earnings of unconsolidated entities		(2,411	)		2,381		9,858		>(100	)%		(75.8	)%
Gain on sale of investments and extinguishment of debt		—			—		162		—			(100	)%
Income tax expense		12,281			435		17,271		>100	%		(97.5	)%
Minority interest (benefit) expense		(29	)		65		223		>(100	)%		(70.9	)%
Income from discontinued operations, net of tax		—			20,364		3,063		(100	)%		>100	%

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  Interest Expense, net of interest income

•  Net interest expense increased $1.9 million in 2008 compared to 2007, primarily due to interest expense of $2.3 million incurred on the borrowings made under the revolving loan on our Credit Facility and $0.8 million for the Sheraton Columbia mortgage debt which was placed in May 2008. These increases, however, were offset by significant interest savings as a result of the downward trend in the 30-day LIBOR rates and repayment of the Hilton Concord mortgage debt in April 2007. Furthermore, interest income decreased $1.1 million also as a result of the downward trend in interest rates combined with a decline in average cash balance held during 2008 compared to 2007.

•  Net interest expense increased $5.2 million in 2007 compared to 2006, primarily due to an increase in our total debt outstanding as a result of borrowings made in connection with our investments in wholly-owned hotels and joint ventures. Specifically, interest expense related to our Credit Facility increased by $2.1 million due to additional borrowings during 2007. Our mortgage interest expense increased by $2.3 million due to the acquisitions of the Hilton Arlington and the Hilton Houston Westchase, offset by the repayment of the Hilton Concord mortgage during the second quarter of 2007. In addition, the amortization of capitalized loan fees increased $0.8 million due to additional fees expensed related to the refinancing of our Credit Facility.

  Equity in Earnings of Unconsolidated Entities

•  Equity in earnings of unconsolidated entities decreased $4.8 million in 2008 compared to 2007. In 2008, we recognized income of $2.4 million from the sale of the Doral Tesoro Hotel and Golf Club by one of our joint ventures, where as in 2007, we recognized $1.2 million from the settlement of working capital and other purchase price adjustments related to two joint ventures sold in 2006. The significant decrease in equity in earnings in 2008 compared with 2007 was primarily due to impairment charges recorded on two of our joint venture interests. During the fourth quarter of 2008, we recognized impairment charges of $0.4 million and $3.5 million related to our investments in Cross Keys Hotel Partners, LLC and Steadfast Mexico, LLC, respectively. The hotels held by these joint ventures had experienced operating losses and coupled with the expected continued deterioration of market demand within their respective markets necessitated us to take impairment charges as we believe we will not be able to recover our investments based on projected cash flows generated by these properties. There was no similar charge taken in 2007.

•  Equity in earnings of unconsolidated entities decreased $7.5 million in 2007 compared to 2006. The decrease is partially due to the gain of $5.4 million recorded in 2006 resulting from the sale of our MIP joint venture, in which we held a 10 percent interest. In 2007, we recognized an additional $0.6 million gain related to the settlement of working capital and other purchase price true-ups from this sale. In addition, we realized a gain of $4.5 million during the third quarter of 2006 from the sale of our 10 percent interest in the joint venture that owned the Sawgrass Marriott Resort & Spa. During the second quarter of 2007 we recognized an additional $0.6 million gain related to the settlement of working capital and other purchase price true-ups from this sale. Excluding the gain related to the sale of these two joint ventures in 2006, our equity in earnings of unconsolidated entities increased $1.2 million in 2007.

  Gain on Sale of Investments and Extinguishment of Debt

•  In December 2006, we recognized a gain of $0.2 million primarily from the exchange of stock warrants for stock and subsequent sale of that stock in an unaffiliated company, which we held as an investment. No such gains or losses were recorded in 2007 or 2008.

  Income Tax Expense

•  The increase in income tax expense in 2008 compared to 2007 is primarily related to an increase of $18.1 million in the valuation allowances on our net operating loss carryforwards, our tax credit carryforwards and certain other deferred tax assets in the fourth quarter of 2008 as our estimate of expected utilization of these assets changed in late 2008 as the severe economic decline and our expectation for very challenging operating conditions resulted in lower projected taxable income for the foreseeable future. This large increase in our valuation allowance resulted in a corresponding charge to income tax expense and is the primary reason our effective tax rate for 2008 is 213.9%, (reflecting net income tax expense in a loss year) as compared to an effective rate of 15% for 2007.

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•  The decrease in income tax expense in 2007 compared to 2006 is partially driven by the decrease in our income from continuing operations. In addition, there was a reduction in the effective tax rate from 39 percent in 2006 to 15 percent in 2007. The change in the effective tax rate was due to a change in the tax law relating to certain tax credits which are now allowed to be utilized during the current year and carried back to offset 2006 alternative minimum tax paid. We had previously been carrying a valuation allowance against those credits which was relieved in the third quarter causing the reduction in our effective tax rate. This adjustment to the valuation allowance, combined with lower taxable income, resulted in the decrease to our effective tax rate on continuing operations for 2007.

  Income from Discontinued Operations, net of Tax

•  Discontinued operations for 2007 and 2006 includes the operations of BridgeStreet, our corporate housing subsidiary which was held for sale as of December 31, 2006 and disposed of in January 2007. A gain on sale of BridgeStreet of $20.4 million is also included in discontinued operations for 2007. The disposition of BridgeStreet triggered the recognition of significant differences in the carrying values between tax basis and GAAP basis. As the tax basis was significantly higher, there was a small loss realized for tax purposes compared to the $20.4 million gain recognized in our statement of operations for the year ended December 31, 2007.

Liquidity, Capital Resources and Financial Position

Key metrics related to our liquidity, capital resources and financial position are as follows (in thousands):

	As of December 31,								Percent Change
	2008			2007			2006		‘08 vs. ‘07			‘07 vs. ‘06
Cash provided by operating activities	$	32,298		$	30,319		$	67,902		6.5	%		(55.3	)%
Cash used in investing activities		51,223			168,803			58,946		(69.7	)%		>100	%
Cash provided by financing activities		31,993			124,414			3,062		(74.3	)%		>100	%
Working capital		(165,676	)		(12,829	)		14,315		>(100	)%		>(100	)%
Cash interest expense		12,691			11,891			7,718		6.7	%		54.1	%
Debt balance		244,283			211,663			84,226		15.4	%		>100	%

Operating Activities

The increase in cash provided by operating activities of $2.0 million from 2007 to 2008 was primarily driven by an increase of $4.9 million in gross operating income from our wholly-owned hotels, which was due to the full year effect of our acquisition of three hotels in 2007, and a reduction in G&A expense of $4.0 million as a result of our focus on cost-containment efforts throughout 2008. These increases in operating cash flows were however, offset by a decrease of $6.1 million in management and termination fees as a result of our net loss of full-service properties during the year and an increase in cash interest expense of $0.8 million in 2008 as compared to 2007.

The decrease in cash provided by operating activities of $37.6 million from 2006 to 2007 was primarily driven by the decrease in management fees, termination fees and other revenue (primarily accounting fees) of $30.9 million. These revenues all decreased due to the net loss of properties under management over the course of 2007 and 2006. In 2007, we also had an increase in G&A expense of $6.4 million and an increase in interest expense of $5.2 million due to our additional whole-ownership of hotel properties. In addition, the net change in our assets and liabilities resulted in a cash outflow of $1.2 million in 2007, while in 2006, those changes resulted in a cash inflow of $10.8 million. These decreases were offset by an increase in operating income from our wholly-owned hotels of $14.5 million, primarily due to our acquisition of three additional hotels in 2007 and the full year effect of our two acquisitions from 2006.

Investing Activities

The major components of the decrease in cash used in investing activities from 2007 to 2008 were:

•  The purchase of three wholly-owned hotels in 2007 for a total acquisition cost of $176.3 million compared to none in 2008. In February 2007, we purchased the Hilton Houston Westchase for $51.9 million, in May 2007 we purchased the Westin Atlanta Airport for $76.1 million, and in November 2007 we purchased the Sheraton Columbia for $48.3 million.

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•  The cash expenditures above in 2007 were partially offset by $36.4 million of net cash received from the sale of BridgeStreet in January 2007.

•  In 2008, we invested a total of $20.4 million in joint ventures, of which $18.3 million was in five new joint ventures, while receiving a distribution of $1.9 million from one joint venture. In 2007, we invested a total of $17.1 million in joint ventures, of which $11.8 was in four new joint ventures, while receiving distributions totaling $3.6 million from four joint ventures. Distributions which are a return of our investment in the joint venture are recorded as investing cash flows, while distributions which are a return on our investment are recorded as operating cash flows.

•  In 2008, we spent $31.1 million on property improvements compared with $9.9 million in 2007. Of the $31.1 million spent in 2008, approximately $29.7 million was used for renovations of our wholly-owned properties.

The major components of the increase in cash used in investing activities from 2006 to 2007 were:

•  The purchase of three hotels in 2007 for a total acquisition cost of $176.3 million compared to the purchase of two hotels in 2006 for a total acquisition cost of $51.6 million, an increase of $124.7 million. We also spent an additional $4.0 million on capital purchases in 2007 compared to 2006, which was primarily related to our seven owned hotels.

•  In 2006, we received distributions related to the sale of the Sawgrass Marriott joint venture and the MIP joint venture of $15.3 million ($9.3 million of which was reinvested) and $6.4 million, respectively. In 2007, we received only $3.6 million in distributions from our joint ventures.

•  The increase in cash used in 2007 was partially offset by $36.4 million of net cash received from the sale of BridgeStreet in January 2007.

Financing Activities

Cash provided by financing activities decreased $92.4 million in 2008 compared to 2007 primarily due to net borrowings on long-term debt of $32.6 million in 2008 compared with $127.4 million in 2007. We borrowed $32.6 million in 2008 primarily to continue our two major renovations, execute our growth strategy of continuing to invest in joint ventures, and build cash reserves in light of the tightening of the credit markets in the fourth quarter. The borrowings in 2007 were primarily related to the $32.8 million, $50.0 million and $25.0 million used for the purchase of the Hilton Houston Westchase, the Westin Atlanta Airport and the Sheraton Columbia, respectively.

Cash provided by financing activities increased $121.4 million in 2007 compared to 2006. In 2007, we borrowed an additional $127.4 million, net of repayments/extinguishments, to fund the acquisition of three properties, while in 2006, our long-term debt balance remained flat compared to 2005. We spent $3.3 million in 2007 in connection with the refinancing of our long-term debt. We received $2.8 million of additional proceeds in 2006 from the issuance of common stock related to the exercise of stock options.

Liquidity

Liquidity Requirements — Our known short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures, including: corporate expenses, payroll and related benefits, legal costs, and other costs associated with the management of hotels, interest and scheduled principal payments on our outstanding indebtedness and capital expenditures, which include renovations and maintenance at our wholly-owned hotels.

Our long-term liquidity requirements consist primarily of funds necessary to pay for scheduled debt maturities, capital improvements at our wholly-owned hotels and costs associated with potential acquisitions. In March 2007, we entered into our Credit Facility which matures in March 2010 and consists of a $115.0 million term loan and an $85.0 million revolver. As of December 31, 2008, we had $31.0 million available under our revolver. In connection with obtaining the existing waiver in March 2009, we have agreed to permanently increase the spread over the 30-day LIBOR rate to 350 bps from 275 bps and reduce the capacity under the revolving loan to $60.3 million from $85.0 million, limit our aggregate borrowing capacity under the revolving loan during the waiver period to

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$6.0 million, and pay up front waiver fees of 50 bps to consenting lenders. We also have three non-recourse mortgage loans for $24.7 million, $32.8 million and $25.0 million, which mature in November 2009 (with two one-year extensions at our discretion), February 2010 (with two one-year extensions at our discretion) and April 2013, respectively. See Note 8, “Long-Term Debt,” to our consolidated financial statements for additional information relating to our Credit Facility and mortgage loans.

We have historically satisfied our short-term liquidity requirements through cash provided by our operations and borrowings from our Credit Facility. Our borrowings under our Credit Facility are subject to certain restrictions under the Credit Facility agreement. Additionally, we must maintain compliance with our financial covenants, including an acceptable degree of leverage, value of unencumbered assets and interest coverage ratios, in order to continue to have funds available to borrow under our Credit Facility. We continually monitor our operating and cash flow models in order to forecast our compliance with the financial covenants. As of December 31, 2008, we were in compliance with all financial covenants.

However, we may be in non-compliance with the debt covenant under our Credit Facility requiring continued listing on the NYSE if we are unable to continue our current waiver through maturity. Additionally, there is uncertainty as to whether we will meet one of the financial debt covenants regarding our total leverage ratio for the fourth quarter 2009 calculation given the extremely challenging economic and operating environment which is depressing our current and projected operating results. As we cannot guarantee our continued listing on the NYSE and ability to meet the aforementioned financial debt covenant and with the absence of a waiver from our lenders through December 31, 2009 on these covenants, substantial doubt exists about our ability to continue as a going concern and our independent registered public accounting firm, KPMG LLP, has included an explanatory paragraph to describe this material uncertainty in their auditors report on our consolidated financial statements for the year ended December 31, 2008 included in this Annual Report on Form 10-K. In addition, we have classified the full amount outstanding on the term and revolving loan under the Credit Facility as a current liability as of December 31, 2008.

We have already begun discussions with our lenders to amend the terms of our Credit Facility, including extending the maturity date and adjusting the above mentioned covenants such that we can reasonably expect to achieve the covenant thresholds based on our current and projected operating results. During this amendment process and in the absence of an acceleration of the maturity of our Credit Facility, we believe that we have sufficient liquidity from cash on hand and cash from operations to fund our operating needs in 2009. Additionally in March 2009, Moody’s Investor Services downgraded us from a “B2” rating to a “Caa1” rating and Standard & Poor’s Ratings Services downgraded us from a “B” rating to a “CCC+” rating.

Our short-term liquidity could be influenced by various factors including changes in lodging demand due to seasonality or a slowdown in the overall economy and RevPAR declines. During the past four years, we have invested in the ownership of multiple lodging properties through joint venture partnerships and the whole ownership acquisition of seven hotels. This degree of ownership elevates our level of sensitivity to RevPAR fluctuations, declines in the real estate market and the overall economy in general, which could have a significant impact on our earnings and cash flows. Additional factors include increased operating costs, access to financing, interest rate changes, natural disasters and non-specific operational risks.

We have historically satisfied our long-term liquidity requirements through various sources of capital, including cash provided by operations, bank credit facilities, and long-term mortgage indebtedness. We believe that these sources of capital will continue to be available to us in the future to fund our long-term liquidity requirements although additional debt or equity financing would be extremely difficult to access in the near term. There are certain factors that may have a material adverse effect on our access to these capital sources. Our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, the value of our unencumbered assets (if any), our public debt ratings and borrowing restrictions imposed by existing lenders.

Our continued ability to raise funds through the issuance of equity securities is dependent upon, among other things, overall general market conditions, market valuation of our equity and perceptions about our Company. Given our current market price, the unknown status of our future listing on an exchange and the overall economic conditions, we believe it is unlikely that we have or will have in the near future any access to raise capital in the form of equity in the public markets.

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Additionally, the ability to access new debt financing is extremely limited in the current economic environment. We will focus our near term efforts on amending the terms of our current credit facility and we believe we have the ability to do so prior to its upcoming maturity. However, we are uncertain of the pricing and terms under which we will achieve this amendment. We do not expect to amend any of our longer term debt until the current markets improve. We will continue to analyze which sources of capital are most advantageous to us at any particular point in time, but equity and debt financing may not be consistently available to us on terms that are financially viable or at all.

Expectations for 2009 — During 2009, we expect to fund our operations and limited growth plans through cash on hand and cash from operations. We will focus our efforts on cash preservation and expect to make limited investments in our current assets or any new investments, which would most likely only be in the form of joint venture interests or new management contract incentives in the form of loans.

Our Credit Facility matures in March 2010, and we have begun discussions with our lenders to amend the terms of this facility. During this amendment process and in the absence of an acceleration of the maturity of our Credit Facility, we believe that we have sufficient liquidity from cash on hand and cash from operations to fund our operating needs in 2009. We have undertaken efforts to minimize our cash outflows which included eliminating 45 corporate positions, reducing pay up to 10 percent for senior management, placing a freeze on merit increases for all corporate employees, suspending the company match for 401(K) and non-qualified deferred compensation plans for 2009, restructuring the corporate bonus plan, reducing the annual fee by 25 percent and eliminating restricted stock grants during 2009 for the company’s board of directors, and reducing all other corporate expenses, including advertising, travel, training, and employee relations expenses. We will continue to seek additional measures to further reduce our cash outflows and any excess cash generated from operations in 2009 will be used to pay down our debt to the extent possible. Other options that we are evaluating to enhance our cash position include selling one or more of our wholly-owned hotels.

The current environment poses significant challenges on our ability to amend the terms of our Credit Facility. No assurance can be given that we will be successful in amending our Credit Facility on acceptable terms, if at all, or amend such debt covenants in a manner sufficient to adequately reduce the risk of default in the near future. In addition, the current interest rate on our Credit Facility, which is based on a spread over the 30-day LIBOR rate, was obtained at a point in time when we were able to obtain favorable interest rates and other terms, which we are unlikely to obtain in the amendment process, given the current economic situation. As a result, if we are able to amend the terms of our Credit Facility, we currently expect to pay a greater amount of debt service, which will adversely affect our cash flow, and consequently, our cash available for operations and our net income. Should our lenders and/or other counterparties demand immediate repayment of all of our obligations, we will likely be unable to pay such obligations. In such event, we may have to recapitalize, refinance our obligations, sell some or all of our assets or seek to reorganize under Chapter 11 of the United States Bankruptcy Code.

Our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, the value of our unencumbered assets (if any), our public debt ratings and borrowing restrictions imposed by existing lenders. Given the current lending environment, our access to additional funding may be limited. In consideration of our current working capital, projected operations and current capital structure, we do not foresee a need to seek additional capital to fund our operational and growth strategies in 2009. If we are required to obtain additional funds in excess of our current Credit Facility, our ability or inability to do so, may require the restructuring of certain debt and the amendment of certain covenants. Our ability and willingness to accept certain terms may significantly affect our ability to obtain additional capital funding. Also, an increase in our cost of capital may cause us to delay, restructure or not commence future investments, which could limit our ability to grow our business.

Shelf Registration Statement — In August 2004, we filed a Form S-3 shelf registration statement registering up to $150.0 million of debt securities, preferred stock, common stock and warrants. This shelf registration expired as of December 1, 2008. We currently have no plans to register any securities in 2009.

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Contractual Obligations and Off-Balance Sheet Arrangements — The following table summarizes our contractual obligations at December 31, 2008, and the effect that those obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

			Less than		Payment terms				More than
	Total		1 year		1-3 years		3-5 years		5 year
Senior credit facility — term loan(a)	$	112,988	$	112,988	$	—	$	—	$	—
Senior credit facility — revolving loan(a)		48,770		48,770		—		—		—
Mortgage debt(a)		82,525		—		25,400		57,125		—
Estimated interest payments on long-term debt(b)		15,639		8,015		5,677		1,947		—
Non-cancelable office leases(c)		19,151		4,166		8,132		6,375		478
Debt guarantee(d)		3,702		3,702		—		—		—
Total	$	282,775	$	177,641	$	39,209	$	65,447	$	478

(a)	For principal repayment obligations with respect to our Credit Facility and mortgage loans, see Note 8, “Long-Term Debt,” to our consolidated financial statements. We expect to settle such debt by several options, including cash flows from operations, amending the terms of our Credit Facility and or sale of one or more of our wholly-owned hotels. Although the Credit Facility matures in March 2010, we have classified the full amount outstanding on the term and revolving loan under the facility as payable in less than one year as the lenders may have the option to accelerate the maturity date given our projected non-compliance of certain debt covenants in the near future. We have classified two of our non-recourse mortgage loans of $24.8 million and $32.8 million taking account of our unilateral ability to extend the current maturity dates of November 2009 and February 2010, respectively, with two one-year extensions we hold at our discretion for each.
(b)	To estimate interest payments on our long-term debt, all of which is variable-rate debt, we estimated interest rates and payment dates based on our determination of the most likely scenarios for each relevant debt instrument. We expect to settle such interest payments with cash on hand or cash flows from operations.
(c)	The office lease obligations shown in the table above have not been reduced by minimum payments to be received related to a non-cancelable sublease at our corporate offices. These offsetting payments aggregate to approximately $5.9 million through August 2013. The Company remains secondarily liable under this sublease in the event that the sub-lessee defaults under the sublease terms. We do not believe that material payments will be required as a result of the secondary liability provisions of the primary lease agreement.
(d)	We entered into a guarantee agreement related to our mortgage on the Sheraton Columbia for prompt completion and payment of required improvements to the property. For further information, see Note 14, “Commitments and Contingencies,” to our consolidated financial statements. We expect to fund this obligation with cash flows from operations.

We also have the following commitments and off-balance sheet arrangements currently outstanding:

•  Management Agreement Commitments — Under the provisions of management agreements with certain hotel owners, we have outstanding commitments to provide an aggregate of $3.0 million to these hotel owners in the form of advances or loans, if requested. As the timing of these future investments or working capital loans to hotel owners is currently unknown as they are at the hotel owner’s discretion, they are not included in the above table.

•  Letters of Credit — As of March 1, 2009, we have a $1.0 million letter of credit outstanding in favor of our property insurance carrier. We are required by the property insurance carrier to deliver the letter of credit to cover their losses in the event we default on payments to the carrier. Accordingly, the issuing bank has required us to restrict a portion of our cash equal to the amount of the letter of credit, which is presented as restricted cash on our consolidated balance sheet. The letter of credit expires on April 4, 2009. We also have letters of credit outstanding in the amounts of $0.6 million and $1.0 million in favor of insurance carriers that issue surety bonds on behalf of the properties we manage which expire on June 2, 2009 and November 20, 2009, respectively. We are required by the insurance carriers to deliver these letters of credit to cover their risk in the event the properties default on their required payments related to the surety bonds.

•  Equity Investment Funding — In connection with our equity investments in hotel real estate, we are partners or members of various unconsolidated partnerships or limited liability companies. The terms of such partnership or limited liability company agreements provide that we contribute capital as specified. Generally, in the event that we do not make required capital contributions, our ownership interest will be diluted, dollar for dollar, equal to any amounts funded on our behalf by our partner(s). To the extent that any of these partnerships become unable to pay its obligations of the joint venture, those obligations would become obligations of the general partners. We currently have no commitments outstanding for equity investment funding. We are not the sole general partner or managing member for any of the joint ventures. All of the debt of our joint ventures is non-recourse to us, other than for customary non-recourse carveout provisions, and we do not guarantee the debt or other obligations of any

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of our joint ventures. In connection with one of our development joint ventures, we have agreed to fund a portion equal to our equity of any development and construction cost overruns up to 110 percent of the approved capital spending plan for each hotel developed and constructed by our joint venture, IHR Greenbuck Hotel Venture, LLC, should such an overrun occur. To the extent there are cost overruns on any additional project, our maximum commitment to fund these overruns is $0.6 million. As of December 31, 2008, our joint venture had completed construction on two properties and the contingency related to one of those properties has been removed while the contingency related to the second property is expected to be removed in early 2009. We do not currently have any new properties being developed that are covered by this guarantee.

•  Insurance Matters — As part of our management services to hotel owners, we generally obtain casualty (workers compensation and general liability) insurance coverage for our managed hotels. In December 2002, one of the carriers we used to obtain casualty insurance coverage was downgraded significantly by rating agencies. In January 2003, we negotiated a transfer of that carrier’s current policies to a new carrier. We have been working with the prior carrier to facilitate a timely and efficient settlement of the original 1,213 claims outstanding under the prior carrier’s casualty policies. The prior carrier has primary responsibility for settling those claims from its assets. As of December 31, 2008, 30 claims remained outstanding. If the prior carrier’s assets are not sufficient to settle these outstanding claims, and the claims exceed amounts available under state guaranty funds, we will be required to settle those claims. We are indemnified under our management agreements for such amounts, except for periods prior to January 2001, when we leased certain hotels from owners. Based on currently available information, we believe the ultimate resolution of these claims will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

During 2005, the prior carrier presented invoices to us and other policy holders related to dividends previously granted to us and other policy holders with respect to the prior policies. Based on this information, we had determined that the amount was probable and estimable and therefore recorded the liability. In September 2005, we invoiced the prior carrier for premium refunds due to us on previous policies. The initial premiums on these policies were calculated based on estimated employee payroll expenses and gross hotel revenues. Due to the September 11th terrorist attacks and the resulting substantial decline in business and leisure travel in the months that followed, we reduced hotel level headcount and payroll. The estimated premiums billed were significantly overstated and as a result, we were owed refunds on the premiums paid. The amount of our receivable exceeded the dividend amounts claimed by the prior carrier. We had reserved the amount of the excess given the financial condition of the carrier. We believed that we held the legal right of offset in regard to this receivable and payable with the prior insurance carrier. Accordingly, there was no effect on the statement of operations in 2006 or 2007. In October 2008, we paid our prior carrier approximately $0.4 million in settlement of all matters, except for covered claims described in the preceding paragraph. Simultaneous with this payment, we obtained a written release related to all amounts owed to us or owed by us to the prior carrier. Accordingly, we have written off in the fourth quarter the offsetting amounts related to the dividends claimed by the prior carrier and the premium refunds owed to us.

•  Sunstone Liabilities — We purchased Sunstone on October 26, 2004. As part of the purchase we assumed the liabilities of that company which included certain employee related liabilities such as workers’ compensation and liabilities under a defined benefit pension plan. We are indemnified by Sunstone REIT for these liabilities. We recorded the liabilities for workers’ compensation and the pension plan on our balance sheet and recorded a receivable for the same amount from the owner, Sunstone REIT, at the time of the purchase. To the extent Sunstone REIT would be unable to reimburse us for these liabilities, we would be primarily liable.

•  Property Improvement Plans — In connection with our wholly-owned hotels, we have committed to provide certain funds for property improvements as required by the respective brand franchise agreements. As of December 31, 2008, we had ongoing renovation and property improvement projects with remaining expected costs to complete of approximately $6.8 million, of which approximately $4.3 million is directly attributable to the comprehensive renovation program for the Sheraton Columbia.

53

Forward-Looking Statements

The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. In this Annual Report on Form 10-K and the information incorporated by reference herein, we make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, net income and cash flow. Any statements in this document about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “will likely result,” “expect,” “believe,” “will continue,” “anticipate,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook” and other similar terms and phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that are not yet determinable and could cause actual results to differ materially from those expressed in the statements. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Annual Report on Form 10-K and the documents incorporated by reference herein. In addition to the risks related to our business, the factors that may cause actual results to differ materially from those described in the forward-looking statements include, among others, the following:

•  there could be substantial doubt about our ability to continue as a going concern as a result of our potential non-compliance of certain debt covenants under our senior secured credit facility agreement;

•  economic conditions generally and the real estate market specifically;

•  the effects of the U.S. and global economic slowdown and government fiscal policy on the personal wealth and disposable income of our potential guests, which may cause them to reduce travel expenses or seek alternatives to our hotels;

•  reductions in business travel expenditures as a result of the U.S. and global economic slowdown and as a result of changes in business travel practices at various companies, including financial institutions;

•  our ability to successfully manage our cash and liquidity resources as we continue to execute our business strategy;

•  the impact of war, actual or threatened terrorist activity and heightened travel security measures instituted in response to war;

•  international, national and regional geo-political conditions;

•  travelers’ fears of exposure to contagious diseases, such as Avian Flu and Severe Acute Respiratory Syndrome (SARS);

•  the success of our capital improvement and renovation projects;

•  uncertainties associated with obtaining additional financing for future real estate projects and to undertake future capital improvements;

•  demand for, and costs associated with, real estate development and hotel rooms, market conditions affecting the real estate industry, seasonality of resort and hotel revenues and fluctuations in operating results;

•  changes in laws and regulations applicable to us, including federal, state or local hotel, resort, restaurant or land use regulations, employment, labor or disability laws and regulations and laws governing the taxation of real estate investment trusts;

•  the occurrence of natural disasters, such as earthquakes, tsunamis and hurricanes;

•  legislative/regulatory changes, including changes to laws governing the taxation of REITs;

•  the availability and cost of capital for growth;

•  litigation involving antitrust, consumer and other issues;

•  loss of any executive officer or failure to hire and retain highly qualified employees; and

•  other factors discussed under the heading “Risk Factors” and in other filings with the Securities and Exchange Commission.

54

These factors and the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made or incorporated by reference in this Annual Report on Form 10-K. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we do not undertake to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk in the form of changes in interest rates and foreign currency exchange rate fluctuation. In certain instances, we attempt to reduce volatility in earnings and cash flow associated with interest rate and foreign exchange rate risks by entering into derivative arrangements intended to provide hedges against a portion of the associated risks. We continue to have exposure to such risks to the extent that they are not hedged.

Interest Rate Risk

Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. As of December 31, 2008, all of our debt is at variable rates based on current LIBOR rates. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity, Capital Resources and Financial Position — Long-Term Debt” for more information regarding our long-term debt. In an effort to manage interest rate risk covering our outstanding debt, we have entered into interest rate cap agreements and an interest rate collar agreement that are designed to provide an economic hedge against the potential effect of future interest fluctuations.

In October 2006, we entered into a $24.7 million three-year interest rate cap agreement in conjunction with our mortgage loan associated with the purchase of the Hilton Arlington. The interest rate agreement caps the 30-day LIBOR at 7.25 percent and is scheduled to mature on November 19, 2009. In February 2007, we entered into a $32.8 million three-year interest rate cap agreement in conjunction with our mortgage loan associated with the purchase of the Hilton Houston Westchase. The agreement caps the 30-day LIBOR at 7.25 percent and is scheduled to mature on February 9, 2010. In April 2008, we entered into a $25.0 million five-year interest rate cap agreement in conjunction with our mortgage loan associated with the Sheraton Columbia. The agreement caps the three-month LIBOR at 6.00 percent and is scheduled to mature on May 1, 2013. At December 31, 2008, the total fair value of these interest rate cap agreements was approximately a $0.1 million asset on our consolidated balance sheet. The change in fair value for these interest rate cap agreements is recognized in the consolidated statement of operations.

In January 2008, we entered into an interest rate collar agreement for a notional amount of $110.0 million to hedge against the potential effect of future interest rate fluctuation underlying our Credit Facility. The interest rate collar consists of an interest rate cap at 4.0 percent and an interest rate floor at 2.47 percent on the 30-day LIBOR rate. We are to receive the effective difference of the cap rate and the 30-day LIBOR rate, should the LIBOR rate exceed the cap rate. Should the 30-day LIBOR rate fall to a level below the stated floor rate, we are to pay the effective difference. The interest rate collar became effective January 14, 2008, with monthly settlement dates on the last day of each month beginning January 31, 2008, and maturing January 31, 2010. At the time of inception, we designated the interest rate collar to be a cash flow hedge. The effective portion of the change in fair value of the interest rate collar is recorded as other comprehensive income. Ineffectiveness is recorded through earnings. At December 31, 2008, the interest rate collar had a fair value of $(1.9) million. The amount of ineffectiveness was inconsequential.

We review quarterly our exposure to counterparty risk related to our interest rate cap and interest rate collar agreements. Based on the credit worthiness of our counterparties, we believe our counterparties will be able to perform their obligations under these agreements.

The 30-day LIBOR rate, upon which our debt and interest rate cap and collar agreements are based, decreased from 4.6 percent per annum as of December 31, 2007, to 0.44 percent per annum as of December 31, 2008. At December 31, 2008, we had $244.3 million of outstanding debt that was variable rate. Based upon this amount of

55

variable rate debt and giving effect to our interest rate hedging activities, a 1.0 percent change in the 30-day LIBOR rate would have changed our interest expense by approximately $2.3 million, $1.5 million and $0.9 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Exchange Rate Risk

Our international operations are subject to foreign exchange rate fluctuations. To date, our foreign currency exposure related to our management and incentive fees from six managed properties in Russia, which are denominated and paid in Rubles. These hotels accounted for $12.7 million, or 21.5 percent, of total management fees in 2008. In 2008, the exchange rate of Russian Rubles to one U.S. Dollar has ranged from a high of 29.6 to a low of 23.1 and averaged 24.9. For the period January 1, 2009 to March 1, 2009, the exchange rate has ranged from a high of 36.5 to a low of 28.5 and averaged 33.7. A 10.0 percent fluctuation in the exchange rate of Russian Rubles to one U.S. Dollar would cause approximately a 2.1 percent change in total management fees. Furthermore, incentive fees on two of our managed properties in Russia are based on those properties achieving certain operating thresholds denominated in U.S. Dollar. Significant fluctuations in the U.S. Dollar to Russian Ruble exchange rate may materially impact our ability to meet these thresholds and earn incentive fees in the future from these properties.

We have not entered into any currency contracts or other derivative financial instruments. We continue to monitor and evaluate our current and future exposure to foreign currency fluctuation and risk in determining future derivative arrangements. We derived approximately 8.1 percent, 8.6 percent and 7.4 percent of our total revenues, excluding reimbursed expenses, from services performed outside of the United States for the years ended December 31, 2008, 2007 and 2006, respectively. Our foreign currency translation (losses) gains of $(0.3) million, $0.1 million and $1.1 million for the years ended December 31, 2008, 2007 and 2006, respectively, are included in other comprehensive income (loss).

56

ITEM 8.   FINANCIAL STATEMENTS

The following Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K:

INTERSTATE HOTELS & RESORTS, INC.

Reports of Independent Registered Public Accounting Firm	58
Consolidated Balance Sheets as of December 31, 2008 and 2007	60
Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006	61
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2008, 2007 and 2006	62
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006	63
Notes to the Consolidated Financial Statements	64

57

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Interstate Hotels & Resorts, Inc.:

We have audited the accompanying consolidated balance sheets of Interstate Hotels & Resorts, Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule III as listed in the index at item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Interstate Hotels & Resorts, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 2 and 8 to the consolidated financial statements, the Company may violate certain covenants included in its credit facility loan arrangement. Violation of one or more covenants would place the Company in default under this loan arrangement. The lenders would then have the right to demand immediate repayment of all outstanding amounts. Uncertainty exists as to whether the Company has the ability to generate sufficient liquidity to repay the outstanding amounts if such an immediate demand for repayment was made. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Notes 2 and 8. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Interstate Hotels & Resorts, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 31, 2009, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

McLean, Virginia

March 31, 2009

58

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Interstate Hotels & Resorts, Inc.:

We have audited Interstate Hotels & Resorts, Inc.’s (the Company) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Interstate Hotels & Resorts, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Interstate Hotels & Resorts, Inc. and subsidiaries as of December 31, 2008 and 2007, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008, and our report dated March 31, 2009, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

McLean, Virginia

March 31, 2009

59

INTERSTATE HOTELS & RESORTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)

	December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	22,924		$	9,775
Restricted cash		7,174			7,090
Accounts receivable, net of allowance for doubtful accounts of $1,432 and $516, respectively		27,775			27,989
Due from related parties, net of allowance for doubtful accounts of $1,465 and $1,465, respectively		3,688			1,822
Deferred income taxes		2,990			3,796
Prepaid expenses and other current assets		3,514			5,101
Total current assets		68,065			55,573
Marketable securities		1,676			1,905
Property and equipment, net		282,050			278,098
Investments in unconsolidated entities		41,625			27,631
Notes receivable, net		4,254			4,976
Deferred income taxes		9,750			18,247
Goodwill		66,046			66,599
Intangible assets, net		16,353			17,849
Total assets	$	489,819		$	470,878
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,491		$	2,597
Accrued expenses		69,492			64,952
Current portion of long-term debt		161,758			863
Total current liabilities		233,741			68,412
Deferred compensation		1,649			1,831
Long-term debt		82,525			210,800
Total liabilities		317,915			281,043
Minority interests (redemption value of $36 and $200 at December 31, 2008 and 2007, respectively)		282			329
Commitments and contingencies (see Note 14)
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued		—			—
Common stock, $.01 par value; 250,000,000 shares authorized; 31,859,986 and 31,843,186 shares issued and outstanding, respectively, at December 31, 2008; 31,718,817 and 31,702,017 issued and outstanding, respectively, at December 31, 2007		319			317
Treasury stock		(69	)		(69	)
Paid-in capital		197,302			195,729
Accumulated other comprehensive loss		(1,523	)		(87	)
Accumulated deficit		(24,407	)		(6,384	)
Total stockholders’ equity		171,622			189,506
Total liabilities, minority interests and stockholders’ equity	$	489,819		$	470,878

The accompanying notes are an integral part of the consolidated financial statements.

60

INTERSTATE HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

	Year Ended December 31,
	2008			2007			2006
Revenue:
Lodging	$	94,072		$	74,198		$	27,927
Management fees		52,415			59,960			61,972
Management fees-related parties		6,906			3,752			13,333
Termination fees		6,896			8,597			19,764
Termination fees-related parties		—			—			6,117
Other		6,830			8,464			10,646
Other-related parties		3,061			1,062			922
		170,180			156,033			140,681
Other revenue from managed properties		609,273			644,098			834,484
Total revenue		779,453			800,131			975,165
Expenses:
Lodging		67,286			52,281			20,768
Administrative and general		61,910			65,937			59,327
Depreciation and amortization		18,322			14,475			6,721
Asset impairments and write-offs		12,537			11,127			13,214
		160,055			143,820			100,030
Other expenses from managed properties		609,273			644,098			834,484
Total operating expenses		769,328			787,918			934,514
OPERATING INCOME		10,125			12,213			40,651
Interest income		958			2,153			2,020
Interest expense		(14,443	)		(13,783	)		(8,481	)
Equity in (losses) earnings of unconsolidated entities		(2,411	)		2,381			9,858
Gain on sale of investments and extinguishment of debt		—			—			162
(LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST		(5,771	)		2,964			44,210
Income tax expense		(12,281	)		(435	)		(17,271	)
Minority interest benefit (expense)		29			(65	)		(223	)
(LOSS) INCOME FROM CONTINUING OPERATIONS		(18,023	)		2,464			26,716
Income from discontinued operations, net of tax		—			20,364			3,063
NET (LOSS) INCOME	$	(18,023	)	$	22,828		$	29,779
BASIC (LOSS) EARNINGS PER SHARE:
Continuing operations	$	(0.57	)	$	0.08		$	0.86
Discontinued operations		—			0.64			0.10
Basic (loss) earnings per share	$	(0.57	)	$	0.72		$	0.96
DILUTED (LOSS) EARNINGS PER SHARE:
Continuing operations	$	(0.57	)	$	0.08		$	0.85
Discontinued operations		—			0.63			0.09
Diluted (loss) earnings per share	$	(0.57	)	$	0.71		$	0.94

The accompanying notes are an integral part of the consolidated financial statements.

61

INTERSTATE HOTELS & RESORTS,
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)

											Accumulated
								Accumulated			Other
	Common		Treasury			Paid-in-		(Deficit)			Comprehensive
	Stock		Stock			Capital		Income			(Loss) Income			Total
Balance at December 31, 2005	$	306	$	(69	)	$	189,330	$	(58,991	)	$	64		$	130,640
Options exercised, including tax benefit		7		—			3,881		—			—			3,888
Options expense		—		—			91		—			—			91
Restricted stock award transactions, net		1		—			394		—			—			395
Conversion of operating partnership units		2		—			764		—			—			766
Net income		—		—			—		29,779			—			29,779
Other comprehensive income, net of tax		—		—			—		—			1,137			1,137
Balance at December 31, 2006	$	316	$	(69	)	$	194,460	$	(29,212	)	$	1,201		$	166,696
Options exercised, including tax benefit		—		—			189		—			—			189
Options expense		—		—			132		—			—			132
Restricted stock award transactions, net		1		—			696		—			—			697
Conversion of operating partnership units		—		—			252		—			—			252
Net income		—		—			—		22,828			—			22,828
Reclassification adjustment for discontinued operations included in net income		—		—			—		—			(1,224	)		(1,224	)
Other comprehensive loss, net of tax		—		—			—		—			(64	)		(64	)
Balance at December 31, 2007	$	317	$	(69	)	$	195,729	$	(6,384	)	$	(87	)	$	189,506
Options expense		—		—			64		—			—			64
Restricted stock award transactions, net		2		—			1,491		—			—			1,493
Conversion of operating partnership units		—		—			18		—			—			18
Net loss		—		—			—		(18,023	)		—			(18,023	)
Other comprehensive loss, net of tax		—		—			—		—			(1,436	)		(1,436	)
Balance at December 31, 2008	$	319	$	(69	)	$	197,302	$	(24,407	)	$	(1,523	)	$	171,622

The accompanying notes are an integral part of the consolidated financial statements.

62

INTERSTATE HOTELS & RESORTS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	Year Ended December 31,
	2008			2007			2006
OPERATING ACTIVITIES:
Net (loss) income	$	(18,023	)	$	22,828		$	29,779
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Depreciation and amortization		18,322			14,475			6,721
Amortization of deferred financing fees		1,309			1,725			777
Amortization of key money management contracts		1,147			709			31
Stock compensation expense		1,812			1,160			990
Discount on notes receivable		(308	)		896			—
Bad debt expense		1,759			3,100			616
Asset impairments and write-offs		12,537			11,127			13,214
Equity in losses (earnings) of unconsolidated entities		2,411			(2,381	)		(9,858	)
Gain on sale of investment and forgiveness of debt		—			—			162
Operating distributions from unconsolidated entities		1,598			389			350
Minority interest		(29	)		65			223
Deferred income taxes		10,823			(1,960	)		13,672
Excess tax benefits from share-based payment arrangements		—			(104	)		(919	)
Discontinued operations:
Depreciation and amortization		—			—			1,533
Gain on sale		—			(20,541	)		—
Changes in assets and liabilities:
Accounts receivable and due from related parties		(655	)		2,357			4,221
Prepaid expenses and other current assets		190			(517	)		(353	)
Notes receivable related to termination and incentive fees		(649	)		—			—
Accounts payable and accrued expenses		516			(2,898	)		5,989
Changes in assets and liabilities held for sale		—			93			—
Other changes in asset and liability accounts		(462	)		(204	)		754
Cash provided by operating activities		32,298			30,319			67,902
INVESTING ACTIVITIES:
Proceeds from the sale of discontinued operations		959			36,417			—
Change in restricted cash		(84	)		(605	)		(3,276	)
Proceeds from the sale of investments		1,397			—			—
Acquisition of hotels		—			(176,262	)		(51,551	)
Purchases related to discontinued operations		—			(68	)		(2,055	)
Purchases of property and equipment		(31,145	)		(9,874	)		(5,871	)
Additions to intangible assets		(4,295	)		(2,560	)		(1,964	)
Contributions to unconsolidated entities		(20,379	)		(17,056	)		(16,549	)
Distributions from unconsolidated entities		1,909			3,626			21,724
Change in notes receivable		415			(2,421	)		596
Cash used in investing activities		(51,223	)		(168,803	)		(58,946	)
FINANCING ACTIVITIES:
Proceeds from borrowings		62,071			196,826			33,700
Repayments of borrowings		(29,450	)		(69,389	)		(34,526	)
Proceeds from issuance of common stock		2			190			2,969
Excess tax benefits from share-based payment arrangements		—			104			919
Financing fees paid		(630	)		(3,317	)		—
Cash provided by financing activities		31,993			124,414			3,062
Effect of exchange rate changes on cash		81			(144	)		314
Net increase (decrease) in cash and cash equivalents		13,149			(14,214	)		12,332
CASH AND CASH EQUIVALENTS, beginning of period		9,775			23,989			11,657
CASH AND CASH EQUIVALENTS, end of period	$	22,924		$	9,775		$	23,989
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes:
Interest	$	12,691		$	11,891		$	7,718
Income taxes	$	437		$	3,111		$	4,219

The accompanying notes are an integral part of the consolidated financial statements.

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INTERSTATE HOTELS & RESORTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

1.  BUSINESS SUMMARY

We are a leading hotel real estate investor and the nation’s largest independent hotel management company, as measured by number of rooms under management and gross annual revenues of the managed portfolio. We have two reportable operating segments: hotel ownership (through whole-ownership and joint ventures) and hotel management. Each segment is reviewed and evaluated separately by the company’s senior management. For financial information about each segment, see Note 10, “Segment Information.”

Our hotel ownership segment includes our wholly-owned hotels and our minority interest investments in hotel properties through unconsolidated entities. Hotel ownership allows us to participate in operations and potential asset appreciation of the hotel properties. As of December 31, 2008, we wholly-owned and managed seven hotels with 2,051 rooms and held non-controlling equity interests in 18 joint ventures, which owned or held ownership interests in 50 of our managed properties. We manage all of the properties within our hotel ownership segment.

We manage a portfolio of hospitality properties and provide related services in the hotel, resort and conference center markets to third-parties. Our portfolio is diversified by location/market, franchise and brand affiliations, and ownership group(s). The related services provided include insurance and risk management, purchasing and capital project management, information technology and telecommunications, and centralized accounting. As of December 31, 2008, we and our affiliates managed 226 hotel properties with 46,448 rooms and six ancillary service centers (which consist of a convention center, a spa facility, two restaurants and two laundry centers), in 37 states, the District of Columbia, Russia, Mexico, Canada, Belgium and Ireland.

A third reportable operating segment, corporate housing, was disposed of on January 26, 2007 with the sale of BridgeStreet Corporate Housing Worldwide, Inc. and its affiliated subsidiaries, which we refer to as “BridgeStreet.” The operations of BridgeStreet are presented as discontinued operations in our consolidated statement of operations and cash flows for all periods presented.

Our subsidiary operating partnership, Interstate Operating Company, L.P, indirectly holds substantially all of our assets. We are the sole general partner of that operating partnership. Certain independent third-parties and we are limited partners of the partnership. The interests of those third-parties are reflected in minority interests on our consolidated balance sheet. The partnership agreement gives the general partner full control over the business and affairs of the partnership. We own more than 99 percent of Interstate Operating Company, L.P.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These statements include our accounts and the accounts of all of our majority owned subsidiaries. If we determine that we hold an interest in a variable interest entity (“VIE”) within the meaning of Financial Accounting Standards Board, or FASB, Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FIN 46(R)”) and that our variable interest will absorb a majority of the entities’ expected losses, or receive a majority of the expected returns, or both to the extent they occur, then we will consolidate the entity.

If the entity does not meet the definition of a VIE, we evaluate our voting interest and other indicators of control. We consolidate entities when we own over 50 percent of the voting shares of a company or the majority of the general partner interest of a partnership, assuming the absence of other factors determining control. Other control factors we consider include the ability of minority owners to participate in or block management decisions. Emerging Issues Task Force 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” (“EITF 04-05”) addresses the issue of what rights held by the limited partner(s) preclude consolidation in circumstances in which the sole general partner would otherwise consolidate the limited partnership in accordance with U.S. GAAP. We are not the sole general partner in any of our joint ventures, nor are we the controlling general partner for the one joint venture which

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involves multiple general partners. We are not the primary beneficiary or controlling investor in any of these joint ventures, however, if we exert significant influence as the manager of the underlying assets, we account for these interests using the equity method of accounting.

We own 100 percent of seven hotel properties, the operations of which are consolidated in our financial statements. We eliminate all intercompany balances and transactions.

We have reclassified certain immaterial amounts in the prior years’ consolidated statement of operations within operating expenses to conform to the current year presentation. These reclassifications had no effect on previously reported net income or retained earnings.

Going Concern

A fundamental principle of the preparation of financial statements in accordance with accounting principles generally accepted in the United States is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate. There is uncertainty with respect to our projected compliance during 2009 with certain debt covenants in our senior secured credit facility (as amended from time to time, which we refer to as the “Credit Facility”). While we have prepared our consolidated financial statements on a going concern basis, if we are unable to obtain continued waivers for these covenants or successfully amend the terms of the Credit Facility, our ability to continue as a going concern may be impacted. Therefore, we may not be able to realize our assets and settle our liabilities in the ordinary course of business. Our consolidated financial statements included in this Annual Report on Form 10-K do not reflect any adjustments that might specifically result from the outcome of this uncertainty or our debt refinancing activities.

On March 12, 2009, our common stock was suspended from trading on the New York Stock Exchange (“NYSE”) and we face potential delisting by NYSE Regulation, Inc., pending an appeal scheduled on June 1, 2009, because we have failed to meet the continued listing standard regarding average global market capitalization over a consecutive 30 trading-day period of not less than $15 million. Our Credit Facility includes a debt covenant requiring continued listing on the NYSE. Additionally, there is uncertainty as to whether we will meet one of the financial debt covenants regarding our total leverage ratio for our fourth quarter 2009 calculation period given the extremely challenging economic and operating environment which is depressing our current and projected operating results.

With the potential of these covenant violations through December 31, 2009 and in the absence of information to support our ability to comply with these debt covenants, such as covenant waivers through December 31, 2009 or an amendment revising the covenants, substantial doubt exists about our ability to continue as a going concern and our independent registered public accounting firm, KPMG LLP, has included an explanatory paragraph to describe this material uncertainty in their auditors report on our consolidated financial statements for the year ended December 31, 2008 included in this Annual Report on Form 10-K. Furthermore, our Credit Facility also contains a covenant that requires us to receive an audit report without qualification as to the scope or any other material qualification or exception.

Because we have limited solutions available under the appeal process with the NYSE and the lenders of our Credit Facility may have the right to declare the outstanding debt under the Credit Facility immediately due and payable after the expiration of any applicable notice and/or cure period, we have asked for and received a waiver through June 30, 2009 for the NYSE listing covenant and the covenant relating to the audit report. If there are instances of non-compliance beyond the term of the existing waiver, the lenders have the right to declare an event of default and accelerate repayment of the outstanding debt under the Credit Facility. Additionally in March 2009, Moody’s Investor Services downgraded us from a “B2” rating to a “Caa1” rating and Standard & Poor’s Ratings Services downgraded us from a “B” rating to a “CCC+” rating.

We have already begun discussions with our lenders to amend the terms of our Credit Facility, including extending the maturity date and adjusting the above mentioned covenants such that we can reasonably expect to achieve the covenant thresholds based on our current and projected operating results. However, we can provide no assurances

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that the existing waiver will be continued, that any of the aforementioned amendments can be obtained, or that the terms under which such continued waivers or amendments obtained would be satisfactory to us. Should our lenders and/or other counterparties demand immediate repayment of all of our obligations upon default, we will likely be unable to pay such obligations. In such event, we may have to recapitalize, refinance our obligations, sell some or all of our assets or seek to reorganize under Chapter 11 of the United States Bankruptcy Code.

During this amendment process and in the absence of an acceleration of the maturity of our Credit Facility, we believe we will have sufficient liquidity from cash on hand and cash from operations to fund our operating needs in 2009. We have undertaken efforts to minimize our cash outflows which included eliminating corporate positions, reducing pay for senior management, placing a freeze on merit increases for all corporate employees, suspending the company match for 401(K) and non-qualified deferred compensation plans for 2009, restructuring the corporate bonus plan, reducing the annual fee and eliminating restricted stock grants during 2009 for the company’s board of directors, and reducing all other corporate expenses, including advertising, travel, training, and employee relations expenses. We will continue to seek additional measures to further reduce our cash outflows and any excess cash generated from operations in 2009 will be used to pay down the debt to the extent possible. Other options that we are evaluating to enhance our cash position include selling one or more of our wholly-owned hotels.

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Estimates are used in accounting for, among other things, the valuation of accounts and notes receivable, the impairment of long-lived assets and other than temporary declines in the value of our joint venture investments, the impairment of goodwill and intangible assets, useful lives for depreciation and amortization, the assumptions used in our self-insurance programs, and the assumptions used in the calculation of income taxes, specifically, the valuation allowance for our deferred tax assets. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience, industry data and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Short-Term Investments

Our captive insurance subsidiary held short-term liquid investments of $1.4 million as of December 31, 2007. We classified all short-term investments as available-for-sale and the value of unrealized gains and losses on these securities were reported as accumulated other comprehensive income, a separate component of stockholders’ equity. The average underlying maturities of these investments ranged from six months to three years. Despite the long-term nature of the securities stated contractual maturities, these funds could have been readily liquidated within a short period of time and therefore, were classified as short-term and included within prepaid expenses and other current assets.

In May 2008, our captive insurance subsidiary liquidated all of its short-term investments. We held no short term investments as of December 31, 2008.

Restricted Cash

Restricted cash primarily consists of cash reserves statutorily required to be held by our captive insurance subsidiary for insurance we provide to certain of our managed hotels; escrows required related to property improvement plans at wholly-owned hotels; and working capital from our owners to purchase goods for renovation projects that our purchasing subsidiary oversees.

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Allowance for Doubtful Accounts Receivable

We provide an allowance for doubtful accounts when we determine it is more likely than not a specific accounts receivable will not be collected and provide a general reserve for the population of our accounts that we believe may become uncollectible based on current business conditions. Our allowance for doubtful accounts was $2.9 million and $2.0 million as of December 31, 2008 and 2007, respectively.

Related Parties

In January 2007, we were retained as manager for two properties owned by Capstar Hotel Company, LLC (“New Capstar”), a real estate investment company founded by Paul Whetsell, our current Chairman of the Board. Balances related to New Capstar have been included within “due from related parties” on our consolidated balance sheet and “management fees — related parties” on our consolidated statement of operations for all periods presented.

In May 2006, an affiliate of The Blackstone Group (“Blackstone”) acquired MeriStar Hospitality Corporation (“MeriStar”). MeriStar had previously been considered a related party, as our Chairman of the Board, Paul Whetsell, was also the CEO of MeriStar. Mr. Whetsell did not become part of the Blackstone management team, and we therefore do not consider Blackstone to be a related party. As such, the line items “due from related parties” on our consolidated balance sheet and “management fees — related parties”, “termination fees — related parties” and “other — related parties” on our consolidated statement of operations do not include any amounts associated with Blackstone as of and for the years ended December 31, 2008 and 2007 and for the period from May 2, 2006 through December 31, 2006, although fees received from MeriStar for the period from January 1, 2006 through May 2, 2006 continue to be included in “management fees — related parties.” See Note 12, “Related-Party Transactions” for further information on these related party transactions.

Our managed properties for which we also hold a joint venture ownership interest are included within “due from related parties” on our consolidated balance sheet and “management fees — related parties” and “other — related parties” on our consolidated statement of operations for all periods presented. See Note 3, “Investments in Unconsolidated Entities” for further information on these related party amounts.

Marketable Securities

We provide the benefit of a non-qualified deferred compensation plan for certain employees, allowing them to make deferrals upon which we will match up to certain thresholds defined in the plan. The investments in the plan, which consist primarily of mutual funds, are classified as available for sale. They are recorded at fair value with corresponding unrealized gains or losses serving to increase or decrease the corresponding deferred compensation obligation, which is paid to the employees when they terminate employment with us or reach the required age for distribution. Other marketable securities are recorded at fair value with corresponding unrealized gains or losses reported as accumulated other comprehensive income, which is a separate component of stockholders’ equity.

Property and Equipment

Property and equipment are recorded at cost and depreciated over their estimated useful lives. Costs directly related to an acquisition are capitalized in accordance with SFAS 141, “Business Combinations”. All internal costs related to the pursuit of an acquisition are expensed as incurred. All third-party costs capitalized in connection with the pursuit of an unsuccessful acquisition are expensed at the time the pursuit is abandoned. Repairs and maintenance costs that do not improve service potential or extend economic life are expensed as incurred.

Depreciation expense is recorded using the straight-line method over the assets’ estimated useful lives, which generally have the following ranges: buildings and improvements, 40 years or less; furniture and fixtures, five to seven years; computer equipment, three years; and software, five years. Leasehold improvements are depreciated over the shorter of the lease terms or the estimated useful lives of the improvements.

Whenever events or changes in circumstances indicate that the carrying values of property and equipment may be impaired, we perform an analysis to determine the recoverability of the asset’s carrying value. We make estimates of the undiscounted cash flows from the expected future operations of the asset. If the analysis indicates that the carrying value is not recoverable from future cash flows, the asset is written down to estimated fair value and an impairment loss is recognized. When property and equipment are sold or disposed, the cost and related accumulated depreciation is written off and any gain or loss is recognized.

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Investments in Unconsolidated Entities

We account for the majority of our joint venture investments in limited partnerships and limited liability companies using the equity method of accounting when we own more than a minimal investment. At December 31, 2008, our ownership interest in these joint ventures ranged from 5% to 50%. We currently employ the cost method on four of our investments. We periodically assess the recoverability of our equity method and cost method investments. If an identified event or change in circumstances requires an impairment evaluation, we assess the fair value based on accepted valuation methodologies, including discounted cash flows, estimates of sales proceeds and external appraisals, as appropriate. If an investment is considered to be impaired and the decline is other than temporary, we will recognize an impairment of the investment to its fair value. Cash distributions from investments in unconsolidated entities are presented as an operating activity on our statement of cash flows when it is a return on investment and as an investing activity on our statement of cash flows when it is a return of investment. See Note 3, “Investments in Unconsolidated Entities” for additional information on our equity and cost investments.

Notes Receivable

We have notes receivable, which are generally issued in connection with obtaining a management contract or in connection with termination or incentive fees due to us based on terms of existing management contracts, from various hotel owners. We assess the collectability of these notes receivable on a periodic basis or when circumstances warrant. As of December 31, 2008, we believe the net balance of our notes receivable is collectible. See Note 19, “Notes Receivable” for additional information.

Goodwill

Goodwill represents the excess of the cost to acquire a business over the estimated fair value of the net identifiable assets of that business. We estimate the fair value of goodwill to assess potential impairments on an annual basis, or during the year if an event or other circumstances indicate that we may not be able to recover the carrying value amount of the asset. We evaluate the fair value of goodwill at the reporting unit level and make that determination based upon internal projections of expected future cash flows and operating plans. We record an impairment loss when the implied fair value of the goodwill assigned to the reporting unit is less than the carrying value of that reporting unit, including goodwill.

Intangible Assets

Our intangible assets consist of costs incurred to obtain management contracts, franchise agreements, and deferred financing fees. The cost of intangible assets is amortized to reflect the pattern of economic benefits consumed, principally on a straight-line basis over the estimated periods benefited. Management contract and franchise agreement costs are amortized over the life of the related management contract or franchise agreement, unless circumstances indicate that the useful life is a shorter period. We currently amortize these costs over periods ranging from one to 20 years. Deferred financing fees consist of costs incurred in connection with obtaining various loans and are amortized to interest expense over the life of the underlying loan using a method which approximates the effective interest method.

Costs incurred to obtain a management contracts may include cash payments made to owners to incentivize them to enter into new management contracts in the form of a notes receivable which is forgiven over the life of the contract. These arrangements are referred to as key money loans and they are amortized against management fee revenue over the life of the management contract using the straight-line method.

We test intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable. For intangible assets related to management contracts, this may occur when we are notified by an owner that we will no longer be managing a specific property or when a multiple property owner indicates their intent to dispose of a portion or all of their portfolio. We make estimates of the undiscounted cash flows from the expected future operations related to the asset. If the analysis indicates that the carrying value is not recoverable from future cash flows, the asset is written down to estimated fair value and an impairment loss is recognized. When a management contract is terminated, we write-off the entire value of the intangible asset related to the terminated management contract as of the date of termination.

Assets/Liabilities Held for Sale and Discontinued Operations

Assets and liabilities are classified as held for sale when they meet the criteria of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We believe this criteria includes reclassifying an asset or business

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segment as held for sale when purchase agreements are executed, the buyer has a significant deposit at risk, no financing contingencies exist and the sale will be completed within one year.

We present the results of operations of an entity as discontinued operations when the operations and cash flows of the entity have been, or will be, eliminated from our ongoing operations and the entity will not have any significant continuing involvement in our operations.

Revenue Recognition

We earn revenue from our wholly-owned hotels and hotel management and related sources. We recognize revenue from our wholly-owned hotels from rooms, food and beverage, and other operating departments as earned at the close of each business day. In addition, we collect sales, occupancy and other similar taxes at our wholly-owned hotels that we remit to the taxing authority, which we present on a net basis (excluded from revenue) on our statement of operations. Our hotel management segment earns fees from base and incentive management fees, termination fees, receivables from third-party owners of hotel properties and fees for other related services we provide, primarily centralized accounting and purchasing. We recognize base fees and fees for other services as revenue when earned in accordance with the individual management contracts. Base management fees are calculated based on a percentage of the total revenue at the property. We record incentive fees in the period in which they are earned. As most of our contracts have annual incentive fee targets, we typically record incentive fees on these contracts in the last month of the annual contract period when all contingencies have been met.

Termination fee revenue is recognized on terminated management contracts when all contingencies are removed. For the majority of contracts with The Blackstone Group (“Blackstone”), Blackstone can elect to pay a present value lump sum amount at time of termination or pay over a 48 month period during which Blackstone retains the right to replace a terminated management contract with a replacement contract on a different hotel and reduce the amount of any remaining unpaid termination fees dollar for dollar. For terminated contracts which allow for replacement, revenue is recognized as the contingency is removed which is generally over the payment period of 48 months.

Other Revenue and Other Expenses From Managed Properties

These amounts represent expenses incurred in managing the hotel properties for which we are contractually reimbursed by the hotel owner and generally include salary and employee benefits for our employees working in the properties and certain other costs.

Contingencies

We are involved in various legal proceedings and tax matters. Due to their nature, such legal proceedings and tax matters involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions. We assess the probability of loss for such contingencies and accrue a liability and/or disclose the relevant circumstances, as appropriate. See Note 14, “Commitments and Contingencies” for additional information.

Accounting for Income Taxes

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes— an Interpretation of FASB Statement No. 109” (“FIN 48”) clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The cumulative effect of applying the provisions of FIN 48 are reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that fiscal year. See Note 17, “Income Taxes” for additional information.

We have accounted for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities to reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The realization of total deferred tax assets is contingent upon the generation

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of future taxable income. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.

Stock-Based Compensation

On January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS 123R”) using the modified prospective method. We have previously and will continue to use the Black-Scholes pricing model to estimate the value of stock options granted to employees. The adoption of SFAS 123R did not have a material impact on our results of operations or financial position as all of our unvested stock-based awards as of December 31, 2005 had previously been accounted for under the fair value method of accounting. See Note 13, “Stock-Based Compensation,” for additional information.

Foreign Currency Translation

We maintain the results of operations for our Russian office in the local currency and translate these results using the average exchange rates during the period. We translate the assets and liabilities to U.S. dollars using the exchange rate in effect at the balance sheet date. We reflect the resulting translation adjustments in stockholders’ equity as a cumulative foreign currency translation adjustment, a component of accumulated other comprehensive (loss) income, net of tax. To date, our only foreign currency exposure related to our management contracts are for management and incentive fees related to our properties in Russia and Belgium, which are denominated and paid in Rubles and Euros, respectively.

Derivative Instruments

We have entered into three interest rate cap and one interest rate collar agreements, which are considered derivative instruments, in order to manage our interest rate exposure. Our interest rate risk management objective is to limit the impact of interest rate changes on our earnings and cash flows. We record these agreements at fair value as either assets or liabilities. Amounts paid or received under these agreements are recognized over the life of the agreements as adjustments to interest expense. If the requirements for hedge accounting are met, gains and losses from changes in the fair value of the agreements are recorded as a component of accumulated other comprehensive (loss) income, net of tax. Otherwise, we recognize changes in the fair value of the agreements in the consolidated statement of operations. We do not enter into derivative financial instruments for trading or speculative purposes and monitor the financial stability and credit standing of our counterparties.

Fair Value Measurement

Effective January 1, 2008, we implemented Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“SFAS 157”), for our financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In accordance with the provisions of Staff Position No. 157-2 “Effective Date of FASB Statement No. 157” (“FSP SFAS 157-2”), we have elected to defer implementation of SFAS 157 as it relates to our non-financial assets and liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until January 1, 2009. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy under SFAS 157 are:

Level 1 Inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market corroborated inputs) for substantially the full term of the asset or liability;

Level 3 Inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Such unobservable inputs include prices or valuation techniques that require inputs that are both significant to the fair value measurement and that reflect our assumption(s) about the assumption(s) that market participants would use in pricing the asset or liability (including assumptions about risk). We develop these inputs based on the best information available, including our own data.

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Earnings Per Share

We compute basic earnings per share by dividing net income by the weighted-average number of shares outstanding. Dilutive earnings per share include the diluted effect of outstanding stock-based compensation awards and minority interests that have the option to convert their limited partnership interests to common stock. No effect is presented for anti-dilutive securities.

Rebates and Allowances

We participate in various vendor rebate and allowance arrangements as a manager of hotel properties. There are three types of programs common in the hotel industry that are sometimes referred to as “rebates” or “allowances,” including unrestricted rebates, marketing (restricted) rebates and sponsorships. The primary business purpose of these arrangements is to secure favorable pricing for our hotel owners for various products and services or enhance resources for promotional campaigns co-sponsored by certain vendors. More specifically, unrestricted rebates are funds returned to the buyer, generally based upon volumes or quantities of goods purchased. Marketing (restricted) allowances are funds allocated by vendor agreements for certain marketing or other joint promotional initiatives. Sponsorships are funds paid by vendors, generally used by the vendor to gain exposure at meetings and events, which are accounted for as a reduction of the cost of the event.

Unrestricted rebates are refunded back to the properties or applied towards training programs for the properties. We account for marketing and sponsorship allowances as adjustments of the prices of the vendors’ products and services. Vendor rebates received for unrestricted and marketing allowances are recorded as accrued expenses on our consolidated balance sheets until utilized for hotel level programs.

Recently Issued Accounting Pronouncements

In December 2007, FASB Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements” (“SFAS 160”) was issued. SFAS 160 establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation. The statement also requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interest of the non-controlling owners of the subsidiary. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The adoption of this statement will not have a material effect on our financial statements.

In December 2007, FASB Statement No. 141R, “Business Combinations” (“SFAS 141R”) was issued. SFAS 141R revises SFAS 141, “Business Combinations” (“SFAS 141”), but it retains a number of fundamental requirements of SFAS 141. SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, in-process research and development costs, and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141R, will be applied prospectively to business combinations for which the acquisition dates are after January 1, 2009.

In February 2008, the FASB issued FSP SFAS 157-2 which delayed the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. We have not yet conclusively determined the impact that the implementation of SFAS 157 will have on our non-financial assets and liabilities; however we do not anticipate it to significantly impact our consolidated financial statements.

In March 2008, FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”) was issued. SFAS 161 amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and requires enhanced disclosure regarding an entity’s derivative and hedging activities. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We currently have only four derivative instruments and expect the impact of the adoption of this statement to add minimally to our current disclosures.

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3.  INVESTMENTS IN UNCONSOLIDATED ENTITIES

Our investments in and advances to unconsolidated entities consist of the following (in thousands, except number of hotels):

	Number		Our Equity			December 31,		December 31,
Equity Method Investments	of Hotels		Participation			2008		2007
Amitel Holdings joint venture		6		15.0	%	$	4,291	$	4,065
Budget Portfolio Properties, LLC		22		10.0	%		1,370		250
Cameron S-Sixteen Broadway, LLC		1		15.7	%		844		1,002
Cameron S-Sixteen Hospitality, LLC		1		10.9	%		188		399
CNL/IHC Partners, L.P.		3		15.0	%		3,047		2,825
Cross Keys Hotel Partners, LLC		1		15.0	%		—		557
Harte IHR joint venture		4		20.0	%		10,933		2,356
IHR Greenbuck joint venture		2		15.0	%		2,170		2,038
IHR Invest Hospitality Holdings, LLC		2		15.0	%		3,647		4,372
IHR/Steadfast Hospitality Management, LLC(1)		—		50.0	%		719		649
MPVF IHR Lexington, LLC		1		5.0	%		992		—
Steadfast Mexico, LLC		3		10.3	%		1,676		6,133
Other equity method investments		3		various			59		119
Total equity method investments		49					29,936		24,765
Cost Method Investments
Duet Fund(2)		—		—			6,251		—
JHM Interstate Hotels India Ltd(1)		—		50.0	%		500		—
RQB Resort/Development Investors, LLC		1		10.0	%		2,512		1,378
Other cost method investments		—		—			2,426		1,488
Total cost method investments							11,689		2,866
Total investments in unconsolidated entities		50				$	41,625	$	27,631

(1)	Hotel number is not listed as this joint venture owns a management company.
(2)	Hotel number is not listed as this fund is in the process of developing hotels.

In February 2008, we invested $11.6 million to acquire a 20.0 percent equity interest in a joint venture with Barry Harte Holdings Ltd. (“Harte”) of Cork, Ireland. The joint venture purchased four hotels from affiliates of Blackstone for an aggregate price of $208.7 million. At the time of our investment, we managed three of the properties and had previously managed the fourth. The four properties acquired by this joint venture were the 142-room Latham Hotel in Washington, DC, the 198-room Sheraton Frazer Great Valley in Frazer, Pennsylvania, the 225-room Sheraton Mahwah in Mahwah, New Jersey and the 327-room Hilton Lafayette in Lafayette, Louisiana.

In February 2008, our joint venture, Budget Portfolio Properties, LLC, acquired a portfolio of 22 properties located throughout the Midwest in Illinois, Iowa, Michigan, Minnesota, Wisconsin and Texas. We invested $1.7 million, representing our 10.0 percent equity interest in the portfolio. Upon closing, all 22 properties, representing 2,397 rooms, were converted to various Wyndham Worldwide brands.

In February 2008, True North Tesoro Property Partners, L.P., a joint venture in which we hold a 15.9 percent equity interest, sold the Doral Tesoro Hotel & Golf Club, located near Dallas, Texas. Our portion of the joint venture’s gain on sale of the hotel was approximately $2.4 million before post-closing adjustments and has been recorded as equity in losses from unconsolidated entities on our consolidated statement of operations. We received $1.9 million in proceeds from the sale in 2008 and an additional $0.1 million in January 2009.

In February 2008, we and JHM Hotels, LLC (“JHM”) formed a joint venture management company in which we hold a 50.0 percent ownership interest. The joint venture will seek management opportunities throughout India and

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signed its first management agreement in April 2008. Management of this hotel will commence in early 2009. We provided to our partner, JHM, $0.5 million and $0.3 million in March 2008 and January 2009, respectively, in the form of convertible notes towards the working capital of the joint venture, both of which are expected to convert to an equity interest in the joint venture in 2009. Simultaneous with the formation of this management company, we and JHM each committed to invest $6.25 million in the private real estate fund, Duet India Hotels (“Duet Fund”), which will seek opportunities to purchase and/or develop hotels throughout India. In February 2008 and June 2008, we contributed $1.6 million and $4.7 million, respectively, to the Duet Fund to fulfill our investment commitment. The Duet Fund will give our management company joint venture the right of first look to manage all hotels that it invests which are not already encumbered by an existing management contract. As of December 31, 2008, the Duet Fund made investments in four development projects throughout India, one of which is expected to commence operations in 2009. Our joint venture management company with JHM expects to manage all four of these properties upon commencement of operations.

In June 2008, the IHR Greenbuck joint venture, in which we hold a 15.0 percent equity interest, opened the first aloft branded hotel in the United States. The aloft brand is a new upscale and select-service Starwood brand. The hotel has 136 rooms and is located in Rancho Cucamonga, California. In September 2008, the joint venture opened its second aloft hotel with 143 rooms in Cool Springs, Tennessee. We manage both newly built hotels.

In July 2008, we formed a joint venture with an affiliate of Madison W Properties, LLC to recapitalize the existing ownership of the 367-room Radisson Plaza Hotel Lexington and adjacent 234,000 square foot class A office building in Lexington, Kentucky. Upon transition, the hotel was renamed and re-branded as the Lexington Downtown Hotel & Conference Center, a Hilton Affiliate Hotel. We have invested $1.0 million for a 5.0 percent equity interest in the joint venture. The hotel is undergoing a comprehensive, $13 million renovation encompassing guest rooms and public spaces.

We had net related party accounts receivable for management fees and reimbursable costs from the hotels owned by unconsolidated entities of $3.6 million and $1.6 million as of December 31, 2008 and 2007, respectively. We earned related party management fees from our unconsolidated entities of $6.8 million, $3.5 million and $4.8 million for the years ended December 31, 2008, 2007 and 2006, respectively. We earned other revenues, consisting primarily of accounting and purchasing fees and capital project management revenue, from our unconsolidated entities of $3.0 million, $1.0 million and $0.9 million for the years ended December 31, 2008, 2007 and 2006.

The recoverability of the carrying values of our investments in unconsolidated entities is dependent upon the operating results of the underlying hotel assets. Future adverse changes in the hospitality and lodging industry, market conditions or poor operating results of the underlying assets could result in future impairment losses or the inability to recover the carrying value of these interests. We continuously monitor the operating results of the underlying hotel assets for any indicators of other than temporary impairment to our joint venture investments. The debt of all investees is non-recourse to us, other than for customary non-recourse carveout provisions such as environmental conditions, misuse of funds and material misrepresentations, and we do not guarantee any of our investees’ obligations. We are not the primary beneficiary or controlling investor in any of these joint ventures. Where we exert significant influence over the activities of the investee, we account for our interest under the equity method.

We recorded impairment charges of $0.4 million and $3.5 million related to our investments in Cross Keys Hotel Partners, LLC and Steadfast Mexico, LLC, respectively, in the fourth quarter which are included in equity in losses of unconsolidated entities on our statement of operations for the year ended December 31, 2008. In addition, in February 2009, our joint venture partners and us agreed to restructure our equity interest in the Steadfast Mexico, LLC joint venture from 15.00 percent to 10.25 percent.

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The combined summarized unaudited financial information of our outstanding unconsolidated entities as of and for the years ended December 31, 2008, 2007 and 2006 are presented below (in thousands):

	December 31,
	2008		2007
Balance Sheet (unaudited):
Current assets	$	49,604	$	33,663
Noncurrent assets		628,346		292,962
Current liabilities		36,080		25,765
Noncurrent liabilities		475,307		226,665

	Year Ended December 31,
	2008			2007			2006
Results of Operations (unaudited):
Revenue	$	201,010		$	114,967		$	158,508
Operating expenses		141,682			80,037			109,540
Net loss		(16,720	)		(1,849	)		45,641

4.  PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands, except number of hotel properties and hotel rooms):

	December 31,			December 31,
	2008			2007
Land	$	29,712		$	26,912
Furniture and fixtures		31,996			28,841
Building and improvements		235,616			230,058
Leasehold improvements		6,037			5,695
Computer equipment		4,121			6,686
Software		2,504			12,336
Total	$	309,986		$	310,528
Less accumulated depreciation		(27,936	)		(32,430	)
Property and equipment, net	$	282,050		$	278,098
Wholly-owned hotel properties		7			7
Wholly-owned hotel rooms		2,051			2,045

We acquired the Sheraton Columbia hotel in November 2007 and recorded a preliminary purchase allocation at that time. In early 2008, we received the property appraisal from a third-party hospitality consulting group to finalize the purchase allocation which increased the amount of the land allocation by $2.8 million to $6.5 million and increased furniture and fixtures by $0.8 million to $2.6 million. We reduced our previously recorded value for building and improvements by $3.6 million to $38.9 million. The majority of the increase in property and equipment in 2008 relates to renovations at two of our wholly-owned properties, the Westin Atlanta and the Sheraton Columbia.

The cost and related accumulated depreciation of $20.5 million for fully depreciated property and equipment were written off in 2008, of which $6.7 million, $3.5 million and $10.3 million related to furniture and fixtures, computer equipment, and software, respectively. There was no effect on our consolidated statement of operations.

The total net book value of our wholly-owned hotel asset groups was $276.2 million at December 31, 2008. The sharp contraction in economic activity required that we assess the recoverability of the asset groups during the fourth quarter of 2008. We recorded an impairment charge of $11.0 million on building and improvements associated with the Hilton Arlington hotel as we determined the future undiscounted cash flows associated with this hotel were insufficient to recover its carrying value. The impairment charge reflects the amount by which the

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carrying value of the hotel exceeds its estimated fair value determined by its estimated future discounted cash flows. The impairment charge is recorded within “asset impairments and write-offs” in our consolidated statement of operations for the year ended December 31, 2008. It is reasonably possible that our determination that the remainder of our asset groups are not impaired could change in the near term should demand at our wholly-owned hotels continue to decrease significantly.

5.  GOODWILL

As part of the purchase accounting for the MeriStar-Interstate merger in 2002, we recorded $82.2 million of goodwill for the hotel management segment. In October, 2004, we purchased Sunstone Hotel Properties (“Sunstone”) of which $4.7 million of the purchase price was allocated to goodwill. In 2006, we decreased goodwill by $13.2 million when we reduced the valuation allowance on our deferred tax assets for net operating losses that existed at the date of our merger with Old Interstate. In 2008 and 2007, we decreased goodwill by $0.6 million and $7.1 million, respectively, when we further reduced the valuation allowance on our deferred tax assets for net operating losses that existed at the date of our merger with Old Interstate. The carrying amount of goodwill was $66.0 million and $66.6 million as of December 31, 2008 and 2007, respectively.

Our goodwill is related to our hotel management segment. We evaluate goodwill annually for impairment during the fourth quarter; however, when circumstances warrant, we will assess the valuation of goodwill more frequently. As of October 31, 2008 and December 31, 2008, the Company’s market capitalization was less then the book value of its equity. We believe the disparity between the book value of our assets over the market value of our business is in large part a consequence of current market conditions, including perceived risks in the debt markets, the lodging industry and the broader economy. While we believe that some of these risks are unique to specific companies, some represent global industry risks. We evaluated the impairment of our goodwill, with the assistance of a third-party valuation firm, as of October 31, 2008 and at December 31, 2008, giving consideration to these risks, and their impact upon the reporting unit’s fair value, and concluded that there was no impairment of goodwill. Our goodwill impairment analysis was based on future cash flows generated by existing hotel management contracts and did not assume projected revenues for anticipated or unsigned contracts. Our cash flow projections are based on our recent and projected operating performance and were based on assumptions made by management, which we believe to be reasonable. Our hotel management segment continues to generate adequate cash flows and is projected to do so over the foreseeable future to support the carrying value of this reporting unit, including goodwill. Given the current market conditions, however, we will continue to monitor the value of our goodwill on a quarterly basis.

6.  INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):

	December 31,			December 31,
	2008			2007
Management contracts	$	21,955		$	21,338
Franchise fees		1,925			1,925
Deferred financing fees		4,295			3,619
Total cost		28,175			26,882
Less accumulated amortization		(11,822	)		(9,033	)
Intangible assets, net	$	16,353		$	17,849

The majority of our management contract costs were identified as intangible assets at the time of the merger in 2002 and through the purchase of Sunstone in 2004, as part of the purchase accounting for each transaction. We also capitalize external direct costs, such as legal fees, which are incurred to acquire and execute new management contracts. We amortize the value of our intangible assets, all of which have definite useful lives, over their estimated useful lives which generally correspond with the expected terms of the associated management, franchise, or financing agreements.

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We incurred scheduled amortization expense on our remaining management contracts and franchise fees of $2.2 million, $4.0 million, and $2.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. We also incurred amortization expense related to deferred financing fees of $1.3 million, $1.7 million and $0.8 million for the years ended December 31, 2008, 2007 and 2006, respectively. During the first quarter of 2007, $0.5 million of deferred financing fees related to our previous credit facility was amortized in connection with our entrance into a $125.0 million senior secured credit facility (as amended, the “Credit Facility”) and the related payoff of our previous credit facility and subordinated term loan. In connection with the Credit Facility, we recorded $3.0 million of deferred financing fees which is amortized over the term of the Credit Facility. In May 2008, we placed a mortgage on the Sheraton Columbia and capitalized $0.6 million as deferred financing fees. Amortization of deferred financing fees is included in interest expense. See Note 8, “Long-Term Debt,” for additional information related to the Credit Facility.

In the ordinary course of business, we incur acquisition costs related to obtaining management contracts in the form of cash payments made to hotel owners to incentivize them to enter into new management contracts, often referred to in the industry as “key money”. These arrangements are in the form of a note receivable that is forgiven over the term of the management contract. These amounts are capitalized as an intangible asset and amortized against management fee revenue over the life of the management contract using the straight-line method. As of December 31, 2008 and 2007, the unamortized balances were $6.3 million and $4.1 million, respectively.

We evaluate our capitalized management contracts for impairment when circumstances warrant. When we receive notification that a management contract will be terminated early, we evaluate when or if amortization should be accelerated. Once the management contract is terminated, we write-off the entire value of the intangible asset related to the terminated management contract as of the date of termination. We will continue to assess the recorded value of all management contracts and their related amortization periods as circumstances warrant.

For the year ended December 31, 2008, we recognized management contract impairment charges of $1.5 million, of which $1.4 million related to four properties sold by Blackstone and $0.1 million for the loss of seven other management contracts in 2008. For the year ended December 31, 2007, we recognized impairment charges of $11.1 million for the termination of management contracts, of which $10.6 million was for the sale of twenty-four Blackstone properties and $0.5 million for the sale of eight properties by Sunstone REIT in 2007. For the year ended December 31, 2006, we recognized impairment charges of $13.2 million for the termination of management contracts, of which $8.3 million was for the sale of eighteen properties by MeriStar; $3.9 million for the sale of eight properties by Blackstone; $0.7 million for the sale of fifteen properties by Sunstone REIT; and $0.3 million associated with the loss of eight other management contracts in 2006.

Our estimated amortization expense for the next five years is expected to be as follows (in thousands):

2009	$	1,972
2010		1,915
2011		655
2012		490
2013		403

7.  ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

	December 31,		December 31,
	2008		2007
Salaries and employee related benefits	$	28,326	$	27,837
Insurance program reserves		10,834		6,127
Other		30,332		30,988
Total	$	69,492	$	64,952

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“Other” consists of legal expenses, sales and use tax accruals, property tax accruals, general and administrative costs of managing our business and various other items. No individual amounts in “Other” represent more than 5 percent of current liabilities.

8.  LONG-TERM DEBT

Our long-term debt consists of the following (in thousands):

	December 31,			December 31,
	2008			2007
Senior credit facility — term loan	$	112,988		$	114,138
Senior credit facility — revolver loan		48,770			40,000
Mortgage debt		82,525			57,525
Total long-term debt		244,283			211,663
Less current portion		(161,758	)		(863	)
Long-term debt, net of current portion	$	82,525		$	210,800

Credit Facility

In March 2007, we closed on a senior secured Credit Facility with various lenders. The Credit Facility consisted of a $65.0 million term loan and a $60.0 million revolving loan. Upon entering into the Credit Facility, we borrowed $65.0 million under the term loan, using a portion of it to pay off the remaining obligations under our previous credit facility. In May 2007, we amended the Credit Facility to increase the borrowings under our term loan by $50.0 million, resulting in a total of $115.0 million outstanding under the term loan, and increased the availability under our revolving loan to $85.0 million. Under the Credit Facility, we are required to make quarterly payments on the term loan of approximately $0.3 million until its maturity date, along with a commitment fee of 0.50 percent on any unused capacity under our revolving loan. As of December 31, 2008, we had $31.0 million available to us for borrowing under our revolving loan. The Credit Facility matures in March 2010.

Simultaneously with the amendment, we used the additional $50.0 million under the term loan, along with cash on hand, to purchase the 495-room Westin Atlanta Airport in May 2007. In November 2007, we borrowed $40.0 million on the revolving loan, along with cash on hand to purchase the 288-room Sheraton Columbia. See Note 11, “Acquisitions and Dispositions,” for additional information relating to the purchases.

The actual interest rates on both the revolving loan and term loan depend on the results of certain financial tests. As of December 31, 2008, based on those financial tests, borrowings under the term loan and the revolving loan bore interest at the 30-day LIBOR rate plus 275 basis points (a rate of 3.63 percent per annum). We incurred interest expense of $9.4 million, $7.9 million and $5.8 million on the senior credit facilities for the years ended December 31, 2008, 2007 and 2006, respectively.

The debt under the Credit Facility is guaranteed by certain of our wholly-owned subsidiaries and collateralized by pledges of ownership interests, owned hospitality properties, and other collateral that was not previously prohibited from being pledged by any of our existing contracts or agreements. The Credit Facility contains covenants that include maintenance of certain financial ratios at the end of each quarter, compliance reporting requirements and other customary restrictions. At December 31, 2008, we were in compliance with the loan covenants of the Credit Facility.

On September 15, 2008, Lehman Brothers Holdings Inc. (“Lehman”) filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. Lehman and its subsidiary, Lehman Commercial Paper Inc. (“Lehman CPI”), are the administrator and one of the lenders under our Credit Facility. Lehman’s remaining commitment under this Credit Facility is 11.6 percent of the unfunded portion of the revolving loan, or approximately $4.2 million as of December 31, 2008. To date, we continue to have access to funding under this Credit Facility with the exception of Lehman’s commitment. It is uncertain whether future funding requests will be honored by Lehman or whether another lender will assume Lehman’s commitment. We believe that any loss of Lehman’s commitment under this Credit Facility will not be material to us and we expect to generate sufficient cash from operations to meet our liquidity needs and execute our business strategy. We are in

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continuous discussions with Lehman regarding the future administration of our Credit Facility and their outstanding funding commitment.

On March 12, 2009, our common stock was suspended from trading on the NYSE and we face potential delisting by NYSE Regulation, Inc., pending an appeal scheduled on June 1, 2009, because we have failed to meet the continued listing standard regarding average global market capitalization over a consecutive 30 trading-day period of not less than $15 million. Our Credit Facility includes a debt covenant requiring continued listing on the NYSE. Additionally, there is uncertainty as to whether we will meet one of the financial debt covenants regarding our total leverage ratio for our fourth quarter 2009 calculation period given the extremely challenging economic and operating environment which is depressing our current and projected operating results.

We have received a waiver through June 30, 2009 for the NYSE listing covenant and the covenant relating to the audit report. In obtaining this waiver, we have agreed to permanently increase the spread over the 30-day LIBOR rate to 350 bps from 275 bps and reduce the capacity under the revolving loan to $60.3 million from $85.0 million, limit our remaining aggregate borrowing capacity under the revolving loan during the waiver period to $6.0 million, and pay up front waiver fees of 50 bps to consenting lenders. If there are instances of non-compliance beyond the term of the existing waiver, the lenders have the right to declare an event of default and accelerate repayment of the outstanding debt under the Credit Facility. Scheduled principal payments under the Credit Facility are $0.9 million in 2009 and $160.9 million in 2010, however, as a result of the above, we have classified the $161.8 million outstanding under the Credit Facility as of December 31, 2008 as a current liability in our accompanying consolidated balance sheet.

We have already begun discussions with our lenders to amend the terms of our Credit Facility, including extending the maturity date and adjusting the above mentioned covenants such that we can reasonably expect to achieve the covenant thresholds based on our current and projected operating results. However, we can provide no assurances that the existing waiver will be continued, that any of the aforementioned amendments can be obtained, or that the terms under which such continued waivers or amendments obtained would be satisfactory to us.

Mortgage Debt

The following table summarizes our mortgage debt as of December 31, 2008:

	Principal		Maturity	Spread over		Interest Rate as of
	Amount		Date	LIBOR(1)		December 31, 2008
Hilton Arlington	$	24.7 million	November 2009		135 bps		2.69	%
Hilton Houston Westchase	$	32.8 million	February 2010		135 bps		2.69	%
Sheraton Columbia	$	25.0 million	April 2013		200 bps		5.19	%

(1) The interest rate for the Hilton Arlington and Hilton Houston Westchase mortgage debt is based on a 30-day LIBOR, whereas, the interest rate for the Sheraton Columbia mortgage is based on a 90-day LIBOR.

For the Hilton Arlington and the Hilton Houston Westchase, we are required to make interest-only payments until these loans mature, with two optional one-year extensions at our discretion to extend the maturity date beyond the date indicated. Based on the terms of these mortgage loans, a prepayment cannot be made during the first year after it has been entered. After one year, a penalty of 1 percent is assessed on any prepayments. The penalty is reduced ratably over the course of the second year. There is no penalty for prepayments made during the third year.

In May 2008, we placed a non-recourse mortgage of $25.0 million on the Sheraton Columbia. We are required to make interest-only payments until March 2011. Beginning May 2011, the loan will amortize based on a 25-year period through maturity. The loan bears interest at a rate of LIBOR plus 200 basis points and based on the terms of this mortgage loan, a penalty of 0.5 percent is assessed on any prepayments made during the first year. The net proceeds were used to pay down the revolving loan under our Credit Facility.

Scheduled principal payments under our mortgage debt (assuming we exercise our unilateral right to extend the maturities) are as follows: $0.0 million in 2009; $0.0 million in 2010; $25.4 million in 2011; $33.8 million in 2012; and $23.3 million in 2013. We incurred interest expense related to our mortgage loans of $3.3 million, $4.1 million and $1.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.

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Interest Rate Caps

We have entered into three interest rate cap agreements in order to provide an economic hedge against the potential effect of future interest rate fluctuations. The following table summarizes our interest rate cap agreements as of December 31, 2008:

			Maturity	30-Day LIBOR
	Amount		Date	Cap Rate
October 2006 (Hilton Arlington mortgage loan)	$	24.7 million	November 2009		7.25	%
February 2007 (Hilton Westchase mortgage loan)	$	32.8 million	February 2010		7.25	%
April 2008 (Sheraton Columbia mortgage loan)	$	25.0 million	May 2013		6.00	%

In March 2005, we entered into an interest rate cap with a notional amount of $55.0 million related to our then effective, amended and restated credit agreement. In January 2008, the $55.0 million interest rate cap matured.

At December 31, 2008, the total fair value of these interest rate cap agreements was approximately a $0.1 million asset on our consolidated balance sheet. The interest rate caps are not designed as hedging derivatives under Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The change in fair value for these interest rate cap agreements is recognized in our consolidated statement of operations.

Interest Rate Collar

On January 11, 2008, we entered into an interest rate collar agreement for a notional amount of $110.0 million to hedge against the potential effect of future interest rate fluctuations underlying our Credit Facility. The interest rate collar consists of an interest rate cap at 4.0 percent and an interest rate floor at 2.47 percent on the 30-day LIBOR rate. We are to receive the effective difference of the cap rate and the 30-day LIBOR rate, should LIBOR exceed the stated cap rate. If, however, the 30-day LIBOR rate should fall to a level below the stated floor rate, we are to pay the effective difference. The interest rate collar became effective January 14, 2008, with monthly settlement dates on the last day of each month beginning January 31, 2008, and maturing January 31, 2010. At the time of inception, we designated the interest rate collar to be a cash flow hedge. We use the regression method to evaluate hedge effectiveness on a quarterly basis and the effective portion of the change in fair value of the interest rate collar is recorded as other comprehensive income. Ineffectiveness is recorded through earnings. At December 31, 2008, the interest rate collar had a fair value of $1.9 million and is included within “accrued expenses” on our consolidated balance sheet. The amount of ineffectiveness reflected in earnings was inconsequential.

We review quarterly our exposure to counterparty risk related to our interest rate cap and interest rate collar agreements. Based on the credit worthiness of our counterparties, we believe our counterparties will be able to perform their obligations under these agreements.

9.  EARNINGS PER SHARE

We calculate our basic earnings per common share by dividing net income by the weighted average number of shares of common stock outstanding. Our diluted earnings per common share assumes the issuance of common stock for all potentially dilutive stock equivalents outstanding. Potentially dilutive shares include restricted stock and stock options granted under our various stock compensation plans and operating partnership units held by minority partners. In periods in which there is a loss, diluted shares outstanding will equal basic shares outstanding to prevent anti-dilution.

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Basic and diluted (loss) earnings per common share are as follows (in thousands, except per share amounts):

	Year Ended
	December 31, 2008								December 31, 2007							December 31, 2006
						Per Share							Per Share							Per Share
	Loss			Shares		Amount			Income		Shares		Amount			Income		Shares		Amount
(Loss) income from continuing operations	$	(18,023	)		31,802	$	(0.57	)	$	2,464		31,640	$	0.08		$	26,716		31,105	$	0.86
Income from discontinued operations, net of tax		—			—		—			20,364		—		0.64			3,063		—		0.10
Basic net (loss) income	$	(18,023	)		31,802	$	(0.57	)	$	22,828		31,640	$	0.72		$	29,779		31,105	$	0.96
Assuming exercise of all outstanding employee stock options less shares repurchased at average market price		—			—		—			—		35		—			—		266		(0.01	)
Assuming vesting of restricted stock		—			—		—			—		288		(0.01	)		—		171		(0.01	)
Diluted net (loss) income	$	(18,023	)		31,802	$	(0.57	)	$	22,828		31,963	$	0.71		$	29,779		31,542	$	0.94

10.  SEGMENT INFORMATION

We are organized into two reportable segments: hotel ownership and hotel management. A third reportable segment, corporate housing, was disposed of on January 26, 2007, with the sale of BridgeStreet and its affiliated subsidiaries. Each segment is managed separately because of its distinctive economic characteristics. Reimbursable expenses, classified as “other revenue from managed properties” and “other expenses from managed properties” on the statement of operations, are not included as part of this segment analysis. These reimbursable expenses are all part of the hotel management segment and net to zero.

Hotel ownership includes our wholly-owned hotels and our minority interest investments in hotel properties through unconsolidated entities. For the hotel ownership segment presentation, we have allocated internal management fee expense of $2.6 million, $2.1 million and $0.8 million for the years ended December 31, 2008, 2007 and 2006, respectively, to wholly-owned hotels. These fees are eliminated in consolidation but are presented as part of the segment to present their operations on a stand-alone basis. Interest expense related to hotel mortgages and other debt drawn specifically to finance the hotels is included in the hotel ownership segment. Our entire debt balance relates to our hotel ownership segment throughout 2007 and 2008.

Hotel management includes the operations related to our managed properties, our purchasing, construction and design subsidiary and our insurance subsidiary. Revenue for this segment consists of “management fees”, “termination fees” and “other” from our consolidated statement of operations. Our insurance subsidiary, as part of the hotel management segment, provides a layer of reinsurance for property, casualty, auto and employment practices liability coverage to our hotel owners. Interest income related to notes receivable issued to certain hotel owners of managed properties is included in the hotel management segment presentation.

Corporate is not a reportable segment but rather includes costs that do not specifically relate to any other single segment of our business. Corporate includes expenses related to our public company structure, certain restructuring charges, Board of Directors costs, audit fees, and an allocation for rent and legal expenses. Corporate assets include our cash accounts, deferred tax assets, deferred financing fees and various other corporate assets.

Due to the sale of our third reportable segment, corporate housing, in January 2007, the operations of this segment are included as part of discontinued operations on the consolidated statement of operations for all periods presented. The assets of our corporate housing segment were $28.4 million as of December 31, 2006 and are separately included within the corporate assets in the segment presentation below. As the corporate housing segment was sold, we have not presented its operations within the following segment presentation. See Note 11, “Acquisitions and Dispositions” for more information on the disposition of the segment.

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Capital expenditures includes the “acquisition of hotels” and “purchases of property and equipment” line items from our cash flow statement. All amounts presented are in thousands.

	Hotel			Hotel
	Ownership			Management		Corporate			Consolidated
2008
Revenue	$	94,072		$	76,108	$	—		$	170,180
Depreciation and amortization		13,968			3,923		431			18,322
Operating expense		80,919			56,125		4,689			141,733
Operating (loss) income		(815	)		16,060		(5,120	)		10,125
Interest income		485			473		—			958
Interest expense		(14,443	)		—		—			(14,443	)
Equity in losses of unconsolidated entities		(2,411	)		—		—			(2,411	)
Other gains		—			—		—			—
(Loss) income before minority interests and income taxes	$	(17,184	)	$	16,533	$	(5,120	)	$	(5,771	)
Total assets	$	327,978		$	123,741	$	38,100		$	489,819
Capital expenditures	$	29,698		$	1,159	$	288		$	31,145
2007
Revenue	$	74,198		$	81,835	$	—		$	156,033
Depreciation and amortization		8,313			5,851		311			14,475
Operating expense		54,362			69,829		5,154			129,345
Operating income (loss)		11,523			6,155		(5,465	)		12,213
Interest income		1,506			647		—			2,153
Interest expense		(13,783	)		—		—			(13,783	)
Equity in earnings of unconsolidated entities		2,381			—		—			2,381
Other gains		—			—		—			—
Income (loss) before minority interests and income taxes	$	1,627		$	6,802	$	(5,465	)	$	2,964
Total assets	$	309,410		$	124,617	$	36,851		$	470,878
Capital expenditures	$	184,633		$	1,317	$	186		$	186,136
2006
Revenue	$	27,927		$	112,754	$	—		$	140,681
Depreciation and amortization		2,441			3,823		457			6,721
Operating expense		21,608			66,637		5,064			93,309
Operating income (loss)		3,878			42,294		(5,521	)		40,651
Interest income		—			—		2,020			2,020
Interest expense		(1,901	)		—		(6,580	)		(8,481	)
Equity in earnings of unconsolidated entities		9,858			—		—			9,858
Other gains		—			—		162			162
Income (loss) before minority interests and income taxes	$	11,835		$	42,294	$	(9,919	)	$	44,210
Total assets	$	115,225		$	148,064	$	70,401		$	333,690
Capital expenditures	$	55,554		$	1,498	$	370		$	57,422

Revenues from foreign operations, excluding reimbursable expenses, were as follows (in thousands)(1),(2):

	2008		2007		2006
Russia	$	12,789	$	12,627	$	9,595
Other	$	940	$	826	$	726

(1) Revenues for the United Kingdom and France related solely to BridgeStreet operations have been reclassified as discontinued operations on the consolidated statement of operations for the related periods due to the sale of BridgeStreet during the first quarter of 2007 and therefore have not been included in the above table. BridgeStreet revenues from the United Kingdom and France were $2.8 million and $0.2 million; and $36.7 million and $2.6 million for the years ended December 31, 2007 and 2006, respectively.

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(2) Management fee revenues from our managed properties in Mexico are recorded through our joint venture, IHR/Steadfast Hospitality Management, LLC, and as such, are included in equity in earnings of unconsolidated entities on our consolidated statements of operations for the years ended December 31, 2008 and 2007.

A significant portion of our managed properties and management fees are derived from seven owners. This group of owners represents 39.8 percent of our managed properties as of December 31, 2008, and 61.3 percent of our base and incentive management fees for the year ended December 31, 2008. As of December 31, 2008, we managed eight hotels for Blackstone and 25 hotels and two ancillary service centers for Sunstone REIT. Total management fees for all Blackstone properties accounted for $3.5 million, or 5.9 percent of management fees in 2008, while the Sunstone REIT properties accounted for $7.7 million, or 13.0 percent of total management fees in 2008. As of December 31, 2008, we managed six hotels in Moscow for a single owner, one of which was an addition in 2008. These hotels accounted for $12.7 million, or 21.5 percent, of total management fees in 2008. As of December 31, 2008, we managed 43 properties owned by Equity Inns, Inc., which accounted for $3.1 million, or 5.2 percent, of total management fees in 2008. As of December 31, 2008, we also managed eight hotels for three other owners which accounted for 4,197, or 9.0 percent of total managed rooms. These properties accounted for $9.3 million, or 15.7 percent, of total management fees in 2008.

11.  ACQUISITIONS AND DISPOSITIONS

For properties acquired from Blackstone that we managed prior to the purchase, we were entitled to termination fees pursuant to the preexisting management agreements for those properties. Under Emerging Issues Task Force Issue 04-1, “Accounting for Preexisting Relationships between the Parties to a Business Combination”, the settlement of the preexisting management agreements (including the payment of the termination fees) requires accounting separate from the acquisition of the properties. Under EITF 04-1, the effective settlement of a management agreement with respect to an acquired property is required to be measured at the lesser of (x) the amount by which the agreement is favorable or unfavorable from our perspective when compared to pricing for current market transactions for the same or similar management agreements and, (y) the stated settlement provisions that are unfavorable to the seller. Therefore, in connection with the purchase of a hotel being managed by us, we will evaluate the terms of the contract and record the lesser amount, if any, as income from the settlement of the management contract and a corresponding increase in the recorded purchase price. We determined that the stated contract termination fee provisions were the lesser of the two amounts for the Westin Atlanta Airport, the Hilton Houston Westchase, and the Sheraton Columbia in 2007, and the Hilton Arlington in 2006. As a result we recorded termination fees in 2007 and 2006 of $3.1 million and $0.8 million, respectively.

Acquisitions

In November 2007, we acquired the 288-room Sheraton Columbia hotel, from an affiliate of Blackstone, for a total acquisition cost of $48.3 million, including normal and customary closing costs. We funded the acquisition through a combination of borrowings on our Credit Facility and cash on hand. From November 29, 2007 to December 31, 2007, hotel revenues and operating income of $1.1 million and $0.1 million, respectively, have been included in our consolidated statement of operations. The acquisition cost of the hotel was allocated as follows (in thousands):

Land	$	6,500
Buildings and improvements		38,910
Furniture and fixtures		2,557
Working capital		331
Total	$	48,298

In May 2007, we acquired the 495-room Westin Atlanta Airport hotel, from an affiliate of Blackstone, for a total acquisition cost of $76.1 million, including normal and customary closing costs. We funded the acquisition through a combination of borrowings on our Credit Facility and cash on hand. From May 24, 2007 to December 31, 2007,

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hotel revenues and operating income of $13.6 million and $2.2 million, respectively, have been included in our consolidated statement of operations. The acquisition cost of the hotel was allocated as follows (in thousands):

Land	$	4,419
Buildings and improvements		68,897
Furniture and fixtures		2,297
Working capital		474
Total	$	76,087

In February 2007, we acquired the 297-room Hilton Houston Westchase hotel, from an affiliate of Blackstone, for a total acquisition cost of $51.9 million, including normal and customary closing costs. We financed the acquisition through a non-recourse mortgage loan of $32.8 million and the remainder with a combination of cash on hand and borrowings on our previous credit facility. From February 8, 2007 to December 31, 2007, hotel revenues and operating income of $16.6 million and $3.7 million, respectively, have been included in our consolidated statement of operations. The acquisition cost of the hotel was allocated as follows (in thousands):

Land	$	8,525
Buildings and improvements		37,989
Furniture and fixtures		5,179
Working capital		226
Total	$	51,919

On October 17, 2006, we acquired the 308-room Hilton Arlington hotel, from affiliates of Blackstone. The acquisition cost was $37.0 million, including normal and customary closing costs. On the date of the acquisition, Blackstone owed us $14.6 million, on a present value basis, for unpaid termination fees from the termination of this management contract and 48 others. We received credit for these unpaid termination fees at closing. We financed the remainder of the purchase through a non-recourse mortgage loan of $24.7 million. From October 17, 2006 to December 31, 2006, hotel revenues and operating income of $2.5 million and $0.2 million, respectively, have been included in our consolidated statement of operations. The acquisition cost of the hotel was allocated as follows (in thousands):

Land	$	3,284
Buildings and improvements		28,125
Furniture and fixtures		5,929
Intangible assets		354
Working capital		(669	)
Total	$	37,023

On June 27, 2006, we acquired the 131-room Hilton Garden Inn Baton Rouge Airport hotel. The acquisition cost was $14.5 million, including normal and customary closing costs. We financed the purchase through borrowings on our previous credit facility and available cash. From June 27, 2006 to December 31, 2006, hotel revenues and operating income of $2.3 million and $0.5 million, respectively, have been included in our consolidated statement of operations. The acquisition cost of the hotel was allocated as follows (in thousands):

Land	$	1,375
Buildings and improvements		12,087
Furniture and fixtures		1,022
Working capital		44
Total	$	14,528

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Dispositions

On January 26, 2007, we sold BridgeStreet, our corporate housing subsidiary, for total proceeds of approximately $42.4 million in cash. Our corporate housing business had been classified as its own reportable segment. The operations of BridgeStreet have been classified as discontinued operations in our consolidated statement of operations for the years ended December 31, 2007 and 2006. The following table summarizes operating results, the gain on the sale, and our segment reporting of our corporate housing subsidiary:

	Year Ended December 31,
	2007			2006
Revenue	$	8,500		$	134,057
Depreciation and amortization		—			1,533
Operating expense		8,969			127,927
Operating income (loss)	$	(469	)	$	4,597
Gain on sale		20,541
Interest expense		—			19
Income before minority interest and taxes	$	20,072		$	4,578
Income tax (expenses) benefit		90			(1,515	)
Income from discontinued operations, net of taxes	$	20,162		$	3,063

On September 7, 2005, we sold the Pittsburgh Airport Residence Inn by Marriott for $11.0 million and recognized a gain on sale of $2.5 million. We received an additional distribution of $0.2 million during the second quarter of 2007 that had been held in escrow for any contingent liabilities. The resulting adjustment to our gain on sale of $0.2 million, net of tax, has been recorded as part of discontinued operations in our consolidated statement of operations for the year ended December 31, 2007.

12.  RELATED-PARTY TRANSACTIONS

Transactions with MeriStar Prior to its Acquisition by Blackstone

On May 2, 2006, an affiliate of The Blackstone Group acquired MeriStar. MeriStar had previously been considered a related party, as our Chairman of the Board, Paul Whetsell, was also the CEO of MeriStar. Mr. Whetsell did not become part of the Blackstone management team, and we therefore do not consider Blackstone to be a related party. As such, the line items “due from related parties” on our consolidated balance sheet do not include any amounts associated with Blackstone at December 31, 2008 and 2007. On our consolidated statement of operations, the line items “management fees — related parties” and “termination fees — related parties” during the full years of 2008 and 2007, and for the period from May 2, 2006 through December 31, 2006, also do not include any amounts associated with Blackstone. Fees received from MeriStar prior to May 2, 2006 do continue to be included in “management fees — related parties” and “termination fees — related parties.” Our management agreements for the hotels Blackstone acquired as a result of the transaction were not affected by the transaction, as the rights and duties (including with respect to budget setting, asset management and termination) under those contracts were assumed by Blackstone.

On May 2, 2006, we managed 44 properties owned by MeriStar and we recorded $14.6 million in management and termination fees from MeriStar for the year ended December 31, 2006.

Property-Level Transactions with Directors

In January 2007, we were retained as manager for two Boston-area hotels acquired by affiliates of CapStar Hotel Company LLC (“New Capstar”). Paul Whetsell, the Chairman of our Board, is the founder and CEO of CapStar Hotel Company LLC. We recorded $0.1 million and $0.3 million in management fees from New Capstar for the years ended December 31, 2008 and 2007. Additionally, we sublet space in our corporate office and perform accounting and administrative services for New CapStar pursuant to a shared-services agreement. Paul Whetsell will resign as Chairman of the Board effective March 31, 2009 and will no longer be considered a related party.

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13.  STOCK-BASED COMPENSATION

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and amends SFAS No. 95, “Statement of Cash Flows.” We adopted SFAS No. 123R on January 1, 2006 using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all equity-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (b) compensation cost for all equity-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.

Since our merger with MeriStar in 2002, we maintained two stock-based compensation plans. Under these plans, we have the ability to issue and award officers, key employees and non-employee directors, options to purchase our common stock and restricted shares of our common stock. The Employee Incentive Plan authorizes us to issue and award stock options and restricted shares for up to 15 percent of the number of outstanding share of our common stock. We may grant awards under the plan to officers and other key employees. The Director’s Plan authorizes us to issue and award options for up to 500,000 shares of common stock for non-employee directors. Under both plans, stock-based awards typically vest in three annual installments beginning on the date of grant and on subsequent anniversaries, assuming the continued employment of the recipient. Options granted are exercisable for ten years from the grant date. Restricted stock awards require no payment from the recipient.

In 2007, upon approval by our shareholders, we adopted the Interstate Hotels & Resorts Inc. 2007 Equity Award Plan (“2007 Equity Award Plan”). The 2007 Equity Award Plan provides for an aggregate of 3,000,000 shares of our common stock to be available for issue and awards to officers, key employees and non-employee directors. Options granted under the plan will have a term of no more than 10 years and an option price not less than the fair market value of our common stock at the time of grant. Under the plan, stock-based awards typically vest in four annual installments beginning on the date of grant and on subsequent anniversaries, assuming the continued employment of the recipient. All stock based compensation issued and awarded prior to the adoption of the 2007 Equity Award Plan will continue to be administered through either The Employee Incentive Plan or The Directors Plan. All stock based compensation issued and awarded in 2007 and thereafter, will be administered under the 2007 Equity Award Plan. At December 31, 2008, approximately 1.9 million shares of common stock were available for future grants under the 2007 Equity Award Plan.

For stock subject to graded vesting, we have utilized the “straight-line” method for allocating compensation cost by period. The stock-based compensation expense for stock option grants was $0.1 million, $0.1 million and $0.1 million for the years ended December 31, 2008, 2007 and 2006, respectively. The stock-based compensation expense for restricted stock grants was $1.7 million, $1.0 million and $0.9 million for the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, there was $4.0 million of unrecognized compensation cost related to unvested stock awards granted under our compensation plans noted above. The cost is expected to be recognized over a weighted-average recognition period of 2.67 years.

In calculating the compensation expense for options granted, we have estimated the fair value of each grant issued through December 31, 2008 using the Black-Scholes option-pricing model. The fair value of stock options granted have been calculated based on the stock price on the date of the option grant, the exercise price of the option and the following assumptions, which are evaluated and revised, as necessary, to reflect market conditions and experience. These assumptions are the weighted-average of the assumptions used for all grants which occurred during the respective fiscal year. There were no stock options granted in 2008.

	2007		2006
Expected volatility		35.4%		31.1%
Risk-free interest rate		4.6%		5.1%
Expected life of options		6.0 years		6.0 years
Expected dividend yield		0%		0%
Forfeiture rate		2.0%		2.0%

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Expected Volatility — Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. We use the historical volatility over the expected life of the option to estimate expected volatility.

Risk-Free Interest Rate — This is the average U.S. Treasury rate (having a term that most closely resembles the expected life of the option) for the quarter in which the option was granted.

Expected Life of Options — This is the period of time that the options granted are expected to remain outstanding. This estimate is based primarily on historical exercise data.

Expected Dividend Yield — We have never declared or paid dividends on our common stock and do not anticipate paying any dividends in the foreseeable future.

Forfeiture Rate — This is the estimated percentage of options granted that are expected to be forfeited or cancelled on an annual basis before becoming fully vested. We estimate the forfeiture rate based on past turnover data with further consideration given to the level of the employees to whom the options were granted.

A summary of option activity under the equity-based compensation plans as of December 31, 2008, and changes during the twelve months then ended is as follows:

						Aggregate
	Number of			Weighted Average		Intrinsic
	Shares			Exercise Price/Share		Value
Options outstanding at December 31, 2007		388,433		$	6.31
Granted		—		$	—
Exercised		—		$	—
Forfeited		(34,559	)	$	14.00
Options outstanding at December 31, 2008		353,874		$	5.56	$	—
Options exercisable at December 31, 2008		310,545		$	5.45	$	—

There were no options granted or exercised in 2008. The weighted average remaining contractual life for all options outstanding and all options exercisable under these plans at December 31, 2008 was 5.1 years and 4.7 years, respectively.

The weighted average grant-date fair value of options granted in 2007 and 2006 was $3.49 and $2.71 per share, respectively. The total intrinsic value of stock options exercised in 2007 and 2006 was $0.1 million and $2.4 million, respectively. Cash received from options exercised in 2007 and 2006 was $0.2 million and $3.0 million, respectively. The actual tax benefit realized for the tax deductions from option exercises in 2007 and 2006 totaled $0.1 million and $0.9 million, respectively.

A summary of the restricted stock activity under the equity-based compensation plans as of December 31, 2008, and changes during the year then ended is as follows:

				Weighted
				Average
	Number of			Grant-
	Restricted			Date Fair
	Shares			Value
Unvested at December 31, 2007		476,531		$	5.78
Granted		844,414		$	4.91
Vested		(195,245	)	$	5.56
Forfeited		(73,577	)	$	5.17
Unvested at December 31, 2008		1,052,123		$	5.17

The total intrinsic value of restricted stock which vested during the years ended December 31, 2008, 2007 and 2006 was less than $0.1 million, $0.9 million and $0.8 million, respectively.

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14.  COMMITMENTS AND CONTINGENCIES

Insurance Matters

As part of our management services to hotel owners, we generally obtain casualty (workers’ compensation and general liability) insurance coverage for our managed hotels. In December 2002, one of the carriers we used to obtain casualty insurance coverage was downgraded significantly by rating agencies. In January 2003, we negotiated a transfer of that carrier’s current policies to a new carrier. We have been working with the prior carrier to facilitate a timely and efficient settlement of the original 1,213 claims outstanding under the prior carrier’s casualty policies. The prior carrier has primary responsibility for settling those claims from its assets. As of December 31, 2008, only 30 claims remained outstanding. If the prior carrier’s assets are not sufficient to settle these outstanding claims, and the claims exceed amounts available under state guaranty funds, we will be required to settle those claims. We are indemnified under our management agreements for such amounts, except for periods prior to January 2001, when we leased certain hotels from owners. Based on currently available information, we believe the ultimate resolution of these claims will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

During 2005, the prior carrier presented invoices to us and other policy holders related to dividends previously granted to us and other policy holders with respect to the prior policies. Based on this information, we had determined that the amount was probable and estimable and therefore recorded the liability. In September 2005, we invoiced the prior carrier for premium refunds due to us on previous policies. The initial premiums on these policies were calculated based on estimated employee payroll expenses and gross hotel revenues. Due to the September 11th terrorist attacks and the resulting substantial decline in business and leisure travel in the months that followed, we reduced hotel level headcount and payroll. The estimated premiums billed were significantly overstated and as a result, we were owed refunds on the premiums paid. The amount of our receivable exceeded the dividend amounts claimed by the prior carrier. We had reserved the amount of the excess given the financial condition of the carrier. We believed that we held the legal right of offset in regard to this receivable and payable with the prior insurance carrier. Accordingly, there was no effect on the statement of operations in 2006 or 2007. In October 2008, we paid our prior carrier approximately $0.4 million in settlement of all matters, except for covered claims described in the preceding paragraph. Simultaneous with this payment, we obtained a written release related to all amounts owed to us or owed by us to the prior carrier. Accordingly, we have written off in the fourth quarter the offsetting amounts related to the dividends claimed by the prior carrier and the premium refunds owed to us.

Insurance Receivables and Reserves

Our captive insurance subsidiary earns insurance revenues through direct premiums written and reinsurance premiums ceded. Reinsurance premiums are recognized when policies are written and any unearned portions of the premium are recognized to account for the unexpired term of the policy. Direct premiums written are recognized in accordance with the underlying policy and reinsurance premiums ceded are recognized on a pro-rata basis over the life of the related policies. Losses, at present value, are provided for reported claims and claim settlement expenses. We provide a reinsurance layer between the primary and excess carrier that we manage through our captive insurance subsidiary. Consultants determine loss reserves and we evaluate the adequacy of the amount of reserves based on historical claims and future estimates. At December 31, 2008 and 2007, our reserve for claims was $1.9 million and $1.6 million, respectively.

Leases

As of December 31, 2008, our lease obligations consist of office space for our corporate offices, some of which contain rent escalations. We record rent expense on a straight-line basis over the term of the lease. Rent expense under leases for office space amounted to $2.8 million, $2.4 million and $2.9 million for the years ended

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December 31, 2008, 2007 and 2006. Future minimum lease payments required under these operating leases as of December 31, 2008 were as follows (in thousands):

2009	$	4,166
2010		4,248
2011		3,884
2012		3,702
2013		2,673
Thereafter		478
Total	$	19,151

The operating lease obligations shown in the table above have not been reduced by non-cancelable subleases related to our former corporate office space. We remain secondarily liable under this lease in the event that the sub-lessee defaults under the sublease terms. Given the size and financial stability of the sub-lessee, we do not believe that any payments will be required as a result of the secondary liability provisions of the primary lease agreements. We expect to receive minimum payments under this sublease as follows (in thousands):

2009	$	1,179
2010		1,226
2011		1,275
2012		1,326
2013		913
Thereafter		—
Total	$	5,919

Commitments Related to Management Agreements and Hotel Ownership

Under the provisions of management agreements with certain hotel owners, we are obligated to provide an aggregate of $3.0 million to these hotel owners in the form of advances or loans. The timing or amount of working capital loans to hotel owners is not currently known as these advances are at the hotel owner’s discretion.

In connection with our wholly-owned hotels, we have committed to provide certain funds for property improvements as required by the respective brand franchise agreements. As of December 31, 2008, we had ongoing renovation and property improvement projects with remaining expected costs to complete of approximately $6.8 million, of which approximately $4.3 million is directly attributable to the comprehensive renovation program for the Sheraton Columbia which is expected to be completed in the first half of 2009. The comprehensive renovation program for the Westin Atlanta Airport was completed during 2008.

In connection with our equity investments in hotel real estate, we are partners or members of various unconsolidated partnerships or limited liability companies. The terms of such partnership or limited liability company agreements provide that we contribute capital as specified. Generally, in an event that we do not make required capital contributions, our ownership interest will be diluted, dollar for dollar, equal to any amounts funded on our behalf by our partner(s). We currently have no outstanding equity funding commitments.

Guarantees

As discussed in Note 8 “Long-Term Debt,” on May 1, 2008, our wholly-owned subsidiary which owns the Sheraton Columbia hotel entered into a mortgage which is non-recourse to us, other than for customary non-recourse carveout provisions. However, in order to obtain this mortgage we entered into a guarantee agreement in favor of the lender which requires prompt completion and payment of the required improvements as defined in the agreement. These required improvements are included in the property improvement plan, as required by the brand franchise agreement and are subject to change based upon changes in the construction budget. As of December 31, 2008, the required improvements were approximately $3.7 million and we anticipate the completion prior to June 30, 2009. No liability has been recognized related to this guarantee. If the required improvements are not completed, the

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lender has the right to force us to do so. We expect the required improvements will be completed in a timely basis and no amounts will be funded under this guarantee.

Letters of Credit

As of December 31, 2008, we had a $1.0 million letter of credit outstanding from Northridge Insurance Company in favor of our property insurance carrier. The letter of credit expires on April 4, 2009. We are required by the property insurance carrier to deliver the letter of credit to cover its losses in the event we default on payments to the carrier. Accordingly, the lender has required us to restrict a portion of our cash equal to the amount of the letter of credit, which we present as restricted cash on our consolidated balance sheet. We also had letters of credit outstanding in the amounts of $0.6 million and $1.0 million in favor of our insurance carriers that issue surety bonds on behalf of the properties we manage which expire on June 2, 2009 and November 20, 2009, respectively. We are required by the insurance carriers to deliver these letters of credit to cover their risk in the event the properties default on their required payments related to the surety bonds.

Contingent Liabilities Related to Partnership Interests

In connection with one of our development joint ventures, we have agreed to fund, through additional contributions, a portion of any development and construction cost overruns up to $0.6 million of the approved capital spending plan for each hotel developed and constructed by our joint venture, IHR Greenbuck Hotel Venture. We believe that with our experience in project management and design, the risk of any required additional funding in excess of our planned equity investments is minimal. However, certain circumstances throughout the design and construction process could arise that may prevent us from completing the project with total costs under the 110 percent and therefore, require us to contribute additional funding. As construction and development of each hotel is completed, the contingency for cost overruns on that hotel is removed. As of December 31, 2008, our joint venture had completed construction on two properties and the contingency related to one of those properties has been removed while the contingency related to the second property is expected to be removed in early 2009. We do not currently have any new properties being developed that are covered by this guarantee.

Additionally, we own interests in several other partnerships and joint ventures. To the extent that any of these partnerships or joint ventures become unable to pay its obligations, those obligations would become obligations of the general partners. We are not the sole general partner of any of our joint ventures. The debt of all investees is non-recourse to us, other than for customary non-recourse carveout provisions, and we do not guarantee any of our investees’ obligations. Furthermore, we do not provide any operating deficit guarantees or income support guarantees to any of our joint venture partners. While we believe we are protected from any risk of liability because our investments in certain of these partnerships as one of several general partners were conducted through the use of single-purpose entities, to the extent any debtors pursue payment from us, it is possible that we could be held liable for those liabilities, and those amounts could be material.

Litigation

During the third quarter of 2008, we reached a settlement with plaintiffs in a class action lawsuit filed against numerous defendants including, Sunstone Hotel Properties, Inc., our subsidiary management company. The lawsuit alleged that the defendants did not compensate hourly employees for break time in accordance with California state labor requirements. Our portion of the gross settlement agreed upon was $1.7 million, which includes approximately $0.5 million to be paid for the plaintiffs’ legal costs and other various administrative costs to oversee payment to the individuals who will participate in the settlement. The remaining $1.2 million of the gross settlement is the maximum amount that our subsidiary has agreed to pay out to participating plaintiffs in the aggregate. As part of this settlement, we have guaranteed that we will make a minimum payment to all participating plaintiffs of at least 50 percent of the proposed settlement, or approximately $0.6 million. Accordingly, we have recorded an aggregate of $1.1 million for payment of the $0.5 million in plaintiffs’ legal costs and administrative fees and the $0.6 million minimum guaranteed amount to be paid under the settlement to the plaintiffs. This aggregate amount is recorded as other expenses from managed properties in our statement of operations. Additionally, we have also recorded the same amount as a receivable and as other revenue from managed properties in our statement of operations as we are entitled to reimbursement for all operating expenses, including all employee related expenses,

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under the terms of our management contract with the hotel owner. We expect payments for settlement and related legal and administrative fees to be made by December 31, 2009.

We are subject to various other claims and legal proceedings covering a wide range of matters that arise in the ordinary course of our business activities. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material effect on our financial condition or results of operations.

15.  STOCKHOLDERS’ EQUITY AND MINORITY INTERESTS

Common Stock

As of December 31, 2007, 31,718,817 common shares were issued and 31,702,017 were outstanding. During 2008, we issued 138,113 shares of common stock through the vesting of restricted stock (after adjusting for payroll tax net downs) and 3,056 shares of common stock through the redemption of Class A operating partnership units. As a result, at December 31, 2008, 31,859,986 shares of our common stock were issued and 31,843,186 were outstanding. Each holder of common stock is entitled to one vote per share on all matters submitted to a vote of stockholders.

Comprehensive Income

Comprehensive (loss) income consisted of the following (amounts in thousands):

	Year Ended December 31,
	2008			2007			2006
Net (loss) income	$	(18,023	)	$	22,828		$	29,779
Other comprehensive income, net of tax:
Foreign currency translation (loss) gain		(304	)		81			1,129
Unrealized (loss) gain on cash flow hedge instrument		(1,160	)		—			—
Unrealized gain (loss) on investments		28			(145	)		8
Comprehensive (loss) income	$	(19,459	)	$	22,764		$	30,916

Accumulated other comprehensive loss on the balance sheet consists of the following components, net of tax (in thousands):

	December 31,			December 31,
	2008			2007
Foreign currency translation adjustment	$	(218	)	$	86
Unrealized (losses) gains on investments		(145	)		(173	)
Unrealized (losses) gains on cash flow hedge instrument		(1,160	)		—
Total accumulated other comprehensive loss	$	(1,523	)	$	(87	)

Operating Partnership Units

Interstate Operating Company, L.P., our subsidiary operating partnership, indirectly holds substantially all of our assets. We are the sole general partner of that partnership. Along with 38 independent third-parties, we are also a limited partner of the partnership. The partnership agreement gives the general partner full control over the business and affairs of the partnership. The agreement also gives us, as general partner, the right, in connection with the contribution of property to the partnership or otherwise, to issue additional partnership interests in the partnership in one or more classes or series. These interests may have such designations, preferences and participating or other special rights and powers, including rights and powers senior to those of the existing partners, as we may determine.

Currently, the partnership has only Class A units of limited partnership interests outstanding. We and our wholly-owned subsidiaries own a number of Class A units equal to the number of outstanding shares of our common stock. The holders of each Class A unit not held by us or one of our subsidiaries may redeem it for cash equal to the value of one share of our common stock or, at our option, one share of our common stock. Throughout 2008, the other limited partners redeemed 3,056 Class A units and as of December 31, 2008, they continue to own 51,987 Class A

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units. At December 31, 2008 and 2007, the redemption value of the outstanding operating partnership units was $36 thousand and $0.2 million, respectively.

We did not make any distributions during 2008, 2007 or 2006 to the holders of the Class A units. All net income and capital proceeds received by the partnership, after payment of the annual preferred return and, if applicable, the liquidation preference, will be shared by the holders of the Class A units in proportion to the number of units owned by each holder.

16.  EMPLOYEE BENEFIT PLANS

Employee Healthcare Plans

Our Associate Benefit Choices plan provides healthcare benefits for the majority of our employees. The plan is administered through a third-party vendor. The estimated extended liability reserve for this plan was approximately $13.5 million and $12.2 million as of December 31, 2008 and 2007, respectively. Substantially all of this liability is related to property level employees, the cost of which is reimbursed to us by the hotel owners. This plan does not provide any post-employment or post-retirement benefits. Only active employees are eligible for the healthcare benefits. In addition, our Sunstone subsidiary maintains benefit plans for all of its employees at the property level. The estimated extended liability reserve for these plans was $6.4 million and $5.1 million at December 31, 2008 and 2007, respectively. These amounts are reflected as “accrued expenses” on our consolidated balance sheet. We have also recorded a corresponding receivable for these amounts as we are indemnified by Sunstone REIT for the payment of these liabilities.

Defined Contribution Plans

We maintain two defined contribution savings plans for our employees. Eligibility for participation in the plans is based on an employee meeting certain minimum age and service requirements. Employer matching contributions are based on a percentage of employee contributions. Participants may make voluntary, pre-tax contributions through salary deferrals to the plan in which they participate. We incurred expenses related to employees at our corporate offices and wholly-owned hotels of approximately $1.0 million, $0.6 million and $0.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. We incurred reimbursable expenses related to hotel employees of $2.8 million, $2.4 million, and $2.9 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Deferred Compensation Plans

We maintain a deferred compensation plan for certain executives and hotel general managers by depositing amounts into trusts for the benefit of the participating employees. During 2005, participant contributions were frozen due to pending legislation related to such plans being introduced by the IRS in that year. A plan amendment was made in 2006 and participation was then allowed. We recorded approximately $0.1 million, $0.1 million and $0.1 million for a discretionary match for the 2008, 2007 and 2006 plan years, respectively. Amounts in the trusts earn investment income, which serves to increase the corresponding deferred compensation obligation. Investments, which are recorded at market value and presented within “marketable securities” on our consolidated balance sheet, are directed by the participants, and consist principally of mutual funds.

17.  INCOME TAXES

We performed a comprehensive review of our tax positions in accordance with the more-likely-than-not standard established by FIN 48. There are no unrecognized tax benefits that, if recognized would affect the Company’s effective income tax rate in future periods. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its recognized tax positions and we do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

We will recognize interest and penalties accrued related to any unrecognized tax benefits in income tax expense. For the year ended December 31, 2008, we did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor were any interest expenses or penalties recognized during the quarter.

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We file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and several foreign jurisdictions in which we operate. As of December 31, 2008, our open tax years for federal, state and local jurisdictions that remain subject to examination range from 2001 through 2007.

Our effective income tax expense (benefit) rate for the years ended December 31, 2008, 2007, and 2006 differs from the federal statutory income tax rate as follows:

	2008			2007			2006
Statutory tax rate		(35.0	)%		35.0	%		35.0	%
State and local taxes		(3.3	)		5.0			5.2
Foreign subsidiaries rate		37.6			70.5			—
Business meals and entertainment		0.8			1.7			0.2
Employment related tax credits		(28.7	)		(34.4	)		(3.8	)
Foreign tax credits		(43.5	)		(70.9	)		—
Valuation allowance		312.4			4.8			1.4
Other		(26.4	)		3.3			1.3
		213.9	%		15.0	%		39.3	%

The components of income tax expense (benefit) are as follows:

	2008			2007			2006
Current:
Federal	$	(943	)	$	—		$	2,356
State		344			150			1,300
Foreign		2,168			2,245			16
	$	1,569		$	2,395		$	3,672
Deferred:
Federal	$	11,127		$	(1,715	)	$	11,512
State		(415	)		(245	)		2,087
Foreign		—			—			—
		10,712			(1,960	)		13,599
	$	12,281		$	435		$	17,271

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We have net income taxes payable at December 31, 2008 of $0.4 million. We had net income tax refunds receivable at December 31, 2007 of $0.4 million. The tax effects of the temporary differences and carryforwards that give rise to our net deferred tax asset (liability) at December 31, 2008 and 2007 are as follows:

	2008			2007
Deferred tax assets:
Allowance for doubtful accounts	$	2,265		$	2,038
Minority interest temporary difference		258			245
Property and equipment		554			—
Net operating loss carryforward		11,154			7,880
Accrued expenses		2,298			1,634
Amortizable intangible assets (management contracts)		8,387			11,953
Employment related tax credits		14,516			13,045
Foreign and alternative minimum tax credits		4,746			2,335
Investments in affiliates		6,882			6,174
Other assets		1,015			—
Total gross deferred tax assets		52,075			45,304
Less: valuation allowance		(38,115	)		(20,641	)
Deferred tax assets		13,960			24,663
Deferred tax liabilities:
Property and equipment		—			(1,333	)
Prepaid expense		(419	)		(344	)
Other liabilities		(801	)		(943	)
Deferred tax liabilities		(1,220	)		(2,620	)
Net deferred taxes	$	12,740		$	22,043

Our deferred tax assets primarily consist of net operating loss carryforwards, asset basis differences between GAAP and tax, mainly for investment in unconsolidated entities, intangible assets (management contracts), and employment related tax credits. Our valuation allowance is primarily related to these same assets. Management continually evaluates the expected future realization of our net deferred tax asset. We consider current and expected future industry and economic conditions, as well as the expected reversal of timing differences, in projecting future taxable income and future utilization of our deferred tax asset. Economic and industry conditions deteriorated markedly during the fourth quarter of 2008. We typically complete our updated forecasting and planning for the following year and beyond during the fourth quarter. Our revised forecasts of future taxable income for 2009 and the foreseeable future is much lower than our previous expectations. Based on this most recent evaluation, we recorded a valuation allowance against $17.5 million of our deferred tax assets.

We believe certain other deferred tax assets that were offset by a valuation allowance in purchase accounting will now be realized in the foreseeable future. Accordingly, in 2008 we reduced the valuation allowance attributable to these assets by $0.6 million and recorded a corresponding reduction in goodwill. Also in 2008, as we cannot determine utilization of these assets based on our lower projected taxable income in future years due to deteriorating industry and economic conditions, we increased the valuation allowances on our net operating loss carryforwards, our tax credit carryforwards and certain other deferred tax assets by a total of $18.1 million. The projection of taxable income and utilization of deferred tax assets is subject to significant judgment, risks and uncertainties including, but not limited to: future operating results, ability to generate gains from dispositions of hotels and joint venture interests, and execution of tax planning strategies.

This large increase in our valuation allowance is the primary reason our effective tax rate on continuing operations for 2008 is 213.9% (reflecting net tax expense in a loss year), as compared to an effective rate of 15% for 2007.

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Management believes that our valuation allowance of $38.1 million as of December 31, 2008 reduces the carrying value of our net deferred tax asset to an amount that will more likely than not be realized in the foreseeable future.

As of December 31, 2008, we have net operating loss carryforwards from pre-MeriStar/Old Interstate merger of $16.7 million. These carryforwards begin to expire in 2021. We also have net operating loss carryforwards from post-MeriStar/Old Interstate merger periods of $10.2 million after considering statutory usage limitations which begin to expire in 2023. Our employment related tax credits begin to expire in 2022. Our foreign tax credits begin to expire in 2018.

18.  QUARTERLY FINANCIAL DATA (UNAUDITED)

The following interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to SEC form 10-Q and Article 10 of SEC Regulation S-X. In our opinion, this information has been prepared on a basis consistent with that of our audited consolidated financial statements and all necessary material adjustments, consisting of normal recurring accruals and adjustments, have been included to present fairly the unaudited quarterly and year-to-date financial data. Our quarterly results of operations for these periods are not necessarily indicative of future results of operations. They do not include all the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and note thereto for the year ended December 31, 2008 included in this Annual Report on Form 10-K.

The following table sets forth certain items included in our consolidated financial statements for each quarter of the years ended December 31, 2008 and 2007. Other revenue from managed properties from our consolidated statement of operations has been excluded from total revenues (in thousands):

	First			Second		Third			Fourth
2008:
Total revenues	$	38,936		$	40,503	$	36,800		$	53,941
Net (loss) income from continuing operations		(286	)		134		(1,403	)		(16,468	)
Net (loss) income from discontinued operations		—			—		—			—
Net (loss) income	$	(286	)	$	134	$	(1,403	)	$	(16,468	)
Basic (loss) earnings per common share from continuing operations	$	(0.01	)	$	—	$	(0.05	)	$	(0.52	)
Basic (loss) earnings per common share from discontinued operations		—			—		—			—
Basic (loss) earnings per common share	$	(0.01	)	$	—	$	(0.05	)	$	(0.52	)
Diluted (loss) earnings per common share from continuing operations	$	(0.01	)	$	—	$	(0.05	)	$	(0.52	)
Diluted (loss) earnings per common share from discontinued operations		—			—		—			—
Diluted (loss) earnings per common share	$	(0.01	)	$	—	$	(0.05	)	$	(0.52	)

	First			Second			Third			Fourth
2007:
Total revenues	$	28,389		$	35,382		$	33,703		$	58,559
Net income (loss) from continuing operations		(1,083	)		(1,218	)		(2,036	)		6,801
Net income (loss) from discontinued operations		17,001			607			2,836			(80	)
Net income (loss)	$	15,918		$	(611	)	$	800		$	6,721
Basic earnings (loss) per common share from continuing operations	$	(0.04	)	$	(0.04	)	$	(0.06	)	$	0.21
Basic earnings (loss) per common share from discontinued operations		0.54			0.02			0.09			—
Basic earnings (loss) per common share	$	0.50		$	(0.02	)	$	0.03		$	0.21
Diluted earnings (loss) per common share from continuing operations	$	(0.04	)	$	(0.04	)	$	(0.06	)	$	0.21
Diluted earnings (loss) per common share from discontinued operations		0.54			0.02			0.09			—
Diluted earnings (loss) per common share	$	0.50		$	(0.02	)	$	0.03		$	0.21

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The sum of the basic and diluted (loss) earnings per common share for the four quarters may differ from the annual (loss) earnings per common share due to the required method of computing the weighted average number of shares in the respective periods.

19.  NOTES RECEIVABLE

Our notes receivable consist of the following (in thousands):

	December 31,			December 31,
	2008			2007
Working capital notes	$	2,742		$	3,007
Working capital notes — related parties		2,551			2,551
Termination and incentive fee notes		1,817			1,010
Other		—			959
Total		7,110			7,527
Less allowance		(2,856	)		(2,551	)
Notes receivable, net	$	4,254		$	4,976

As of December 31, 2008, we had twelve notes receivable outstanding, of which six were issued to hotel owners in connection with obtaining management contracts and six were issued to hotel owners in connection with termination or incentive fees due to us based on terms of their existing management contracts. As of December 31, 2007, we had ten notes receivable outstanding, of which seven were issued to hotel owners in connection with obtaining management contracts, two were issued to hotel owners in connection with termination fees due to us and one was issued in connection with the sale of BridgeStreet.

Our notes receivable vary in maturity from six months to six years. They include non-interest bearing notes and notes bearing interest at various rates. On non-interest bearing notes, we impute interest based on the market rates of debt with similar terms and maturity at time of issuance. As of December 31, 2008 and 2007, our non-interest bearing notes totaled $3.2 million an $2.3 million, respectively, net of unamortized discount with imputed interest rates ranging from 7.0-11.5 percent. We recorded $0.5 million, $0.6 million and $0 in interest income from the amortization of discount on notes receivable within our statement of operations for the years ended December 31, 2008, 2007 and 2006, respectively.

We hold a note receivable of $2.6 million due from the partners in a joint venture in which we hold a 50.0 percent ownership interest. The joint venture owns one hotel property and our joint venture investment was written down to zero in 2002 at the time of the merger with Old Interstate. The partners’ sole asset in the joint venture is their investment. In 2007, based on our projections of the proceeds from a potential sale of the hotel, we recorded a reserve for the full amount of the loan and accrued interest and corresponding bad debt expense of $2.9 million, which is included within administrative and general expense in our consolidated statement of operations for the year ended December 31, 2007. In the fourth quarter of 2008, we recorded a reserve and corresponding bad debt expense of $0.3 million related to a working capital note issued to a different hotel owner for which we manage.

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20.  FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table sets forth our financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required by SFAS 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands).

	Fair Value at December 31, 2008
	Total		Level 1		Level 2		Level 3
Assets:
Derivative instruments	$	50	$	—	$	50	$	—
Marketable securities	$	1,676	$	1,676	$	—	$	—
Total:	$	1,726	$	1,676	$	50	$	—
Liabilities:
Derivative instruments	$	1,933	$	—	$	1,933	$	—
Deferred compensation	$	1,649	$	1,649	$	—	$	—
Total:	$	3,582	$	1,649	$	1,933	$	—

Our marketable securities are valued using quoted market prices in active markets and as such are classified within Level 1 of the fair value hierarchy. The fair value of the marketable equity securities is calculated as the quoted market price of the marketable equity security multiplied by the quantity of shares held by us. As our deferred compensation is directly increased or decreased to reflect changes in fair value of its related marketable securities, we have also classified the liability within Level 1 of the fair value hierarchy.

Our derivative instruments are classified within Level 2 of the fair value hierarchy as they are valued using third-party pricing models which contain inputs that are derived from observable market data. Where possible, we verify the values produced by the pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility, and correlations of such inputs.

Statement of Financing Accounting Standard No. 107, “Disclosures about Fair Value of Financial Instruments”, requires the disclosure of the fair value of financial instruments for which it is practical to estimate fair value. In addition to the financial instruments and related fair values disclosed in the table above, the carrying amounts reflected in our consolidated balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate fair value due to their short-term maturities. Our long-term debt is primarily variable rate and therefore, also approximates fair value.

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ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.   CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our chief executive officer, chief financial officer, and chief accounting officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)).

Following the implementation of the remedial actions described below and in the Company’s Annual Report on Form-10K for the year ended December 31, 2007, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, we concluded that our disclosure controls and procedures were adequate and effective in ensuring that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this report was being prepared. We concluded that the consolidated financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Internal control over financial reporting cannot provide absolute assurance for the prevention or detection of misstatements within the Company’s financial reporting because of its inherent limitations. Internal control over financial reporting is a process that involves human judgment and requires diligence and compliance to prevent errors. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis. However, these inherent limitations are known features of the financial reporting process and it is possible to design safeguards to reduce, though not eliminate, this risk.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate and effective internal control over financial reporting for Interstate Hotels and Resorts, Inc. Internal control over financial reporting refers to the process designed by, or under the supervision of our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that:

(1)	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2)	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and
(3)	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Management has used the framework set forth in the report entitled Internal Control — Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Based on this evaluation, management

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concluded that the Company’s internal control over financial reporting was effective as of December 31, 2008. KPMG LLP, the Company’s independent registered public accounting firm, has issued an audit report on our internal control over financial reporting, which is included in Item 8, “Financial Statements and Supplementary Data”

Remediation of Previously Disclosed Material Weaknesses

In connection with the preparation of the consolidated financial statements for the year ended December 31, 2007, management concluded that the Company’s internal control over financial reporting was not effective because of the following material weakness:

The Company did not have effective policies and procedures designed either to evaluate or review changes in accounting principles in accordance with U.S. GAAP. Specifically, the consideration and supervisory review of potential changes in the Company’s accounting principles was not designed to encompass all of the factors required by GAAP. Furthermore, the Company’s disclosure committee did not have procedures suitably designed to ensure that all of these factors were reviewed before approving a change in accounting principle. As a result, management adopted a new accounting policy related to impairment of intangible assets during the first quarter of 2007 that was not in accordance with GAAP. This material weakness resulted in material misstatements in the Company’s interim consolidated financial statements for the periods ended March 31, 2007, June 30, 2007 and September 30, 2007, all of which have been restated in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

In order to remedy the material weakness described above, in 2008 management formalized specific actions that are required to be performed by the disclosure committee with respect to the evaluation of accounting changes. In 2008, we implemented various remedial actions, including a requirement that documentation and evaluation of all changes in accounting policies are performed quarterly and reviewed by senior management and the disclosure committee. Based on the successful implementation of these controls, management has determined that the previously disclosed material weakness has been remediated as of December 31, 2008.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their stated goals under all potential future conditions. Also, we have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to these entities are substantially more limited than those we maintain with respect to our consolidated subsidiaries.

ITEM 9B.   OTHER INFORMATION

None.

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PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

1.  FINANCIAL STATEMENTS

All financial statements of the registrant are provided under Item 8 of this Report on Form 10-K.

2.  FINANCIAL STATEMENT SCHEDULES

Financial Schedules:

		Page
III.	Real Estate and Accumulated Depreciation	S-1 to S-2

All other information relating to schedules for which provision is made in the applicable accounting regulations of the SEC is included in the notes to the financial statements and is incorporated herein by reference.

3.  EXHIBITS

Exhibit
No.	Description of Document
3.1	Amended and Restated Certificate of Incorporation of the Company, formerly MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form S-1/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
3.1.1	Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated June 30, 2001 (incorporated by reference to Exhibit 3.1.1 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 8, 2002).
3.1.2	Certificate of Merger of Interstate Hotels Corporation into MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.1.2 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
3.1.3	Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated July 31, 2002 (incorporated by reference to Exhibit 3.1.3 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
3.2	Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2007).
4.1	Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
10.1	Amended and Restated Agreement of Limited Partnership of MeriStar H&R Operating Company, L.P. dated as of August 3, 1998 (incorporated by reference to Exhibit 10.11 to the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1998).
10.3	Interstate Hotels & Resorts, Inc., 2007 Equity Award Plan (incorporated by reference to Annex A to the Company’s Form Def 14A filed with the Securities and Exchange Commission on April 24, 2007).
10.4	Interstate Hotels & Resorts, Inc. Supplemental Deferred Compensation Plan, dated as of December 21, 2006 (incorporated by reference to Exhibit 10.9 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 16, 2007).
10.5	Employment Agreement, dated as of February 17, 2005, by and between Thomas F. Hewitt and the Company (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 9, 2005).
10.5.1	Amended Employment Agreement, dated as of January 16, 2007, by and between Thomas F. Hewitt and the Company (incorporated by reference to Exhibit 10.5.1 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 16, 2007).

99

Exhibit
No.	Description of Document
10.5.2	Amended Employment Agreement, dated as of October 30, 2008, by and between Thomas F. Hewitt and the Company (incorporated by reference to Exhibit 10.5.2 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 5, 2008).
10.6	Employment Agreement, dated as of April 17, 2006, by and between Bruce A. Riggins and the Company (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 9, 2006).
10.7	Employment Agreement, dated as of June 8, 2006, by and between Samuel E. Knighton and the Company (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 16, 2007).
10.7.1	Amended Employment Agreement, dated as of December 18, 2007, by and between Samuel E. Knighton and the Company (incorporated by reference to Exhibit 10.7.1 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 17, 2008).
10.8	Amended and Restated Employment Agreement and Consulting Agreement, dated as of July 1, 2008, by and between Henry L. Ciaffone and the Company (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 6, 2008).
10.9	Amended Employment Agreement, dated June 1, 2007, by and between Christopher L. Bennett and the Company (incorporated by reference to Exhibit 10.9 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 17, 2008).
10.10	Employment Agreement, dated June 1, 2007, by and between Denis S. McCarthy and the Company (incorporated by reference to Exhibit 10.10 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 17, 2008).
10.11	Employment Agreement, dated as of September 26, 2005, by and between Leslie Ng and the Company (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 16, 2007).
10.11.1	Amended Employment Agreement, dated September 26, 2008, by and between Leslie Ng and the Company (incorporated by reference to Exhibit 10.19 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 5, 2008).
10.12	Senior Secured Credit Facility, dated March 9, 2007, among Interstate Operating Company, LP, Lehman Brothers Inc. and various others lenders (incorporated by reference to Exhibit 10.17 to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 16, 2007).
10.12.1	First Amendment to the Senior Secured Credit Facility, dated May 24, 2007, among Interstate Operating Company, LP, Lehman Brothers Inc. and various other lenders (incorporated by reference to Exhibit 10.5.1 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 9, 2007).
10.12.2	Second Amendment to the Senior Secured Credit Facility, dated July 2, 2008, among Interstate Operating Company, LP, Lehman Brothers Inc. and various other lenders (incorporated by reference to Exhibit 10.5.2 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 6, 2008).
10.12.3*	First waiver to the Senior Secured Credit Facility, dated April 9, 2008, among Interstate Operating Company, LP, Lehman Brothers Inc. and various other Lenders.
10.12.4*	Second waiver and Third Amendment to the Senior Secured Credit Facility, dated March 30, 2009, among Interstate Operating Company, LP, Lehman Brothers Inc. and various other lenders.
10.13	Loan Agreement dated May 1, 2008 between Interstate Columbia SPE, LLC and Calyon New York Branch and various other lenders (incorporated by reference to Exhibit 10.17 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 6, 2008).
10.14*	Loan Agreement dated October 17, 2006 between Interstate Arlington, LP and UBS Real Estate Securities Inc.
10.14.1*	First Amendment to the Loan Agreement, dated December 26, 2007 between Interstate Arlington, LP and UBS Real Estate Securities, Inc.
10.15*	Loan Agreement dated February 8, 2007 between Interstate Westchase, LP and UBS Real Estate Securities Inc.

100

Exhibit
No.	Description of Document
10.15.1*	First Amendment to the Loan Agreement, dated December 26, 2007 between Interstate Westchase, LP and UBS Real Estate Securities, Inc.
21*	Subsidiaries of the Company.
23.1*	Consent of KPMG LLP.
24	Power of Attorney (see signature page).
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*	Sarbanes-Oxley Act Section 906 Certifications of Chief Executive Officer and Chief Financial Officer.

* Filed herewith

101

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Interstate Hotels & Resorts, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INTERSTATE HOTELS & RESORTS, INC.

By:  /s/  THOMAS F. HEWITT

Thomas F. Hewitt

Chief Executive Officer

Dated: March 31, 2009

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas F. Hewitt and Christopher L. Bennett, such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and revocation, for such person and in such person’s name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this report filed pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, and to file the same with all exhibits thereto, and the other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and things requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report and the foregoing Power of Attorney have been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/  THOMAS F. HEWITT Thomas F. Hewitt	Chief Executive Officer (Principal Executive Officer)	March 31, 2009
/s/  PAUL W. WHETSELL Paul W. Whetsell	Chairman of the Board	March 31, 2009
/s/  BRUCE A. RIGGINS Bruce A. Riggins	Chief Financial Officer (Principal Financial and Accounting Officer)	March 31, 2009
Leslie R. Doggett	Director
/s/  H. ERIC BOLTON H. Eric Bolton	Director	March 31, 2009
/s/  JAMES B. MCCURRY James B. McCurry	Director	March 31, 2009
/s/  RONALD W. ALLEN Ronald W. Allen	Director	March 31, 2009

102

Signature	Title	Date
/s/  JOHN J. RUSSELL, JR. John J. Russell, Jr.	Director	March 31, 2009
/s/  JAMES F. DANNHAUSER James F. Dannhauser	Director	March 31, 2009
/s/  CHRISTOPHER SHACKELTON Christopher Shackelton	Director	March 31, 2009

103

SCHEDULE III
Page 1 of 2

INTERSTATE HOTELS & RESORTS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2008
(in thousands)

			Initial Costs				Subsequent			Gross Amount at December 31, 2008
					Building &		Costs					Building &				Accumulated		Date		Depreciation
Description	Debt		Land		Improvements		Capitalized(1)			Land		Improvements		Total		Depreciation		Acquired		Life
Hilton Concord (Concord, CA)	$	—	$	4,700	$	25,235	$	2,876		$	4,700	$	28,111	$	32,811	$	5,239		Feb 2005		3-39	1/2Years
Hilton Durham (Durham, NC)		—		909		13,141		4,404			909		17,545		18,454		2,028		Nov 2005		3-39	1/2Years
Hilton Garden Inn Baton Rouge Airport (Baton Rouge, LA)		—		1,375		13,109		1,011			1,375		14,120		15,495		1,243		Jun 2006		3-39	1/2Years
Hilton Arlington (Arlington, TX)		24,700		3,284		34,054		(7,895	)		3,284		26,159		29,443		5,031		Oct 2006		3-39	1/2Years
Hilton Houston Westchase (Houston, TX)		32,825		8,525		43,168		2,396			8,525		45,564		54,089		3,389		Feb 2007		3-39	1/2Years
Westin Atlanta Airport (Atlanta, GA)		—		4,419		71,194		17,971			4,419		89,165		93,584		3,579		May 2007		3-39	1/2Years
Sheraton Columbia (Columbia, MD)		25,000		6,500		41,467		6,290			6,500		47,757		54,257		1,417		Nov 2007		3-39	1/2Years
TOTAL	$	82,525	$	29,712	$	241,368	$	27,053		$	29,712	$	268,421	$	298,133	$	21,926

(1) In the fourth quarter of 2008, we wrote down the carrying value of the Hilton Arlington to its fair value, which was determined on the basis of future discounted cash flows, and recorded a non-cash impairment charge of $11.0 million within “asset impairments and write-offs” on our consolidated statement of operations.

S-1

SCHEDULE III
Page 2 of 2

INTERSTATE HOTELS & RESORTS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2008
(in thousands)

Notes:

(A) The change in total cost of properties for the fiscal years ended December 31, 2008, 2007 and 2006 is as follows:

Balance at December 31, 2005	$	44,198
Additions:
Acquisitions		51,822
Capital expenditures and transfers from construction-in-progress		3,654
Deductions:
Dispositions and other		—
Balance at December 31, 2006		99,674
Additions:
Acquisitions		175,273
Capital expenditures and transfers from construction-in-progress		8,406
Deductions:
Dispositions and other		—
Balance at December 31, 2007		283,353
Additions:
Acquisitions		—
Capital expenditures and transfers from construction-in-progress		29,698
Deductions:
Dispositions, write-downs and other		(14,918	)
Balance at December 31, 2008	$	298,133

(B) The change in accumulated depreciation and amortization of real estate assets for the fiscal years ended December 31, 2008, 2007 and 2006 is as follows:

Balance at December 31, 2005	$	1,167
Depreciation and amortization		2,426
Dispositions and other		—
Balance at December 31, 2006		3,593
Depreciation and amortization		8,288
Dispositions and other		—
Balance at December 31, 2007		11,881
Depreciation and amortization		13,934
Dispositions and other		(3,889	)
Balance at December 31, 2008	$	21,926

(C) The aggregate cost of properties for federal income tax purposes is approximately $277.0 million at December 31, 2008.

S-2

EX-10.12.3

Exhibit 10.12.3

WAIVER

     WAIVER, dated as of April 9, 2008 (this “Waiver”), by and among INTERSTATE OPERATING COMPANY, LP, a Delaware limited partnership (the “Borrower”), LEHMAN COMMERCIAL PAPER INC. (the “Administrative Agent”), and the Lenders party hereto to the Credit Agreement (as defined below).

WITNESSETH:

     WHEREAS, the Borrower, the Administrative Agent, Lehman Brothers Inc., as sole lead an-anger and sole bookrunner, Societe Cidnerale, as syndication agent. CaIyon New York Branch and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc.. as co-documentation agents and the Lenders have entered into that certain Senior Secured Credit Agreement, dated as of March 9, 2007 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”);

     WHEREAS, a Subsidiary of the Borrower, Interstate Columbia, LLC, acquired a Sheraton hotel located at 10207 Wincopin Circle, Columbia, Maryland 21044 (the “Sheraton-Maryland”) on November 29, 2007, and, pursuant to the Credit Agreement, maybe required to provide, among other deliverables. Security Documents and a Title Policy within ninety (90) Business Days of the acquisition of the Sheraton-Maryland in order for the Administrative Agent to have an Acceptable Lien on the Sheraton-Maryland;

     WHEREAS, the Borrower has requested additional time to comply with the Credit Agreement in connection with the acquisition of the Sheraton-Maryland: and

     WHEREAS, the Administrative Agent and the Lenders party hereto have agreed, subject to the terms and conditions hereinafter set forth, to waive certain provisions of the Credit Agreement as set firth below.

     NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. the parties hereby agree as follows:

     1. Defined Terms. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement.

     2. Waiver. The Administrative Agent and the Lenders party hereto have agreed to provide the Borrower an additional ninety (90) Business Days to satisfy the requirements of Sections 5.10 and 6.06(d), if necessary, and the Credit Agreement generally in connection with the acquisition of the Sheraton-Maryland.

     3. Conditions to Effectiveness of this waiver. This Waiver shall become effective as of the date (the “Waiver Effective Date”) each of the following conditions precedent shall have been satisfied:

     (a) The Administrative Agent shall have received a duly executed counterpart of this Waiver, executed by the Borrower, the Administrative Agent and the Required Lenders.

     (b) There shall have been paid to the Administrative Agent, for the account of itself and the Lenders, as applicable. all fees and expenses (including reasonable fees and expenses of counsel) due and payable on or before the Waiver Effective Date, including a five (5) basis point waiver fee for

each Lender that has executed and delivered this Waiver on or prior to 5p.m. (New York Time) Wednesday April 9, 2008 on the full amount of such Lender’s Commitment on such date.

     4. Representations and Warranties. The Borrower hereby represents and wan-ants to the Administrative Agent and the Lenders, on and as of’ the date hereof. that:

     (a) (i) The Borrower has taken all necessary action to authorize the execution, delivery and performance of this Waiver, (ii) this Waiver has been duly executed and delivered by the Borrower and (iii) this Waiver is the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles.

     (b) After giving effect to this Waiver, each of the representations and warranties made by any Loan Party in or pursuant to the Credit Documents is true and correct in all material respects on and as of the date hereof, as if made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties arc true and correct in all material respects as of such earlier date.

     (c) After giving effect to this Waiver, no Default or Event of Default has occurred and is continuing as of the date hereof

     (d) The acquisition of the Sheraton-Maryland is a Permitted New Investment and the Borrower is otherwise in compliance with Section 6.06. including the last paragraph of such Section

     5. Continuing Effect. Except as expressly set forth in this Waiver, all of the terms and provisions of the Credit Agreement are and shall remain in full force and effect and the Borrower shall continue to be bound by all of such terms and provisions. The Waiver provided for herein is limited to the specific provisions of the Credit Agreement specified herein and shall not constitute a waiver of, or an indication of the Administrative Agent’s or the Lenders’ willingness to waive, any other provisions of the Credit Agreement or the same sections for any other date or purpose. This Waiver is a Credit Document.

     6. Expenses. The Borrowers agree to pay and reimburse the Administrative Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the negotiation, preparation, execution and delivery of this Waiver, and other documents prepared in connection herewith, and the transactions contemplated hereby, including, without limitation, reasonable tees and disbursements and other charges of counsel to the Administrative Agent relating to the Waiver.

     7. Choice of Law, THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED, AND ANY DISPUTE BETWEEN THE BORROWER, THE ADMINISTRATIVE AGENT, ANY LENDER, OR ANY INDEMMTEE ARISING OUT OF. CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS AGREEMENT, AND WHETHER ARISING IN CONTRACT. TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING, WITHOUT LIMITATION, SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW, BUT OTHERWISE WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF NEW YORK; PROVIDED THAT THE PERFECTION OF THE LIENS OF THE ADMINISTRATIVE AGENT ON THE COLLATERAL AND THE EXERCISE OF REMEDIES AGAINST THE COLLATERAL SHALL BE GOVERNED BY,

2

CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE APPLICABLE JURISDICTION.

     8. Counterparts. This Waiver may be executed in any number of counterparts and by different parties and separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Waiver by facsimile or e-mail shall be effective as delivery of a manually executed counterpart of this Waiver.

     9. Integration. This Waiver, together with the other Credit Documents, incorporates all negotiations of the parties hereto with respect to the subject matter hereof and is the final expression and agreement of the parties hereto with respect to the subject matter hereof.

     10. Severability. In case any provision in this Waiver shall be invalid, illegal or unenforceable, such provision shall be severable from the remainder of this Waiver and the validity, legality and enforceability of the remaining provisions shall not in any way he affected or impaired thereby.

     11. Waiver of Jury Trial. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY SUCH CLAIM. DEMAND. ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

[SIGNATURE PAGES FOLLOW]

3

     IN WITNESS WHEREOF, the parties have entered into this Waiver as of the date first above written.

BORROWER: INTERSTATE OPERATING COMPANY, LP, a Delaware Limited partnership
	By:  INTERSTATE HOTELS & RESORTS, INC.,
	its general partner
	By:	/s/ Bruce Riggins
	Name:	Bruce Riggins
	Title:	Chief Financial Officer
LEHMAN COMMERCIAL PAPER, INC. As a Lender and as Administrative Agent
By:	/s/ Craig Malloy
	Name: Craig Malloy
	Title: Authorized Signatory

[SIGNATURE PAGE TO WAIVER]

EX-10.12.4

Exhibit 10.12.4

WAIVER NO. 2 AND AMENDMENT NO. 3

          WAIVER NO. 2 AND AMENDMENT NO. 3, dated as of March 30, 2009 (this “Amendment”), by and among INTERSTATE OPERATING COMPANY, LP, a Delaware limited partnership (the “Borrower”), LEHMAN COMMERCIAL PAPER INC. (the “Administrative Agent”), and the Lenders party hereto to the Credit Agreement (as defined below).

W I T N E S S E T H:

          WHEREAS, the Borrower, the Administrative Agent, Lehman Brothers Inc., as sole lead arranger and sole bookrunner, Société Générale, as syndication agent, Calyon New York Branch and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc., as co-documentation agents and the Lenders have entered into that certain Senior Secured Credit Agreement, dated as of March 9, 2007, as amended pursuant to that certain Amendment No. 1, dated as of May 24, 2007 and Amendment No. 2, dated as of July 2, 2008 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”);

          WHEREAS, pursuant to Section 5.02 of the Credit Agreement, it is a requirement that the common stock of Parent (as defined in the Credit Agreement) be at all times duly listed on the New York Stock Exchange, Inc. (“NYSE”) (the “Listing Requirement”);

          WHEREAS, (i) the trading of the common stock of Parent has been suspended by the NYSE on March 12, 2009 (the “Suspension”) and (ii) the common stock of Parent shall not be traded on the NYSE until the Suspension has been successfully appealed by Parent (the “Appeal”);

          WHEREAS, in the event the Appeal is unsuccessful, the common stock of Parent shall be de-listed from the NYSE (a “Delisting”);

          WHEREAS, the Borrower desires that the Administrative Agent and Lenders waive any Event of Default that shall arise under Section 8.01(m) of the Credit Agreement in connection with the Suspension or the Delisting, in each case until June 30, 2009 (collectively, the “Delisting Waiver”);

          WHEREAS, pursuant to Section 5.05(b), it is a requirement that Parent furnish to Administrative Agent an audit from KPMG, L.L.P. or other independent certified public accounts of nationally recognized standing reasonably acceptable to the Administrative Agent an opinion without qualification as to scope or any other material qualification or exception (the “Audit Requirement”);

          WHEREAS, KPMG, L.L.P. has advised Parent that, in connection with its audit for the fiscal year ending December 31, 2008, it may deliver an audit opinion which expresses doubt about the Parent’s ability to continue as a “going concern” opinion as a result of the Delisting and a potential inability to comply with the Leverage Ratio for the Parent’s fourth quarter 2009 calculation period (the “Specified Audit”), and such Specified Audit may not comply with the Audit Requirement;

          WHEREAS, Borrower desires that the Administrative Agent and the Lenders waive the Audit Requirement and the Event of Default that shall arise under Section 8.01(d) of the Credit Agreement in connection with the delivery of the Specified Audit, in each case until June 30, 2009 (collectively, the “Audit Requirement Waiver”, and together with the Delisting Waiver, the “Specified Waivers”);

          WHEREAS, the Administrative Agent and the Lenders party hereto (constituting the Required Lenders) have agreed, subject to the terms and conditions hereinafter set forth, to waive and amend certain provisions of the Credit Agreement as set forth below;

          NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

          1. Defined Terms. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement.

          2. Waiver. The Administrative Agent and the Lenders party hereto hereby agree to grant each of the Specified Waivers until June 30, 2009, 5:00 p.m. (New York Time) (the “Waiver Termination Date”), at which time each Specified Waiver shall expire without the further action by any party and any remedy period or cure period provided for under the Credit Agreement in connection with the breach of any of the Listing Requirement and the Audit Requirement shall be deemed to have lapsed.

          3. Forbearance. Subject to the satisfaction of the terms and conditions set forth herein, until the Waiver Termination Date, the Administrative Agent and Lenders party hereto shall not, except as otherwise provided herein, exercise or enforce any remedy provided for in any Credit Document by reason of any breach of the Listing Requirement or the Audit Requirement; provided, however, that such forbearance is not and shall not be deemed to be a waiver of the Administrative Agent’s or any Lender’s right to enforce any other claims, rights or remedies at any time and from time to time on or after the Forbearance Termination Date or with respect to Events of Defaults other than any Event of Default in connection with the Listing Requirement or the Audit Requirement.

          4. Amendment. Effective as of the Effective Date (as defined below) and subject to the terms and conditions set forth herein, the Credit Agreement is hereby amended as follows:

          (a) The definition of Applicable Margin in Section 1.01(a) (Certain Defined Terms) is hereby deleted in its entirety and the following definition is inserted in lieu thereof:

“Applicable Margin” means, (a) with respect to any Advance at any date, the applicable percentage per annum set forth below based upon the Status then in effect under the column for such Class and Type of Advance, and (b) with respect to the letter of credit fee payable under Section 2.03(b) at any date, the applicable percentage per annum set forth below based upon the Status then in effect under the column for Revolving Advances which are Eurodollar Rate Advances.

	Revolving Advances						Term Advances
	Adjusted			Eurodollar			Adjusted			Eurodollar
	Base Rate			Rate			Base Rate			Rate
	Advances			Advances			Advances			Advances
Level I Status		2.25	%		3.25	%		2.25	%		3.25	%
Level II Status		2.50	%		3.50	%		2.50	%		3.50	%

          (b) The definition of Revolving Commitment in Section 1.01(a) (Certain Defined Terms) is hereby deleted in its entirety and the following definition is inserted in lieu thereof:

“Revolving Commitment” means, for each Lender, the Revolving Commitment set forth for such Lender as its Revolving Commitment in the Register maintained by the

2

Administrative Agent pursuant to Section 10.06(c). As of the Amendment No. 3 Effective Date, the aggregate amount of the Revolving Commitments under this Agreement is $60,327,456.24; provided, however, that during the Waiver Period, the aggregate amount of all Revolving Advances made pursuant to Section 2.01(b) shall not exceed $6,000,000.

           (c) Section 1.01(a) (Certain Defined Terms) is hereby amended by inserting the following definitions in the appropriate alphabetical order:

““Amendment No. 3” means that certain Waiver No. 2 and Amendment No. 3, dated as of March 30, 2009, between Borrower, Administrative Agent and the Lenders party thereto.

“Amendment No. 3 Effective Date” has the meaning ascribed to the term “Effective Date” in Amendment No. 3.

“Waiver Period” means the period commencing on the date that is the Amendment No. 3 Effective Date and ending on June 30, 2009.”

          (d) Section 2.01(b) (The Advances) is hereby amended by inserting the proviso at the end of the first sentence thereof:

“provided, further, that during the Waiver Period, the aggregate amount of all Revolving Advances made pursuant to this Section 2.01(b) shall not exceed $6,000,000”

          (e) Section 4.08(a) (Use of Proceeds) is hereby deleted in its entirety and the following is inserted in lieu thereof

“(a) Advances. The proceeds of the Advances shall be used by the Borrower for (i) working capital and general corporate purposes, (ii) the making of Permitted New Investments pursuant to the provisions of Section 6.06, (iii) the repayment of the Existing Credit Facility, and (iv) costs incurred in connection with the incurrence of Indebtedness incurred in compliance with this Agreement; provided, however, that after the Amendment No. 3 Effective Date, the proceeds of the Advances shall not be used to (x) repay or prepay any Indebtedness except for any Advance in accordance with the terms of the Credit Agreement or (y) make any Permitted New Investments pursuant to the provisions of Section 6.06 other than such Permitted New Investments as may be required pursuant to agreements entered into prior to the Amendment No. 3 Effective Date.”

          5. Conditions to Effectiveness of this Amendment. This Amendment shall become effective as of the date (the “Effective Date”) each of the following conditions precedent shall have been satisfied:

          (a) The Administrative Agent shall have received a duly executed counterpart of this Amendment, executed by the Borrower, the Administrative Agent and the Required Lenders.

          (b) There shall have been paid to the Administrative Agent, for the account of itself and the Lenders, as applicable, all fees and expenses (including reasonable fees and expenses of counsel) due and payable on or before the Effective Date, including a fifty (50) basis point waiver fee for each

3

consenting Lender that has executed and delivered this Amendment on or prior to 5:00 p.m. (New York Time) Friday March 27, 2009 on the full amount of such Lender’s Commitment on such date.

          6. Representations and Warranties. The Borrower hereby represents and warrants to the Administrative Agent and the Lenders, on and as of the date hereof, that:

          (a) (i) The Borrower has taken all necessary action to authorize the execution, delivery and performance of this Amendment, (ii) this Amendment has been duly executed and delivered by the Borrower and (iii) this Amendment is the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles.

          (b) After giving effect to this Amendment, each of the representations and warranties made by any Loan Party in or pursuant to the Credit Documents is true and correct in all material respects on and as of the date hereof, as if made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties are true and correct in all material respects as of such earlier date.

          (c) After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing as of the date hereof.

     7. Reaffirmation.

          (a) Each Loan Party hereby consents to the execution, delivery and performance of this Amendment and agrees that each reference to the Credit Agreement in the Credit Documents shall, on and after the Effective Date, be deemed to be a reference to the Credit Agreement as amended by this Amendment.

          (b) Each Loan Party hereby acknowledges and agrees that, after giving effect to this Amendment, all of its respective obligations and liabilities under the Credit Documents to which it is a party are reaffirmed, and remain in full force and effect.

          8. Continuing Effect. Except as expressly set forth in this Amendment, all of the terms and provisions of the Credit Agreement are and shall remain in full force and effect and the Borrower and Lenders shall continue to be bound by all of such terms and provisions. The waiver provided for in Section 2 and the amendment provided in Section 4 herein is limited to the specific provisions of the Credit Agreement specified herein and shall not constitute a waiver or amendment of, or an indication of the Administrative Agent’s or the Lenders’ willingness to waive or amend, any other provisions of the Credit Agreement or the same sections for any other date or purpose. This Amendment is a Credit Document.

          9. Expenses. The Borrowers agree to pay and reimburse the Administrative Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the negotiation, preparation, execution and delivery of this Amendment, and other documents prepared in connection herewith, and the transactions contemplated hereby, including, without limitation, reasonable fees and disbursements and other charges of counsel to the Administrative Agent relating to the Amendment.

          10. Choice of Law. THIS AMENDMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED, AND ANY DISPUTE BETWEEN THE BORROWER, THE ADMINISTRATIVE AGENT, ANY LENDER, OR ANY INDEMNITEE ARISING OUT OF,

4

CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS AGREEMENT, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING, WITHOUT LIMITATION, SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW, BUT OTHERWISE WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF NEW YORK; PROVIDED THAT THE PERFECTION OF THE LIENS OF THE ADMINISTRATIVE AGENT ON THE COLLATERAL AND THE EXERCISE OF REMEDIES AGAINST THE COLLATERAL SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE APPLICABLE JURISDICTION.

          11. Counterparts. This Amendment may be executed in any number of counterparts and by different parties and separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by facsimile or e-mail shall be effective as delivery of a manually executed counterpart of this Amendment.

          12. Integration. This Amendment, together with the other Credit Documents, incorporates all negotiations of the parties hereto with respect to the subject matter hereof and is the final expression and agreement of the parties hereto with respect to the subject matter hereof.

          13. Severability. In case any provision in this Amendment shall be invalid, illegal or unenforceable, such provision shall be severable from the remainder of this Amendment and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

          14. Waiver of Jury Trial. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

[Signature Pages Follow]

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          IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written.

BORROWER:
INTERSTATE OPERATING COMPANY, LP, a Delaware Limited partnership
	By:	Interstate Hotels & Resorts, Inc.,
	its general partner
	By:	/s/ Bruce Riggins
	Name:	Bruce Riggins
	Title:	Chief Financial Officer

[Signature Page to Waiver]

LEHMAN COMMERCIAL PAPER INC., as Administrative Agent
By:	/s/ Gerald D. Pietroforte
	Name:	Gerald D. Pietroforte,
	Title:	Authorized Signatory

[Signature Page to Waiver]

EX-10.14

Exhibit 10.14

LOAN AGREEMENT

Dated as of October 17, 2006

Between

INTERSTATE ARLINGTON, LP,
as Borrower

and

UBS REAL ESTATE SECURITIES INC.,
as Lender

TABLE OF CONTENTS

	Page
I. DEFINITIONS; PRINCIPLES OF CONSTRUCTION
Section 1.1 Definitions		1
Section 1.2 Principles of Construction		24
II. THE LOAN
Section 2.1 The Loan		24
2.1.1 Agreement to Lend and Borrow		24
2.1.2 Single Disbursement to Borrower		24
2.1.3 The Note		24
2.1.4 Use of Proceeds		24
Section 2.2 Interest Rate		24
2.2.1 Applicable Interest Rate		24
2.2.2 Interest Calculation		25
2.2.3 Determination of Interest Rate		25
2.2.4 Usury Savings		27
Section 2.3 Loan Payments		28
2.3.1 Payment Before Maturity Date		28
2.3.2 Payment on Maturity Date		28
2.3.3 Interest Rate and Payment after Default		28
2.3.4 Late Payment Charge		29
2.3.5 Method and Place of Payment		29
Section 2.4 Prepayments		29
2.4.1 Voluntary Prepayments		29
2.4.2 Mandatory Prepayments		30
2.4.3 Prepayments After Default		30
Section 2.5 Interest Rate Cap		30
III. REPRESENTATIONS AND WARRANTIES
Section 3.1 Borrower Representations		31
3.1.1 Organization		31
3.1.2 Proceedings		31
3.1.3 No Conflicts		32
3.1.4 Litigation		32
3.1.5 Agreements		32
3.1.6 Consents		32
3.1.7 Title		32
3.1.8 Intentionally Omitted		32
3.1.9 Intentionally Omitted		32

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	Page
3.1.10 Financial Information		32
3.1.11 Condemnation		33
3.1.12 Utilities and Public Access		33
3.1.13 Separate Lots		33
3.1.14 Assessments		33
3.1.15 Enforceability		33
3.1.16 Assignment of Leases		33
3.1.17 Insurance		33
3.1.18 Licenses		34
3.1.19 Flood Zone		34
3.1.20 Physical Condition		34
3.1.21 Boundaries		34
3.1.22 Leases		34
3.1.23 Filing and Recording Taxes		35
3.1.24 Single Purpose		35
3.1.25 Tax Filings		40
3.1.26 Solvency		41
3.1.27 Federal Reserve Regulations		41
3.1.28 Organizational Chart		41
3.1.29 Bank Holding Company		41
3.1.30 No Other Debt		41
3.1.31 Investment Company Act		41
3.1.32 Access/Utilities		41
3.1.33 No Bankruptcy Filing		42
3.1.34 Full and Accurate Disclosure		42
3.1.35 Foreign Person		42
3.1.36 No Change in Facts or Circumstances; Disclosure		42
3.1.37 Management Agreement		42
3.1.38 Intentionally Omitted		42
3.1.39 Intentionally Omitted		42
3.1.40 Intentionally Omitted		42
3.1.41 Patriot Act		42
3.1.42 Certificate of Occupancy; Licenses		43
3.1.43 Franchise Agreement		43
3.1.44 Inventory		43
Section 3.2 Survival of Representations		43
IV. BORROWER COVENANTS
Section 4.1 Borrower Affirmative Covenants		43
4.1.1 Existence; Compliance with Legal Requirements		43
4.1.2 Taxes, Liens and Other Charges		43
4.1.3 Litigation		44
4.1.4 Access to Property		44
4.1.5 Further Assurances; Supplemental Mortgage Affidavits		44
4.1.6 Financial Reporting		45

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	Page
4.1.7 Title to the Property		47
4.1.8 Estoppel Statement		47
4.1.9 Leases		48
4.1.10 Alterations		48
4.1.11 Material Agreements		49
4.1.12 Performance by Borrower		49
4.1.13 Costs of Enforcement/Remedying Defaults		49
4.1.14 Business and Operations		49
4.1.15 Loan Fees		50
4.1.16 Intentionally Omitted		50
4.1.17 Handicapped Access		50
4.1.18 Certain Hotel/Franchise Covenants		50
4.1.19 Notice of Certain Events		52
4.1.20 Further Assurances		52
4.1.21 Taxes on Security		52
4.1.22 Principal Place of Business, State of Organization		52
4.1.23 No Plan Assets		53
4.1.24 Compliance		53
Section 4.2 Borrower Negative Covenants		53
4.2.1 Liens		53
4.2.2 Dissolution		53
4.2.3 Change in Business		54
4.2.4 Debt Cancellation		54
4.2.5 Affiliate Transactions		54
4.2.6 Zoning		54
4.2.7 Assets		54
4.2.8 No Joint Assessment		54
4.2.9 Intentionally Omitted		54
4.2.10 ERISA		54
4.2.11 Material Agreements		55
V. INSURANCE, CASUALTY AND CONDEMNATION
Section 5.1 Insurance		55
5.1.1 Insurance Policies		55
5.1.2 Insurance Company		59
Section 5.2 Casualty and Condemnation		59
5.2.1 Casualty		59
5.2.2 Condemnation		59
5.2.3 Casualty Proceeds		60
Section 5.3 Delivery of Net Proceeds		60
5.3.1 Minor Casualty or Condemnation		60
5.3.2 Major Casualty or Condemnation		60

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	Page
VI. RESERVE FUNDS
Section 6.1 Required Repair Funds		64
6.1.1 Deposit of Required Repair Funds		64
6.1.2 Release of Required Repair Funds		64
6.1.3 Balance in the Required Repair Account		65
Section 6.2 Tax Funds		65
6.2.1 Deposits of Tax Funds		65
6.2.2 Release of Tax Funds		65
Section 6.3 Insurance Funds		65
6.3.1 Deposits of Insurance Funds		65
6.3.2 Release of Insurance Funds		66
Section 6.4 Capital Expenditure Funds		66
6.4.1 Deposits of Capital Expenditure Funds		66
6.4.2 Release of Capital Expenditure Funds		66
6.4.3 Balance in the Capital Expenditure Account		68
Section 6.5 Replacements and Replacement Reserve		68
6.5.1 Replacement Reserve Fund		68
6.5.2 Disbursements from Replacement Reserve Account		68
6.5.3 Performance of Replacements		70
6.5.4 Balance in the Replacement Reserve Account		71
Section 6.6 Intentionally Omitted		72
Section 6.7 Security Interest in Reserve Funds		72
6.7.1 Grant of Security Interest		72
6.7.2 Income Taxes		72
6.7.3 Prohibition Against Further Encumbrance		72
VII. PROPERTY MANAGEMENT
Section 7.1 The Management Agreement		72
Section 7.2 The Franchise Agreement		72
Section 7.3 Prohibition Against Termination or Modification		73
Section 7.4 Replacement of Manager		73
Section 7.5 Matters Concerning Franchisor		74
VIII. PERMITTED TRANSFERS
Section 8.1 Transfer or Encumbrance of Property		74
IX. SALE AND SECURITIZATION OF MORTGAGE
Section 9.1 Sale of Mortgage and Securitization		77
Section 9.2 Securitization Indemnification		80

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	Page
X. DEFAULTS
Section 10.1 Event of Default		82
Section 10.2 Remedies		85
Section 10.3 Right to Cure Defaults		86
Section 10.4 Remedies Cumulative		86
XI. MISCELLANEOUS
Section 11.1 Successors and Assigns		87
Section 11.2 Lender’s Discretion		87
Section 11.3 Governing Law		87
Section 11.4 Modification, Waiver in Writing		88
Section 11.5 Delay Not a Waiver		89
Section 11.6 Notices		89
Section 11.7 Trial by Jury		90
Section 11.8 Headings		90
Section 11.9 Severability		90
Section 11.10 Preferences		90
Section 11.11 Waiver of Notice		90
Section 11.12 Remedies of Borrower		91
Section 11.13 Expenses; Indemnity		91
Section 11.14 Schedules Incorporated		92
Section 11.15 Offsets, Counterclaims and Defenses		92
Section 11.16 No Joint Venture or Partnership; No Third Party Beneficiaries		92
Section 11.17 Publicity		93
Section 11.18 Waiver of Marshalling of Assets		93
Section 11.19 Waiver of Offsets/Defenses/Counterclaims		93
Section 11.20 Conflict; Construction of Documents; Reliance		93
Section 11.21 Brokers and Financial Advisors		94
Section 11.22 Exculpation		94
Section 11.23 Prior Agreements		96
Section 11.24 Servicer		96
Section 11.25 Joint and Several Liability		97
Section 11.26 Creation of Security Interest		97
Section 11.27 Assignments and Participations		97
Section 11.28 Intentionally Omitted		97
Section 11.29 Component Notes		97
Section 11.30 Mezzanine Loan Option		98
Section 11.31 Approvals; Third Parties; Conditions		99
Section 11.32 Limitation on Liability of Lender’s Officers, Employees, etc		99
Section 11.33 Certain Additional Rights of Lender (VCOC)		100
Section 11.34 Certain Agreements of Lender		100

-v- 

	Page
XII. CASH MANAGEMENT
Section 12.1 Lockbox Account and Cash Management Account		101
Section 12.2 Deposits and Withdrawals		102
Section 12.3 Security Interest		103
Section 12.4 Definitions		105

SCHEDULES

Schedule I	-	Required Repairs
Schedule II	-	PIP Repairs
Schedule III	-	Organizational Chart
Schedule IV	-	Form of Subordination, Non-Disturbance and Attornment Agreement

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LOAN AGREEMENT

          THIS LOAN AGREEMENT, dated as of October 17, 2006 (as amended, restated, replaced, supplemented or otherwise modified from time to time, this “Agreement”), between UBS REAL ESTATE SECURITIES INC., a Delaware corporation, having an address at 1285 Avenue of the Americas, New York, New York 10019 (“Lender”) and INTERSTATE ARLINGTON, LP, a Delaware limited partnership having an address c/o Interstate Hotels & Resorts, Inc., 4501 North Fairfax Drive, Arlington, Virginia 22203 (“Borrower”).

          All capitalized terms used herein shall have the respective meanings set forth in Article I hereof.

W I T N E S S E T H :

          WHEREAS, Borrower desires to obtain the Loan from Lender; and

          WHEREAS, Lender is willing to make the Loan to Borrower, subject to and in accordance with the conditions and terms of this Agreement and the other Loan Documents.

          NOW, THEREFORE, in consideration of the covenants set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree, represent and warrant as follows:

          I. DEFINITIONS; PRINCIPLES OF CONSTRUCTION

          Section 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided:

          “Acquired Property Statements” shall have the meaning set forth in Section 9.1(c)(i).

          “Additional Insolvency Opinion” shall have the meaning set forth in Section 3.1.24(w) hereof.

          “Affiliate” shall mean, as to any Person, any other Person that, directly or indirectly, owns ten percent (10%) or more of, is in control of, is controlled by or is under common ownership or control with such Person or is a director or officer of such Person or of an Affiliate of such Person. As used in this definition, the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management, policies or activities of a Person, whether through ownership of voting securities, by contract or otherwise.

          “ALTA” shall mean American Land Title Association, or any successor thereto.

          “Alteration Threshold” shall mean $741,000.00.

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          “Annual Budget” shall mean the operating and capital budget for the Property setting forth Borrower’s good faith estimate of Gross Income From Operations, Operating Expenses, and Capital Expenditures for the applicable Fiscal Year.

          “Applicable Interest Rate” shall mean 5.32% per annum for the initial Interest Period and thereafter either (i) LIBOR Interest Rate plus the Spread with respect to any period when the Loan is a LIBOR Loan or (ii) the Substitute Rate plus the Substitute Spread with respect to any period when the Loan is a Substitute Rate Loan.

          “Appraisal” shall mean an appraisal of the Property in its then “as is” condition, prepared not more than ninety (90) days prior to the Closing Date (or other relevant date with respect to an updated Appraisal or an Appraisal with respect to the Property) by a member of the American Institute of Real Estate Appraisers selected by Lender, which appraisal (i) shall meet the minimum appraisal standards for national banks promulgated by the Comptroller of the Currency pursuant to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as amended (FIRREA), and (ii) otherwise shall be in both form and substance satisfactory to Lender in its sole and absolute discretion.

          “Approved Bank” shall mean a bank or other financial institution which has a minimum long term unsecured debt rating of at least “AA” by S&P and Fitch and “Aa2” by Moody’s.

          “Assignment of Franchise Agreement” shall mean that certain Assignment of Franchise Agreement and Subordination of Franchise Agreement, dated as of the date hereof among Lender, Borrower and Franchisor, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

          “Assignment of Leases” shall mean that certain first priority Assignment of Leases and Rents, dated as of the date hereof, from Borrower, as assignor, to Lender, as assignee, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

          “Assignment of Management Agreement” shall mean that certain Assignment of Management Agreement and Subordination of Management Fees dated the date hereof among Borrower, Manager and Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

          “Assignment of Protection Agreement” shall mean that certain Assignment of Interest Rate Protection Agreement of even date herewith between Borrower and Lender and acknowledged by UBS AG, London Branch and any other Assignment of Interest Rate Protection Agreement hereafter delivered.

          “Award” shall mean any compensation paid by any Governmental Authority in connection with a Condemnation in respect of all or any part of the Property.

          “Bankruptcy Code” shall mean Title 11 of the United States Code entitled “Bankruptcy”, as amended from time to time, and any successor statute or statutes and all rules and regulations from time to time promulgated thereunder, and any comparable foreign laws

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relating to bankruptcy, insolvency or creditors’ rights, or other Federal or state bankruptcy or insolvency law.

          “Basic Carrying Costs” shall mean the sum of the following costs associated with the Property for the relevant Fiscal Year or payment period: (i) Taxes, (ii) Insurance Premiums and (iii) Other Charges.

          “Borrower” shall mean Interstate Arlington, LP, together with its permitted successors and permitted assigns.

          “Breakage Costs” shall have the meaning set forth in Section 2.2.3(g).

          “Business Day” shall mean any day other than a Saturday, a Sunday or a legal holiday on which national banks are not open for general business in (i) the State of New York, (ii) the state where the corporate trust office of the Trustee is located, or (iii) the state where the servicing offices of the Servicer are located.

          “Cash Management Account” shall have the meaning set forth in Section 12.1(a).

          “Capital Expenditures” for any period shall mean amounts expended for replacements, alterations and capital repairs to the Property and required to be capitalized according to GAAP and the Uniform System of Accounts.

          “Capital Expenditure Funds” shall have the meaning set forth in Section 6.4.1.

          “Capital Expenditures Work” shall mean any labor performed or materials installed in connection with any PIP Repairs.

          “Capped LIBOR Rate” shall mean 7.25%.

          “Casualty” shall mean the occurrence of any casualty, damage or injury, by fire or otherwise, to the Property or any part thereof.

          “Casualty Consultant” shall have the meaning set forth in Section 5.3.2(c).

          “Casualty Retainage” shall have the meaning set forth in Section 5.3.2(d).

          “Closing Date” shall mean the date of funding the Loan.

          “Code” shall mean the Internal Revenue Code of 1986, as amended, and as it may be further amended from time to time, any successor statutes thereto, and applicable U.S. Department of Treasury regulations issued pursuant thereto in temporary or final form.

          “Concession Agreement” shall mean that certain Amended and Restated Concession Management Services Agreement dated as of the date hereof by and between Manager and Interstate Arlington Beverage Corporation.

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          “Condemnation” shall mean a temporary or permanent taking by any Governmental Authority as the result or in lieu or in anticipation of the exercise of the right of condemnation or eminent domain, of all or any part of the Property, or any interest therein or right accruing thereto, including any right of access thereto or any change of grade affecting the Property or any part thereof.

          “Counterparty” shall mean a counterparty to the Interest Rate Protection Agreement that (a) has and shall maintain, until the expiration of the applicable Interest Rate Protection Agreement, a long-term unsecured debt rating of not less than “AAA” by S&P and “Aaa” from Moody’s, which rating shall not include a “t” or otherwise reflect a termination risk, or (b) is otherwise acceptable to all Rating Agencies rating any Securitization, as evidenced by written confirmation from all such Rating Agencies that such counterparty shall not cause a downgrade, withdrawal or qualification of the ratings assigned, or to be assigned, to the Securities or any class thereof in any Securitization.

          “Debt” shall mean the outstanding principal amount of the Loan together with all interest accrued and unpaid thereon and all other sums (including, without limitation, late payment fees, protective advances, the Spread Maintenance Premium and any Breakage Costs) due to Lender in respect of the Loan under the Note, this Agreement, the Mortgage, the Environmental Indemnity or any other Loan Document.

          “Debt Service” shall mean, with respect to any particular period of time, scheduled principal and interest payments under the Note.

          “Debt Service Coverage Ratio” shall mean a ratio for the applicable period for the immediately preceding twelve (12) full calendar month period in which:

(i)	the numerator is the Net Cash Flow for such period as set forth in the financial statements required in accordance with this Agreement; and
(ii)	the denominator is the aggregate amount of principal and interest due and payable on the Loan and any Mezzanine Loan, if any, for such period based upon an assumed constant interest rate for such period equal to eight and 60/100 percent (8.60%).

          “Default” shall mean the occurrence of any event hereunder or under any other Loan Document which, but for the giving of notice or passage of time, or both, would be an Event of Default.

          “Default Rate” shall mean, with respect to the Loan, a rate per annum equal to the lesser of (i) the maximum rate permitted by applicable law, or (ii) five percent (5%) above the Applicable Interest Rate.

          “Deposit Bank” shall mean Wells Fargo Bank, National Association.

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          “Determination Date” shall mean, with respect to any Interest Period, the date that is two (2) London Business Days prior to the fifteenth (15^th) day of the month in which such Interest Period commences; provided, however, that prior to a Securitization of the Loan, Lender shall have the right to change the Determination Date to any other day upon notice to Borrower (in which event such change shall then be deemed effective) and, if requested by Lender, Borrower shall promptly execute an amendment to this Agreement to evidence such change.

          “Disclosure Document” shall have the meaning set forth in Section 9.1(c).

          “Disclosure Document Date” shall have the meaning set forth in Section 9.1(c)(iv).

          “Eligible Account” shall mean a separate and identifiable account from all other funds held by the holding institution that is either (i) an account or accounts maintained with a federal or state-chartered depository institution or trust company which complies with the definition of Eligible Institution or (ii) a segregated trust account or accounts maintained with a federal or state chartered depository institution or trust company acting in its fiduciary capacity which, in the case of a state chartered depository institution or trust company is subject to regulations substantially similar to 12 C.F.R. §9.10(b), having in either case a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by federal and state authority. An Eligible Account will not be evidenced by a certificate of deposit, passbook or other instrument.

          “Eligible Institution” shall mean a depository institution or trust company insured by the Federal Deposit Insurance Corporation the short term unsecured debt obligations or commercial paper of which are rated at least A-1 by S&P and having at least the equivalent rating from one of the two other Rating Agencies in the case of accounts in which funds are held for thirty (30) days or less or, in the case of Letters of Credit or accounts in which funds are held for more than thirty (30) days, the long term unsecured debt obligations of which are rated at least “AA” by Fitch and S&P and “Aa2” by Moody’s.

          “Environmental Indemnity” shall mean that certain Environmental Indemnity Agreement dated as of the date hereof executed by Borrower in connection with the Loan for the benefit of Lender.

          “Equipment” shall have the meaning set forth in the granting clause of the Mortgage.

          “ERISA” shall have the meaning set forth in Section 4.2.11.

          “Event of Default” shall have the meaning set forth in Section 10.1.

          “Exchange Act” shall have the meaning set forth in Section 9.2(a).

          “Exchange Act Filing” shall have the meaning set forth in Section 9.1(c).

          “Executive Order” shall have the meaning set forth in the definition of “Prohibited Person”.

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          “Fiscal Year” shall mean each twelve month period commencing on January 1 and ending on December 31 during each year of the term of the Loan.

          “Fitch” shall mean Fitch, Inc.

          “Force Majeure” shall mean a delay due to acts of God, war, acts of terrorism, civil commotion, governmental restrictions or preemptions, stays, judgments, orders, decrees, enemy actions, civil commotion, fire, casualty, strikes, work stoppages, shortages of labor or materials or other causes beyond the reasonable control of Borrower, but lack of funds in and of itself shall not be deemed a cause beyond the control of Borrower.

          “Foreign Taxes” shall have the meaning set forth in Section 2.2.3(d).

          “Franchise Agreement” shall mean that certain Franchise License Agreement, dated as of the date hereof, between Borrower and Franchisor, as the same may be amended or modified from time to time in accordance with the terms and provisions of this Agreement, or, if the context requires, the Replacement Franchise Agreement executed in accordance with the terms and provisions of this Agreement.

          “Franchisor” shall mean Hilton Inns, Inc., a Delaware corporation, or, if the context requires, a Qualified Franchisor.

          “GAAP” shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the accounting profession), or in such other statements by such entity as may be in general use by significant segments of the U.S. accounting profession.

          “Governmental Authority” shall mean any court, board, agency, commission, office or authority of any nature whatsoever or any governmental unit (federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence.

          “Gross Income from Operations” shall mean all sustainable income and proceeds (whether in cash or on credit, and computed on an accrual basis) received by Borrower or Manager for the use, occupancy or enjoyment of the Property, or any part thereof, or received by Borrower or Manager for the sale of any goods, services or other items sold on or provided from the Property in the ordinary course of the Property operation, including without limitation: (a) all income and proceeds received from rental of rooms, Leases and commercial space, meeting, conference and/or banquet space within the Property including net parking revenue and all income received pursuant to the Concession Agreement; (b) all income and proceeds received from food and beverage operations and from catering services conducted from the Property even though rendered outside of the Property, including all income received pursuant to the Concession Agreement; (c) all income and proceeds from business interruption, rental interruption and use and occupancy insurance with respect to the operation of the Property (after deducting therefrom all necessary costs and expenses incurred in the adjustment or collection thereof); (d) all Awards for temporary use (after deducting therefrom all costs incurred in the adjustment or collection thereof and in Restoration of the Property); (e) all income and proceeds

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from judgments, settlements and other resolutions of disputes with respect to matters which would be includable in this definition of “Gross Income from Operations” if received in the ordinary course of the Property operation (after deducting therefrom all necessary costs and expenses incurred in the adjustment or collection thereof); and (f) interest on credit accounts, rent concessions or credits, and other required pass-throughs and interest on Reserve Funds; but excluding, (1) gross receipts received by lessees, licensees or concessionaires of the Property; (2) consideration received at the Property for hotel accommodations, goods and services to be provided at other hotels, although arranged by, for or on behalf of Borrower or Manager; (3) income and proceeds from the sale or other disposition of goods, capital assets and other items not in the ordinary course of the Property operation; (4) federal, state and municipal excise, sales and use taxes collected directly from patrons or guests of the Property as a part of or based on the sales price of any goods, services or other items, such as gross receipts, room, admission, cabaret or equivalent taxes; (5) Awards (except to the extent provided in clause (d) above); (6) refunds of amounts not included in Operating Expenses at any time and uncollectible accounts; (7) gratuities collected by the Property employees; (8) the proceeds of any financing; (9) other income or proceeds resulting other than from the use or occupancy of the Property, or any part thereof, or other than from the sale of goods, services or other items sold on or provided from the Property in the ordinary course of business; (10) any credits or refunds made to customers, guests or patrons in the form of allowances or adjustments to previously recorded revenues; and (11), and payments made to Borrower pursuant to the Interest Rate Protection Agreement.

          “Improvements” shall have the meaning set forth in the granting clause of the Mortgage.

          “Indebtedness” shall mean, for any Person, without duplication: (i) all indebtedness of such Person for borrowed money, for amounts drawn under a letter of credit, or for the deferred purchase price of property for which such Person or its assets is liable, (ii) all unfunded amounts under a loan agreement, letter of credit, or other credit facility for which such Person would be liable if such amounts were advanced thereunder, (iii) all amounts required to be paid by such Person as a guaranteed payment to partners or a preferred or special dividend, including any mandatory redemption of shares or interests, (iv) all indebtedness guaranteed by such Person, directly or indirectly, (v) all obligations under leases that constitute capital leases for which such Person is liable, and (vi) all obligations of such Person under interest rate swaps, caps, floors, collars and other interest hedge agreements, in each case whether such Person is liable contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations such Person otherwise assures a creditor against loss.

          “Indemnified Liabilities” shall have the meaning set forth in Section 11.13(b).

          “Independent Director” shall have the meaning set forth in Section 3.1.24(p).

          “Initial Interest Rate” shall mean a rate per annum equal to six and 67/100 of one percent (6.67%).

          “Insolvency Opinion” shall mean that certain bankruptcy nonconsolidation opinion letter dated the date hereof rendered by Levenfeld Pearlstein, LLC in connection with the Loan.

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          “Insurance Funds” shall have the meaning set forth in Section 6.3.1.

          “Insurance Premiums” shall have the meaning set forth in Section 5.1.1(b).

          “Interest Period” shall mean, with respect to any Monthly Payment Date, the period commencing on the fifteenth (15^th) day of the preceding calendar month and terminating on the fourteenth (14^th) day of the calendar month in which such Monthly Payment Date occurs; and the initial Interest Period shall begin on the Closing Date and shall end on the immediately following fourteenth (14^th) day of the calendar month.

          “Interest Rate Protection Agreement” shall mean one or more interest rate caps (together with the schedules relating thereto) in form and substance satisfactory to Lender, with a confirmation from the Counterparty in the form and substance satisfactory to Lender between Borrower and, subject to Section 4.1.11, a Counterparty reasonably acceptable to Lender with a Minimum Counterparty Rating, and all amendments, restatements, replacements, supplements and modifications thereto.

          “Lease” shall mean any lease, sublease or subsublease, letting, license, concession or other agreement (whether written or oral and whether now or hereafter in effect) pursuant to which any Person is granted a possessory interest in, or right to use or occupy all or any portion of any space in the Property, excluding hotel rooms let to hotel guest in the ordinary course of business, and every modification, amendment or other agreement relating to such lease, sublease, subsublease, or other agreement entered into in connection with such lease, sublease, subsublease, or other agreement and every guarantee of the performance and observance of the covenants, conditions and agreements to be performed and observed by the other party thereto.

          “Legal Requirements” shall mean all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities affecting Borrower or the Property or any part thereof or the construction, use, alteration or operation thereof, or any part thereof, whether now or hereafter enacted and in force, including, without limitation, the Americans with Disabilities Act of 1990, and all permits, licenses and authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Borrower, at any time affecting the Property or any part thereof, including, without limitation, any which may require repairs, modifications or alterations in or to the Property or any part thereof, or in any way limit the use and enjoyment thereof.

          “Lender” shall mean UBS REAL ESTATE SECURITIES INC., the New York branch of a German banking corporation, together with its successors and assigns.

          “Lender Group” shall have the meaning set forth in Section 9.2(b).

          “Lender Indemnitees” shall have the meaning set forth in Section 11.13(b).

          “Lender’s Notice” shall have the meaning set forth in Section 2.2.3(b).

          “Letter of Credit” shall mean an irrevocable, unconditional, transferable, clean sight draft letter of credit, as the same may be replaced, split, substituted, modified, amended,

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supplemented, assigned or otherwise restated from time to time, (either an evergreen letter of credit or a letter of credit which does not expire until at least two (2) Business Days after the Maturity Date or such earlier date as such Letter of Credit is no longer required pursuant to the terms of this Agreement) in favor of Lender and entitling Lender to draw thereon based solely on a statement purportedly executed by an officer of Lender stating that it has the right to draw thereon, and issued by a domestic Approved Bank or the U.S. agency or branch of a foreign Approved Bank, or if there are no domestic Approved Banks or U.S. agencies or branches of a foreign Approved Bank then issuing letters of credit, then such letter of credit may be issued by a domestic bank, the long term unsecured debt rating of which is the highest such rating then given by the Rating Agency or Rating Agencies, as applicable, to a domestic commercial bank.

          “Liabilities” shall have the meaning set forth in Section 9.2(b).

          “LIBOR” shall mean, with respect to each Interest Period, the rate (calculated by Lender, expressed as a percentage per annum and rounded upward, if necessary, to the next nearest 1/8 of 1%) for deposits in United States dollars for a one-month period, which appears on Telerate Access Service Page 3750 as of 11:00 a.m., London time, on the applicable Determination Date. If such rate does not appear on Telerate Access Service Page 3750 as of 11:00 a.m., London time, on the applicable Determination Date, LIBOR for the next Interest Period and such Determination Date, the Lender will request the principal London office of any four (4) major reference banks in the London interbank market selected by the Lender to provide such reference bank’s offered quotation to prime banks in the London interbank market for deposits in United States dollars for a one (1) month period as of 11:00 a.m., London time, on such LIBOR Determination Date in a principal amount of not less than One Million and No/100 Dollars ($1,000,000.00) that is representative for a single transaction in the relevant market at such time. If at least two such offered quotations are so provided, LIBOR will be the arithmetic mean of such quotations. If fewer than two (2) such quotations are so provided, the Lender will request any three (3) major banks in New York City selected by the Lender to provide such bank’s rate for loans in United States dollars to leading European banks for a one (1) month period as of approximately 11:00 a.m., New York City time, on the applicable LIBOR Determination Date for amounts in a principal amount of not less than One Million and No/100 Dollars ($1,000,000.00) that is representative for a single transaction in the relevant market at such time. If at least two (2) such rates are so provided, LIBOR will be the arithmetic mean of such rates. LIBOR shall be determined conclusively by Lender or its agent.

          “LIBOR Interest Rate” shall mean with respect to each Interest Period the quotient of (i) LIBOR applicable to the Interest Period divided by (ii) a percentage equal to 100% minus the Reserve Requirement applicable to the Interest Period.

          “LIBOR Loan” shall mean the Loan at any time in which the Applicable Interest Rate is calculated at LIBOR Interest Rate plus the Spread in accordance with the provisions of Article II hereof.

          “Licenses” shall have the meaning set forth in Section 3.1.42 hereof.

          “Lien” shall mean any mortgage, deed of trust, lien, pledge, hypothecation, assignment, security interest, or any other encumbrance, charge or transfer of, on or affecting the

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Property or any portion thereof or Borrower, or any interest therein, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, the filing of any financing statement, and mechanic’s, materialmen’s and other similar liens and encumbrances.

          “Loan” shall mean the loan in the original principal amount of Twenty-Four Million Seven Hundred Thousand and No/100 Dollars ($24,700,000.00) made by Lender to Borrower pursuant to this Agreement evidenced by the Note and secured by the Mortgage, together with all sums due or to become due thereunder.

          “Loan Documents” shall mean, collectively, this Agreement, the Note, the Mortgage, the Assignment of Leases, the Environmental Indemnity, the Assignment of Protection Agreement, the Assignment of Management Agreement, the Assignment of Franchise Agreement, the O&M Agreement. any Letter of Credit and any other document pertaining to the Property as well as all other documents now or hereafter executed and/or delivered in connection with the Loan, as amended, restated, replaced, supplemented or otherwise modified from time to time.

          “Loan to Value Ratio” shall mean the ratio, as of a particular date, in which the numerator is equal to the outstanding principal balance of the Debt and the denominator is equal to the appraised value of the Property based on an Appraisal, as determined by Lender in its sole and absolute discretion.

          “Lockbox Account” shall have the meaning set forth in Section 12.1(a).

          “London Business Day” shall mean any day other than a Saturday, Sunday or any other day on which commercial banks in London, England or New York, New York are not open for business.

          “Major Lease” shall mean any Lease (i) covering more than 5,000 square feet at the Property, (ii) made with a Tenant that is a Tenant under another Lease at the Property or that is an Affiliate of any other Tenant under a Lease at the Property, if the Leases together cover more than 5,000 square feet, or (iii) made with a Tenant that is paying base rent in an amount equal to or exceeding five percent (5%) of the Gross Income from Operations.

          “Management Agreement” shall mean that certain management agreement entered into by and between Borrower and the Manager, pursuant to which the Manager is to provide management and other services with respect to the Property.

          “Manager” shall mean Interstate Management Company, LLC or any other manager approved in accordance with the terms and conditions of the Loan Documents.

          “Material Adverse Effect” shall mean any material adverse effect upon (i) the business operations, economic performance, assets, financial condition, equity, contingent liabilities, Material Agreements or results of operations of Borrower or the Property, (ii) the ability of Borrower to perform, in all material respects, its obligations under each of the Loan Documents, (iii) the enforceability or validity of any Loan Document, the perfection or priority

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of any Lien created under any Loan Document or the remedies of the Lender under any Loan Document or (iv) the value of, or cash flow from the Property or the operations thereof.

          “Material Agreements” shall mean each contract and agreement entered into by Borrower or Interstate Arlington GP, LLC on behalf of Borrower relating to the ownership, management, development, use, operation, leasing, maintenance, repair or improvement of the Property (other than the Management Agreement, the Franchise Agreement and the Leases) or other contract and/or agreement that is material to the use and operation of the Property or to Borrower (i) , under which there is an obligation of Borrower to pay more than $125,000.00 in payments or liability in any annual period, (ii) which is made in the ordinary course of its business on an arm’s-length basis with an unrelated third party and on terms which are commercially reasonable, (iii) which is not an Ordinary Contract and (iv) is not cancelable without penalty or premium on no more than thirty (30) days notice.

          “Maturity Date” shall mean November 9, 2009 or such other date on which the final payment of principal of the Note becomes due and payable as therein or herein provided, whether at such stated maturity date, by declaration of acceleration, or otherwise.

          “Maximum Legal Rate” shall mean the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the indebtedness evidenced by the Note and as provided for herein or the other Loan Documents, under the laws of such state or states whose laws are held by any court of competent jurisdiction to govern the interest rate provisions of the Loan.

          “Mezzanine Borrower” shall have the meaning set forth in Section 11.30 hereof.

          “Mezzanine Lender” shall have the meaning set forth in Section 11.30 hereof.

          “Mezzanine Loan” shall have the meaning set forth in Section 11.30 hereof.

          “Mezzanine Option” shall have the meaning set forth in Section 11.30 hereof.

          “Minimum Counterparty Rating” shall mean a credit rating from S&P and Fitch of at least “AA” and from Moody’s of at least “Aa2”; provided, however, that if Lender is the Counterparty, the Minimum Counterparty Rating shall mean a credit rating from S&P and Fitch of at least “AA-” and from Moody’s of at least “Aa3”; notwithstanding the foregoing, if S&P or Fitch withdraws or downgrades the credit rating of Lender below “A”, or Moody’s withdraws or downgrades the credit rating of Lender below “A”, Borrower shall replace the Interest Rate Protection Agreement not later than fifteen (15) Business Days following receipt of notice from Lender of such downgrade or withdrawal with an Interest Rate Protection Agreement in form and substance satisfactory to Lender (and meeting the requirements set forth in Section 2.5 hereof) from a Counterparty acceptable to Lender having a Minimum Counterparty Rating.

          “Minimum Disbursement Amount” shall mean Fifteen Thousand and No/100 Dollars ($15,000.00).

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          “Monthly Payment Date” shall mean the ninth (9^th) day of every calendar month occurring during the term of the Loan, provided, however, that Lender shall have the right to change the Monthly Payment Date to any other day (or such other day of a calendar month selected by Lender, in its sole and absolute discretion, to collect debt service payments under loans which it makes and securitizes) upon notice to Borrower (in which event such change shall then be deemed effective) and, if requested by Lender, Borrower shall promptly execute an amendment to this Agreement to evidence such change.

          “Moody’s” shall mean Moody’s Investors Service, Inc.

          “Mortgage” shall mean that certain first priority Deed of Trust, Assignment of Leases and Rents and Security Agreement, dated the date hereof, executed and delivered by Borrower as security for the Loan and encumbering the Property, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

          “Mortgage Borrower” shall have the meaning set forth in Section 11.30.

          “Mortgage Lender” shall have the meaning set forth in Section 11.30(a).

          “Mortgage Loan” shall have the meaning set forth in Section 11.30.

          “Net Cash Flow” shall mean, for any period, the amount obtained by subtracting Operating Expenses for such period from Gross Income from Operations for such period.

          “Net Proceeds” shall mean: (i) the net amount of all insurance proceeds payable as a result of a Casualty to the Property, after deduction of reasonable costs and expenses (including, but not limited to, reasonable attorneys’ fees), if any, in collecting such insurance proceeds, or (ii) the net amount of the Award, after deduction of reasonable costs and expenses (including, but not limited to, reasonable attorneys’ fees), if any, in collecting such Award.

          “Net Proceeds Deficiency” shall have the meaning set forth in Section 5.3.2(f).

          “Note” shall have the meaning set forth in Section 2.1.3.

          “Notice” shall have the meaning set forth in Section 11.6.

          “O&M Agreement” shall mean, that certain Operations and Maintenance Agreement, dated as of the date hereof, between Borrower and Lender given in connection with the Loan, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

          “Officer’s Certificate” shall mean a certificate delivered to Lender by Borrower which is signed by an authorized representative of Borrower or Borrower’s General Partner.

          “Operating Agreements” shall mean any covenants, agreements, restrictions and encumbrances of record relating to the construction, operation or use of the Property.

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          “Operating Expenses” shall mean the sum of all costs and expenses incurred and required to be expensed as an operating expense under GAAP of operating, maintaining, directing, managing and supervising the Property (excluding, (i) depreciation and amortization, (ii) any Debt Service in connection with the Loan, (iii) any Capital Expenditures in connection with the Property, or (iv) the costs of any other things specified to be done or provided at Manager’s sole expense), incurred by Borrower or by Manager on behalf of, for the account of or at the expense of Borrower pursuant to the Management Agreement, or as otherwise specifically provided therein, which are properly attributable to the period under consideration under Borrower’s system of accounting, including without limitation: (a) the cost of all food and beverages sold or consumed and of all necessary chinaware, glassware, linens, flatware, uniforms, utensils and other items of a similar nature, including such items bearing the name or identifying characteristics of the hotel as Borrower and/or Manager shall reasonably consider appropriate (“Operating Equipment”) and paper supplies, cleaning materials and similar consumable items (“Operating Supplies”) placed in use (other than reserve stocks thereof in storerooms); (b) salaries and wages of personnel of the Property, including costs of payroll taxes and employee benefits; (c) the cost of all other goods and services obtained by Borrower or Manager in connection with its operation of the Property including, without limitation, heat and utilities, office supplies and all services performed by third parties, including leasing expenses in connection with telephone and data processing equipment, and all existing and any future installations necessary for the operation of the Improvements for hotel purposes (including, without limitation, heating, lighting, sanitary equipment, air conditioning, laundry, refrigerating, built-in kitchen equipment, telephone equipment, communications systems, computer equipment and elevators), Operating Equipment and existing and any future furniture, furnishings, wall coverings, fixtures and hotel equipment necessary for the operation of the building for hotel purposes which shall include all equipment required for the operation of kitchens, bars, laundries, (if any) and dry cleaning facilities (if any), office equipment, cleaning and engineering equipment and vehicles; (d) the cost of repairs to and maintenance of the Property other than of a capital nature; (e) insurance premiums for general liability insurance, workers’ compensation insurance or insurance required by similar employee benefits acts and such business interruption or other insurance as may be provided for protection against claims, liabilities and losses arising from the operation of the Property (as distinguished from any property damage insurance on the Property building or its contents) and losses incurred on any self-insured risks of the foregoing types, provided that Borrower and Manager have specifically approved in advance such self-insurance or insurance is unavailable to cover such risks. Premiums on policies for more than one year will be pro rated over the period of insurance and premiums under blanket policies will be allocated among properties covered; (f) all Taxes and Other Charges (other than federal, state or local income taxes and franchise taxes or the equivalent) payable by or assessed against Borrower or Manager with respect to the operation of the Property; (g) legal fees and fees of any firm of independent certified public accounts designated from time to time by Borrower (the “Independent CPA”) for services directly related to the operation of the Property; (h) the costs and expenses of technical consultants and specialized operational experts for specialized services in connection with non-recurring work on operational, legal, functional, decorating, design or construction problems and activities; provided, however, that if such costs and expenses have not been included in an approved budget, then if such costs exceed $25,000.00 in any one instance the same shall be subject to approval by Lender; (i) all expenses for advertising the Property and all expenses of sales promotion and public relations activities; (j) all out-of-pocket expenses and

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disbursements determined by the Independent CPA to have been reasonably, properly and specifically incurred by Borrower, Manager or any of their Affiliates pursuant to, in the course of and directly related to, the management and operation of the Property under the Management Agreement (without limiting the generality of the foregoing, such charges may include all reasonable travel, telephone, telegram, radiogram, cablegram, air express and other incidental expenses, but, excluding costs relating to the offices maintained by Borrower, Manager or any of their Affiliates other than the offices maintained at the Property for the management of the Property and excluding transportation costs of Borrower or Manager related to meetings between Borrower and Manager with respect to administration of the Management Agreement, as applicable or of the Property involving travel away from such party’s principal executive offices); (k) the cost of any reservations system, any accounting services or other group benefits, programs or services from time to time made available to properties in the Borrower’s system; (l) the cost associated with any retail Leases; (m) any management fees, basic and incentive fees or other fees and reimbursables paid or payable to Manager under the Management Agreement; (n) any franchise fees or other fees and reimbursables paid or payable to Franchisor under the Franchise Agreement; and (o) all costs and expenses of owning, maintaining, conducting and supervising the operation of the Property to the extent such costs and expenses are not included above.

          “Ordinary Contract” shall mean any trade or operational contracts incurred in the ordinary course of business on an arm’s-length basis with an unrelated third party and on terms which are commercially reasonable terms and in amounts that are customary and reasonable under the circumstances.

          “Other Charges” shall mean all ground rents, maintenance charges, impositions other than Taxes, and any other governmental or other charges, including, without limitation, fees and charges of the Arlington Entertainment Area Management District, vault charges and license fees for the use of vaults, chutes and similar areas adjoining the Property, now or hereafter levied or assessed or imposed against the Property or any part thereof.

          “Patriot Act” shall mean collectively all laws relating to terrorism or money laundering, including Executive Order No. 13224 on Terrorist Financing (effective September 24, 2001) and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56).

          “Permitted Encumbrances” shall mean, collectively, (i) the Liens and security interests created by the Loan Documents, (ii) all Liens, encumbrances and other matters expressly set forth on Schedule A or Schedule B of the Title Insurance Policy, (iii) Liens, if any, for Taxes and Other Charges imposed by any Governmental Authority not yet due or delinquent or being contested in good faith by Borrower pursuant to Section 4.1.2 of this Agreement, (iv) liens related to equipment leases, provided same are subordinate to any Liens hereunder and the cost of which shall not cause Borrower to violate Section 3.1.24(d) hereof and (iv) such other title and survey exceptions as Lender has approved or may approve in writing in Lender’s sole discretion.

          “Permitted Investments” shall mean any one or more of the following obligations or securities with maturities of not more than three hundred sixty-five (365) days

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acquired at a purchase price of not greater than par, including those issued by any servicer, the trustee under any securitization or any of their respective Affiliates, payable on demand or having a maturity date not later than the Business Day immediately prior to the first Monthly Payment Date following the date of acquiring such investment and meeting one of the appropriate standards set forth below:

     (i) obligations of, or obligations fully guaranteed as to payment of principal and interest by, the United States or any agency or instrumentality thereof provided such obligations are backed by the full faith and credit of the United States of America including, without limitation, obligations of: the U.S. Treasury (all direct or fully guaranteed obligations), the Farmers Home Administration (certificate of beneficial ownership), the General Services Administration (participation certificates), the U.S. Maritime Administration (guaranteed Title XI financing), the Small Business Administration (guaranteed participation certificates and guaranteed pool certificates), the U.S. Department of Housing and Urban Development (local authority bonds) and the Washington Metropolitan Area Transit Authority (guaranteed transit bonds); provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index and (C) such investments must not be subject to liquidation prior to their maturity;

     (ii) Federal Housing Administration debentures;

     (iii) obligations of the following United States government sponsored agencies: Federal Home Loan Mortgage Corp. (debt obligations), the Farm Credit System (consolidated systemwide bonds and notes), the Federal Home Loan Banks (consolidated debt obligations), the Federal National Mortgage Association (debt obligations), the Student Loan Marketing Association (debt obligations), the Financing Corp. (debt obligations), and the Resolution Funding Corp. (debt obligations); provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index and (C) such investments must not be subject to liquidation prior to their maturity;

     (iv) federal funds, unsecured certificates of deposit, time deposits, bankers’ acceptances and repurchase agreements with maturities of not more than three hundred sixty-five (365) days of any bank, the short term obligations of which at all times are rated in the highest short term rating category by two (2) of the Rating Agencies (or, if not rated by all Rating Agencies, rated by at least one (1) Rating Agency in the highest short term rating category and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to the Securities or any class thereof); provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if such investments have a variable rate of interest, such interest rate

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must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index and (C) such investments must not be subject to liquidation prior to their maturity;

     (v) fully Federal Deposit Insurance Corporation-insured demand and time deposits in, or certificates of deposit of, or bankers’ acceptances issued by, any bank or trust company, savings and loan association or savings bank, the short term obligations of which at all times are rated in the highest short term rating category by each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one (1) Rating Agency in the highest short term rating category and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to the Securities or any class thereof); provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index and (C) such investments must not be subject to liquidation prior to their maturity;

     (vi) debt obligations with maturities of not more than three hundred sixty-five (365) days and at all times rated by each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one (1) Rating Agency and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investments would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to the Securities or any class thereof) in its highest long-term unsecured debt rating category; provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index and (C) such investments must not be subject to liquidation prior to their maturity;

     (vii) commercial paper (including both non-interest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not more than one (1) year after the date of issuance thereof) with maturities of not more than three hundred sixty-five (365) days and that at all times is rated by each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one (1) Rating Agency and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to the Securities or any class thereof) in its highest short-term unsecured debt rating; provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index and (C) such investments must not be subject to liquidation prior to their maturity;

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     (viii) units of taxable money market funds, which funds are regulated investment companies, seek to maintain a constant net asset value per share and invest solely in obligations backed by the full faith and credit of the United States, which funds have the highest rating available from each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one (1) Rating Agency and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to the Securities or any class thereof) for money market funds; and

     (ix) any other security, obligation or investment which has been approved as a Permitted Investment in writing by (a) Lender and (b) each Rating Agency, as evidenced by a written confirmation that the designation of such security, obligation or investment as a Permitted Investment will not, in and of itself, result in a downgrade, qualification or withdrawal of the initial, or, if higher, then current ratings assigned to the Securities or any class thereof by such Rating Agency;

          provided, however, that such instrument continues to qualify as a “cash flow investment” pursuant to Code Section 860G(a)(6) earning a passive return in the nature of interest and no obligation or security shall be a Permitted Investment if (A) such obligation or security evidences a right to receive only interest payments or (B) the right to receive principal and interest payments on such obligation or security are derived from an underlying investment that provides a yield to maturity in excess of one hundred twenty percent (120%) of the yield to maturity at par of such underlying investment.

          “Permitted Prepayment Date” shall mean November 10, 2007.

          “Permitted Transferee” shall mean any of the following entities (for purposes of this definition, “control” means the ability to make or veto all material decisions with respect to the operation, management, financing and disposition of the Property, rather than a beneficial ownership requirement, and regardless of the fact that responsibility for such day-to-day operating and management functions are ordinarily handled by a property manager or for leasing activities has been delegated by such controlling Person pursuant to a written agreement):

          (i) a pension fund, pension trust or pension account that immediately prior to such transfer owns, directly or indirectly, total real estate assets of at least $1,000,000,000;

          (ii) a pension fund advisor who (a) immediately prior to such transfer, controls, directly or indirectly, at least $1,000,000,000 of real estate assets and (b) is acting on behalf of one or more pension funds that, in the aggregate, satisfy the requirements of clause (i) of this definition;

          (iii) an insurance company which is subject to supervision by the insurance commissioner, or a similar official or agency, of a state or territory of the United States (including the District of Columbia) (a) with a net worth, determined under GAAP as of a date no more than six (6) months prior to the date of the transfer of at least $500,000,000 and (b) who, immediately prior to such transfer, controls, directly or indirectly, real estate assets of at least $1,000,000,000;

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          (iv) a corporation organized under the banking laws of the United States or any state or territory of the United States (including the District of Columbia) (a) with a combined capital and surplus of at least $500,000,000 and (b) who, immediately prior to such transfer, controls, directly or indirectly, real estate assets of at least $1,000,000,000;

          (v) any Person (a) who has at least five (5) years’ experience in owning and/or operating at least 1,000,000 square feet (exclusive of the Property) of hospitality properties which comprise in the aggregate at least 4,000 hotel rooms of similar size, scope, class, use and value of the Property, (b) who has a net worth, determined as of a date no more than six (6) months prior to the date of such transfer, of at least $400,000,000 and (c) who, immediately prior to such transfer, controls, directly or indirectly, real estate assets of at least $1,000,000,000;

          (vi) a real estate investment trust, bank, saving and loan association, investment bank, insurance company, trust company, commercial credit corporation, pension plan, pension fund or pension advisory firm, mutual fund, government entity or plan, provided that any such Person referred to in this clause (vii) (a) has total assets (in name or under management) in excess of $600,000,000 and (except with respect to a pension advisory firm or similar fiduciary) capital/statutory surplus or shareholder’s equity of $250,000,000 and (b) is regularly engaged in the business of making or owning commercial real estate loans or loans similar in type as the Loan or operating commercial mortgage properties; or

          (vi) any Person in which fifty percent (50%) of the ownership interests are owned directly or indirectly by any of the entities listed in subsections (i) through (vi) of this definition of “Permitted Transferee”, or any combination of more than one such entity, and which is controlled directly or indirectly by such entity or entities.

          “Person” shall mean any individual, corporation, partnership, limited liability company, joint venture, estate, trust, unincorporated association, any other entity, any federal, state, county or municipal government or any bureau, department or agency thereof and any fiduciary acting in such capacity on behalf of any of the foregoing.

          “PIP Repairs” shall have the meaning specified in Section 6.4.1.

          “Policy” shall have the meaning specified in Section 5.1.1(b).

          “Prepayment Date” shall mean the date on which the Loan is prepaid in accordance with the terms hereof.

          “Prepayment Fee” shall mean, with respect to any prepayment received by Lender (a) between November 10, 2007 and November 9, 2008, an amount initially equal to one percent (1.0%) of the Loan; provided however, such fee shall decrease by .08333% on the day immediately after each Monthly Payment Date, with the first such reduction occurring on December 10, 2007 and (b) anytime after November 9, 2008, an amount equal to zero (0).

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          “Principal” shall mean Interstate Arlington GP, LLC, a Delaware Limited Liability Company.

          “Product Improvement Plan” shall have the meaning set forth in the Franchise Agreement.

          “Prohibited Person” shall mean any Person:

     (i) listed in the Annex to, or is otherwise subject to the provisions of, the Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, and relating to Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (the “Executive Order”);

     (ii) that is owned or controlled by, or acting for or on behalf of, any person or entity that is listed in the Annex to, or is otherwise subject to the provisions of the Executive Order;

     (iii) with whom Lender is prohibited from dealing or otherwise engaging in any transaction by any terrorism or money laundering Law, including the Executive Order;

     (iv) who commits, threatens or conspires to commit or supports “terrorism” as defined in the Executive Order;

     (v) that is named as a “specially designated national and blocked person” on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control at its official website or at any replacement website or other replacement official publication of such list; or

     (vi) who is an Affiliate of a Person listed above.

          “Property” shall mean the parcel of real property, the Improvements thereon and all personal property owned by Borrower and encumbered by the Mortgage, together with all rights pertaining to such property and Improvements, all as more particularly described in the granting clauses of the Mortgage.

          “Qualified Franchisor” shall mean either (a) Franchisor; or (b) in the reasonable judgment of Lender, a reputable and experienced franchisor (which may be an Affiliate of Borrower) possessing experience in flagging hotel properties similar in size, scope, use and value as the Property, provided, that Borrower shall have obtained (i) prior written confirmation from the applicable Rating Agencies that licensing of the Property by such Person will not cause a downgrade, withdrawal or qualification of the then current ratings of the Securities or any class thereof and (ii) if such Person is an Affiliate of Borrower, an Additional Insolvency Opinion.

          “Rating Agencies” shall mean, prior to the final Securitization of the Loan, each of S&P, Moody’s and Fitch, or any other nationally-recognized statistical rating agency which has been designated by Lender and, after the final Securitization of the Loan, shall mean any of the foregoing that have rated any of the Securities or any class thereof.

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          “Rating Agency Confirmation” shall mean a written affirmation from each of the Rating Agencies that the credit rating of the Securities or any class thereof by such Rating Agency immediately prior to the occurrence of the event with respect to which such Rating Agency Confirmation is sought will not be qualified, downgraded or withdrawn as a result of the occurrence of such event, which affirmation may be granted or withheld in such Rating Agency’s sole and absolute discretion.

          “Re-Dating” shall have the meaning set forth in Section 9.1(b)(v).

          “Registration Statement” shall have the meaning set forth in Section 9.2(b).

          “Regulation AB” shall have the meaning set forth in Section 9.1(c).

          “Regulation D” shall mean Regulation D of the Board of Governors of the Federal Reserve System from time to time in effect, including any successor or other Regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System.

          “Related Property” shall have the meaning set forth in Section 9.1(c).

          “Related Loan” shall have the meaning set forth in Section 9.1(c).

          “Rents” shall mean, all rents, rent equivalents, moneys payable as damages or in lieu of rent or rent equivalents, royalties (including, without limitation, all oil and gas or other mineral royalties and bonuses), income, receivables, receipts, revenues, deposits (including, without limitation, security, utility and other deposits), accounts, cash, issues, profits, charges for services rendered, and other consideration of whatever form or nature received by or paid to Borrower or its agents or employees for the account of or benefit of Borrower from any and all sources arising from or attributable to the Property, and proceeds, if any, from business interruption or other loss of income or insurance, including, without limitation, all hotel receipts, revenues and credit card receipts collected from guest rooms, restaurants, bars, meeting rooms, banquet rooms and recreational facilities, all receivables, customer obligations, installment payment obligations and other obligations now existing or hereafter arising or created out of the sale, lease, sublease, license, concession or other grant of the right of the use and occupancy of property or rendering of services by Borrower or any operator or manager of the hotel or the commercial space located in the Improvements or acquired from others (including, without limitation, from the rental of any office space, retail space, guest rooms or other space, halls, stores, and offices, and deposits securing reservations of such space), license, lease, sublease and concession fees and rentals, health club membership fees, food and beverage wholesale and retail sales, service charges, vending machine sales and proceeds, if any, from business interruption or other loss of income insurance.

          “Replacement Franchise Agreement” shall mean either (a) a franchise, trademark and license agreement with a Qualified Franchisor substantially in the same form and substance as the Franchise Agreement, or (b) a franchise, trademark and license agreement with a Qualified Franchisor, which franchise, trademark and license agreement shall be reasonably acceptable to Lender in form and substance, provided, with respect to this subclause (b), Lender, at its option, may require that Borrower shall have obtained prior written confirmation from the

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applicable Rating Agencies that such franchise, trademark and license agreement will not cause a downgrade, withdrawal or qualification of the then current rating of the Securities or any class thereof.

          “Replacement Reserve Account” shall have the meaning set forth in Section 6.5.1 hereof.

          “Replacement Reserve Fund” shall have the meaning set forth in Section 6.5.1 hereof.

          “Replacement Reserve Monthly Deposit” shall have the meaning set forth in Section 6.5.1 hereof.

          “Replacements” shall have the meaning set forth in Section 6.5.1 hereof.

          “Required Repair Funds” shall have the meaning set forth in Section 6.1.1.

          “Required Repairs” shall have the meaning set forth in Section 6.1.1.

          “Reserve Funds” shall mean, collectively, Capital Expenditure Funds, the Insurance Funds, the Tax Funds, the Required Repair Funds and the Replacement Reserve Funds.

          “Reserve Requirements” means with respect to any Interest Period, the maximum rate of all reserve requirements (including, without limitation, all basic, marginal, emergency, supplemental, special or other reserves and taking into account any transitional adjustments or other schedule changes in reserve requirements during the Interest Period) which are imposed under Regulation D on eurocurrency liabilities (or against any other category of liabilities which includes deposits by reference to which LIBOR is determined or against any category of extensions of credit or other assets which includes loans by a non-United States office of a depository institution to United States residents or loans which charge interest at a rate determined by reference to such deposits) during the Interest Period and which are applicable to member banks of the Federal Reserve System with deposits exceeding one billion dollars, but without benefit or credit of proration, exemptions or offsets that might otherwise be available from time to time under Regulation D. The determination of the Reserve Requirements shall be based on the assumption that Lender funded 100% of the Loan in the interbank eurodollar market. In the event of any change in the rate of such Reserve Requirements under Regulation D during the Interest Period, or any variation in such requirements based upon amounts or kinds of assets or liabilities, or other factors, including, without limitation, the imposition of Reserve Requirements, or differing Reserve Requirements, on one or more but not all of the holders of the Loan or any participation therein, Lender may use any reasonable averaging and/or attribution methods which it deems appropriate and practical for determining the rate of such Reserve Requirements which shall be used in the computation of the Reserve Requirements. Lender’s computation of same shall be final absent manifest error.

          “Resizing Event” shall have the meaning set forth in Section 11.29.

          “Restoration” shall have the meaning set forth in Section 5.2.1.

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          “Restricted Party” shall mean collectively, (a) Borrower, Principal and any Affiliated Manager and (b) any shareholder, partner, member, non-member manager, any direct or indirect legal or beneficial owner of, Borrower, Principal, any Affiliated Manager or any non member manager.

          “Restoration Threshold” shall mean $741,000.00.

          “S&P” shall mean Standard & Poor’s Ratings Services, a division of the McGraw-Hill Companies, Inc.

          “Secondary Market Transaction” shall have the meaning set forth in Section 9.1(a).

          “Securities” shall have the meaning set forth in Section 9.1(a).

          “Securities Act” shall have the meaning set forth in Section 9.2(a).

          “Securitization” shall have the meaning set forth in Section 9.1(a).

          “Servicer” shall have the meaning set forth in Section 11.24(a).

          “Servicing Agreement” shall have the meaning set forth in Section 11.24(a).

          “Severed Loan Documents” shall have the meaning set forth in Section 10.2(c).

          “Significant Obligator” shall have the meaning set forth in Section 9.1(c).

          “SPC Party” shall have the meaning set forth in Section 3.1.24(o).

          “Spread” shall mean 135 basis points.

          “Spread Maintenance Premium” shall mean, in connection with a prepayment of all or any portion of the outstanding principal balance of the Loan pursuant to Section 2.3.3 hereof, an amount equal to the present value, discounted at LIBOR on the most recent Determination Date, of all future installments of interest which would have been due hereunder through and including the Permitted Prepayment Date on the portion of the outstanding principal balance of the Loan being prepaid as if interest accrued on such portion of the principal balance being prepaid at an interest rate per annum equal to the LIBOR Interest Rate then in effect plus the Spread. The Spread Maintenance Premium shall be calculated by Lender and shall be final absent manifest error.

          “Standard Statements” shall have the meaning set forth in Section 9.1(c)(i).

          “State” shall mean the State or Commonwealth in which the Property or any part thereof is located.

          “Substitute Rate” shall have the meaning set forth in Section 2.2.3(b).

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          “Substitute Rate Loan” shall mean the Loan at any time in which the Applicable Interest Rate is calculated at the Substitute Rate plus the Substitute Spread in accordance with the provisions of Article II hereof.

          “Substitute Spread” shall have the meaning set forth in Section 2.2.3(b).

          “Survey” shall mean a current land survey for the Property, certified to the title company and Lender and its successors and assigns, in form and content satisfactory to Lender and prepared by a professional and properly licensed land surveyor satisfactory to Lender in accordance with the 2005 Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys (i) including the following additional items from the list of “Optional Survey Responsibilities and Specifications” (Table A): 2, 3, 4, 6, 7(a), 7(b)(1), 8, 9, 10, 11(a) and 13, (ii) reflecting a metes and bounds description of the real property comprising part of the Property in conformity with the Title Insurance Policy, and (iii) together with the surveyor’s seal affixed to the Survey and a certification from the surveyor in form and substance acceptable to Lender.

          “Tax Funds” shall have the meaning set forth in Section 6.2.1.

          “Taxes” shall mean all real estate and personal property taxes, assessments, water rates or sewer rents, now or hereafter levied or assessed or imposed against the Property or part thereof, together with all interest and penalties thereon.

          “Telerate Page 3750” means the display designated as “Page 3750” on the Dow Jones Telerate Service (or such other page as may replace Page 3750 on that service or such other service as may be nominated by the British Bankers’ Association as the information vendor for the purpose by displaying British Bankers’ Association Interest Settlement Rates for U.S. Dollar deposits).

          “Tenant” shall mean any Person obligated by contract or otherwise to pay monies (including a percentage of gross income, revenue or profits) under any Lease now or hereafter affecting all or any part of the Property.

          “Tenant Direction Letter” shall have the meaning set forth in Section 12.2(a)(i).

          “Title Insurance Policy” shall mean an ALTA mortgagee title insurance policy in the form acceptable to Lender issued with respect to the Property and insuring the lien of the Mortgage together with such endorsements and affirmative coverages as Lender may require.

          “Transferee” shall have the meaning set forth in Section 8.1.1(f)(ii).

          “Trustee” shall mean any trustee holding the Loan in a Securitization.

          “UBS” shall mean UBS Real Estate Securities Inc., a Delaware corporation.

          “UCC” or “Uniform Commercial Code” shall mean the Uniform Commercial Code as in effect in the State.

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          “Uniform System of Accounts” shall mean the most recent edition of the Uniform System of Accounts for Hotels as adopted by the American Hotel and Motel Association.

          “Underwriter Group” shall have the meaning set forth in Section 9.2(b).

          “Updated Information” shall have the meaning set forth in Section 9.1(b)(i).

          “U.S. Obligations” shall mean direct full faith and credit obligations of the United States of America that are not subject to prepayment, call or early redemption.

          Section 1.2 Principles of Construction. All references to sections and schedules are to sections and schedules in or to this Agreement unless otherwise specified. Unless otherwise specified, the words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all meanings attributed to defined terms herein shall be equally applicable to both the singular and plural forms of the terms so defined.

          II. THE LOAN

          Section 2.1 The Loan.

          2.1.1 Agreement to Lend and Borrow. Subject to and upon the terms and conditions set forth herein, Lender shall make the Loan to Borrower and Borrower shall accept the Loan from Lender on the Closing Date.

          2.1.2 Single Disbursement to Borrower. Borrower shall receive only one (1) borrowing hereunder in respect of the Loan and any amount borrowed and repaid hereunder in respect of the Loan may not be reborrowed.

          2.1.3 The Note. The Loan shall be evidenced by that certain Promissory Note of even date herewith, in the stated principal amount of Twenty-Four Million Seven Hundred Thousand and No/100 Dollars ($24,700,000.00) executed by Borrower and payable to the order of Lender in evidence of the Loan (as the same may hereafter be amended, supplemented, restated, increased, extended or consolidated from time to time, the “Note”) and shall be repaid in accordance with the terms of this Agreement and the Note.

          2.1.4 Use of Proceeds. Borrower shall use proceeds of the Loan to (a) acquire the Property, (b) pay all past-due Basic Carrying Costs, if any, in respect of the Property, (c) deposit the Reserve Funds, (d) pay costs and expenses incurred in connection with the closing of the Loan, as approved by Lender, (e) fund any working capital requirements of the Property, as approved by Lender and (f) distribute the balance of the proceeds, if any to Borrower.

          Section 2.2 Interest Rate.

          2.2.1 Applicable Interest Rate. Except as herein provided with respect to interest accruing at the Default Rate, interest on the principal balance of the Loan outstanding

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from time to time shall accrue from (and including) the Closing Date up to and including the end of the last Interest Period at the Applicable Interest Rate.

          2.2.2 Interest Calculation. Interest on the outstanding principal balance of the Loan shall be calculated by multiplying (a) the actual number of days elapsed in the period for which the calculation is being made by (b) a daily rate based on a three hundred sixty (360) day year (that is, the Applicable Interest Rate or the Default Rate, as then applicable, expressed as an annual rate divided by 360) by (c) the outstanding principal balance.

          2.2.3 Determination of Interest Rate. (a) Any change in the rate of interest hereunder due to a change in the Applicable Interest Rate shall become effective as of the first day of the new Interest Period. Each determination by Lender of the Applicable Interest Rate shall be conclusive and binding for all purposes, absent manifest error.

          (b) In the event that Lender shall have determined (which determination shall be conclusive and binding upon Borrower absent manifest error) that by reason of circumstances affecting the interbank eurodollar market, adequate and reasonable means do not exist for ascertaining LIBOR, then Lender shall, by notice to Borrower (“Lender’s Notice”), which notice shall set forth in reasonable detail such circumstances, establish the Applicable Interest Rate at Lender’s then customary spread (the “Substitute Spread”), taking into account the size of the Loan and the creditworthiness of Borrower, above a published index used for variable rate loans as reasonably determined by Lender (the “Substitute Rate”).

          (c) If, pursuant to the terms of this Agreement, the Loan has been converted to a Substitute Rate Loan and Lender shall determine (which determination shall be conclusive and binding upon Borrower absent manifest error) that the event(s) or circumstance(s) which resulted in such conversion shall no longer be applicable or reasonable and adequate means for establishing LIBOR otherwise exist as determined by Lender, Lender shall give notice thereof to Borrower, and the Substitute Rate Loan shall automatically convert to a LIBOR Loan on the first day of the Interest Period next following the effective date set forth in such notice. Notwithstanding any provision of this Agreement to the contrary, in no event shall Borrower have the right to elect to convert a LIBOR Loan to a Substitute Rate Loan.

          (d) With respect to a LIBOR Loan, all payments made by Borrower hereunder shall be made free and clear of, and without reduction for or on account of, income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions, reserves or withholdings imposed, levied, collected, withheld or assessed by any Governmental Authority, which are imposed, enacted or become effective after the date hereof (such non-excluded taxes being referred to collectively as “Foreign Taxes”), excluding income and franchise taxes of the United States of America or any political subdivision or taxing authority thereof or therein (including Puerto Rico). If any Foreign Taxes are required to be withheld from any amounts payable to Lender hereunder, the amounts so payable to Lender shall be increased to the extent necessary to yield to Lender (after payment of all Foreign Taxes) interest or any such other amounts payable hereunder at the rate or in the amounts specified hereunder. Whenever any Foreign Tax is payable pursuant to applicable law by Borrower, as promptly as possible thereafter, Borrower shall send to Lender an original official receipt, if available, or certified copy thereof showing payment of such Foreign Tax. Borrower hereby indemnifies Lender for any incremental taxes,

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interest or penalties that may become payable by Lender which may result from any failure by Borrower to pay any such Foreign Tax when due to the appropriate taxing authority or any failure by Borrower to remit to Lender the required receipts or other required documentary evidence.

          (e) If any requirement of law or any change therein or in the interpretation or application thereof, shall hereafter make it unlawful for Lender to make or maintain a LIBOR Loan as contemplated hereunder, (i) the obligation of Lender hereunder to make a LIBOR Loan shall be cancelled forthwith and (ii) Lender may give Borrower a Lender’s Notice, establishing the Applicable Interest Rate at the Substitute Rate plus the Substitute Spread, in which case the Applicable Interest Rate shall be a rate equal to the Substitute Rate in effect from time to time plus the Substitute Spread. In the event the condition necessitating the cancellation of Lender’s obligation to make a LIBOR Loan hereunder shall cease, Lender shall promptly notify Borrower of such cessation and the Loan shall resume its characteristics as a LIBOR Loan in accordance with the terms herein from and after the first day of the calendar month next following such cessation. Borrower hereby agrees promptly to pay Lender, upon demand, any additional amounts necessary to compensate Lender for any actual (as reasonably determined by Lender) out-of-pocket costs incurred by Lender in making any conversion in accordance with this Agreement, including, without limitation, any interest or fees payable by Lender to lenders of funds obtained by it in order to make or maintain the LIBOR Loan hereunder. Lender’s notice of such costs, as certified to Borrower, shall be set forth in reasonable detail and Lender’s calculation shall be conclusive absent manifest error.

          (f) In the event that any change in any requirement of law or in the interpretation or application thereof, or compliance by Lender with any request or directive (whether or not having the force of law) hereafter issued from any central bank or other Governmental Authority:

     (i) shall hereafter have the effect of reducing the rate of return on Lender’s capital as a consequence of its obligations hereunder to a level below that which Lender could have achieved but for such adoption, change or compliance (taking into consideration Lender’s policies with respect to capital adequacy) by any amount deemed by Lender to be material;

     (ii) shall hereafter impose, modify, increase or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of Lender which is not otherwise included in the determination of the rate hereunder; or

     (iii) shall hereafter impose on Lender any other condition and the result of any of the foregoing is to increase the cost to Lender of making, renewing or maintaining loans or extensions of credit or to reduce any amount receivable hereunder;

then, in any such case, Borrower shall promptly pay Lender, upon demand, any additional amounts necessary to compensate Lender for such additional cost or reduced amount receivable which Lender deems to be material as determined by Lender. If Lender becomes entitled to

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claim any additional amounts pursuant to this Section 2.2.3(f), Borrower shall not be required to pay same unless the requirement for such additional amounts is the result of requirements imposed generally on lenders similar to Lender and not the result of some specific reserve or similar requirement imposed on Lender as a result of Lender’s special circumstances. If Lender becomes entitled to claim any additional amounts pursuant to this Section 2.2.3(f), Lender shall provide Borrower with not less than thirty (30) days written notice specifying in reasonable detail the event by reason of which it has become so entitled and the additional amounts required to fully compensate Lender for such additional costs or reduced amounts. A certificate as to any additional costs or amounts payable pursuant to the foregoing sentence, executed by an authorized signatory of Lender and submitted by Lender to Borrower shall be conclusive in the absence of manifest error. This provision shall survive payment of the Note and the satisfaction of all other obligations of Borrower under this Agreement and the Loan Documents.

          (g) Borrower agrees to indemnify Lender and to hold Lender harmless from any loss or expense (other than consequential and punitive damages) which Lender sustains or incurs as a consequence of (i) any default by Borrower in payment of the principal of or interest on a LIBOR Loan, including, without limitation, any such loss or expense arising from interest or fees payable by Lender to lenders of funds obtained by it in order to maintain a LIBOR Loan hereunder, (ii) any prepayment (whether voluntary or mandatory) of the LIBOR Loan on a day that (A) is not the Monthly Payment Date immediately following the last day of an Interest Period with respect thereto or (B) is the Monthly Payment Date immediately following the last day of an Interest Period with respect thereto if Borrower did not give the prior written notice of such prepayment required pursuant to the terms of this Agreement, including, without limitation, such loss or expense arising from interest or fees payable by Lender to lenders of funds obtained by it in order to maintain the LIBOR Loan hereunder and (iii) the conversion (for any reason whatsoever, whether voluntary or involuntary) of the Applicable Interest Rate to the Substitute Rate plus the Substitute Spread with respect to any portion of the outstanding principal amount of the Loan then bearing interest at a rate other than the Substitute Rate plus the Substitute Spread on a date other than the Monthly Payment Date immediately following the last day of an Interest Period, including, without limitation, such loss or expenses arising from interest or fees payable by Lender to lenders of funds obtained by it in order to maintain a LIBOR Loan hereunder (the amounts referred to in clauses (i), (ii) and (iii) are herein referred to collectively as the “Breakage Costs”). Whenever in this Section 2.2.3 the term “interest or fees payable by Lender to lenders of funds obtained by it” is used and no such funds were actually obtained from such lenders, it shall include interest or fees which would have been payable by Lender if it had obtained funds from lenders in order to maintain a LIBOR Loan hereunder. Lender will provide to Borrower a statement detailing such Breakage Costs and the calculation thereof.

          (h) The provisions of this Section 2.2.3 shall survive payment of the Note in full and the satisfaction of all other obligations of Borrower under this Agreement and the other Loan Documents.

          2.2.4 Usury Savings. This Agreement and the other Loan Documents are subject to the express condition that at no time shall Borrower be required to pay interest on the principal balance of the Loan at a rate which could subject Lender to either civil or criminal liability as a result of being in excess of the Maximum Legal Rate. If by the terms of this Agreement or the other Loan Documents, Borrower is at any time required or obligated to pay

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interest on the principal balance due hereunder at a rate in excess of the Maximum Legal Rate, the Applicable Interest Rate or the Default Rate, as the case may be, shall be deemed to be immediately reduced to the Maximum Legal Rate and all previous payments in excess of the Maximum Legal Rate shall be deemed to have been payments in reduction of principal and not on account of the interest due hereunder. All sums paid or agreed to be paid to Lender for the use, forbearance, or detention of the sums due under the Loan, shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term of the Loan until payment in full so that the rate or amount of interest on account of the Loan does not exceed the Maximum Legal Rate from time to time in effect and applicable to the Loan for so long as the Loan is outstanding.

          Section 2.3 Loan Payments.

          2.3.1 Payment Before Maturity Date. Borrower shall make a payment to Lender of interest only on the Closing Date for the initial Interest Period. Borrower shall make a payment to Lender of interest calculated in the manner set forth herein on the Monthly Payment Date occurring in November, 2006 and on each Monthly Payment Date thereafter to and including the Maturity Date.

          2.3.2 Payment on Maturity Date. (a) Borrower shall pay to Lender on the Maturity Date the outstanding principal balance of the Loan, all accrued and unpaid interest and all other amounts due hereunder and under the Note, the Mortgage and the other Loan Documents.

          (b) Borrower will have two (2) options to extend the Maturity Date of the Loan for consecutive one (1) year periods. In order to exercise the first such extension right, Borrower shall deliver to Lender written notice of such extension on or before September 25, 2009 and, upon giving of such notice of extension, and subject to the satisfaction of the conditions set forth below in this Section 2.3.2(b) on or before September 25, 2009, the Maturity Date as theretofore in effect will be extended to November 9, 2010. In order to exercise the second such extension right, Borrower shall deliver to Lender written notice of such extension on or before September 25, 2010 and, upon the giving of such notice of extension, and subject to the satisfaction of the conditions set forth below in this Section 2.3.2(b) on or before September 25, 2010, the Maturity Date as theretofore in effect will be extended to November 9, 2011. The Maturity Date shall be extended pursuant to Borrower’s notices as aforesaid, provided that the following conditions are satisfied: (i) no Event of Default shall be in existence either at the time of Borrower’s notice or at the then-current Maturity Date and (ii) Borrower shall enter into an Interest Rate Protection Agreement through the term of the applicable extension under the same terms and conditions of the initial Interest Rate Protection Agreement (including its LIBOR strike price) entered into in connection with the Loan and shall provide an Assignment of Protection Agreement with respect thereto in the form of Assignment of Protection Agreement, together with an opinion of counsel with respect thereto reasonably acceptable to Lender.

          2.3.3 Interest Rate and Payment after Default. In the event that, and for so long as, any Event of Default shall have occurred and be continuing, the outstanding principal balance of the Loan shall accrue interest at the Default Rate, calculated from the date the Default occurred which led to such an Event of Default without regard to any grace or cure periods

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contained herein. If all or any part of the principal amount of the Loan is prepaid upon acceleration of the Loan following the occurrence of an Event of Default prior to the Permitted Prepayment Date, Borrower shall be required to pay Lender, in addition to all other amounts then payable hereunder (including, without limitation, (i) in the event that such prepayment is received on a Monthly Payment Date, interest accruing on such amount calculated through and including the end of the Interest Period in which such Monthly Payment Date occurs, or (ii) in the event that such prepayment is received on a date other than a Monthly Payment Date, interest accruing on such amount calculated through and including the end of the Interest Period in which the next Monthly Payment Date occurs), a prepayment fee equal to a prepayment fee equal to one percent (1%) of the amount of principal being repaid together with a Spread Maintenance Premium calculated with respect to the amount of principal being repaid and Breakage Costs.

          2.3.4 Late Payment Charge. If any principal, interest or any other sum due under the Loan Documents, other than the payment of principal due on the Maturity Date, is not paid by Borrower on the date on which it is due, Borrower shall pay to Lender upon demand an amount equal to the lesser of five percent (5%) of such unpaid sum or the maximum amount permitted by applicable law in order to defray the expense incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment. Any such amount shall be secured by the Mortgage and the other Loan Documents.

          2.3.5 Method and Place of Payment. (a) Except as otherwise specifically provided herein, all payments and prepayments under this Agreement and the Note shall be made to Lender not later than 1:00 P.M., New York City time, on the date when due and shall be made in lawful money of the United States of America by wire transfer in federal or other in immediately available funds to Lender’s account as such bank(s) as Lender may from time to time designate, and any funds received by Lender after such time shall, for all purposes hereof, be deemed to have been paid on the next succeeding Business Day.

          (b) Whenever any payment to be made hereunder or under any other Loan Document shall be stated to be due on a day which is not a Business Day, the due date thereof shall be the first Business Day that is immediately preceding such due date (notwithstanding such adjustment of due dates, Borrower shall not be entitled to any deduction of interest due under the Note, this Agreement or any of the other Loan Documents) and, with respect to payments of principal due on the Maturity Date, interest shall be payable at the Applicable Interest Rate or the Default Rate, as the case may be, during such extension.

          (c) All payments required to be made by Borrower hereunder or under the Note or the other Loan Documents shall be made irrespective of, and without deduction for, any setoff, claim or counterclaim and shall be made irrespective of any defense thereto.

          Section 2.4 Prepayments.

          2.4.1 Voluntary Prepayments. Except as otherwise provided herein, Borrower shall not have the right to prepay the Loan in whole or in part. On and after the Permitted Prepayment Date Borrower may, at its option and upon thirty (30) days prior notice to Lender, prepay the Debt in whole but not in part; provided, however, any prepayment received by Lender

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prior to November 10, 2008 shall be accompanied by the applicable Prepayment Fee. Any prepayment received by Lender on a date other than a Monthly Payment Date shall include interest which would have accrued thereon to the next Monthly Payment Date; provided, however, that no prepayment shall be permitted on any date during the period commencing on the first calendar day immediately following a Monthly Payment Date to, but not including, the Determination Date in such calendar month, unless consented to be Lender in its sole discretion. Any notice of prepayment shall be revocable by Borrower, except during the period commencing on the date five (5) Business Days prior to the applicable date of prepayment set forth in such notice of prepayment and ending on such date, during which time such notice is irrevocable; provided, Borrower may not revoke more than two (2) such notices of prepayment in any twelve (12) month period. If Borrower elects to revoke a notice of prepayment in accordance with the prior sentence, Borrower shall indemnify and pay to Lender immediately upon request the actual out-of-pocket expenses incurred by Lender in connection with such revocation, including but not limited to Breakage Costs as well as any and all costs of any holder of any portion of the Securities which was caused as a result of such revocation.

          2.4.2 Mandatory Prepayments. On each date on which Lender actually receives a distribution of Net Proceeds, and if Lender does not make such Net Proceeds available to Borrower for a Restoration in accordance with the provisions of this Agreement or otherwise remit such Net Proceeds to Borrower pursuant to Section 5.3 hereof, Borrower shall, at Lender’s option, prepay or authorize Lender to apply such Net Proceeds as a prepayment of all or a portion of the outstanding principal balance of the Note in an amount equal to one hundred percent (100%) of such Net Proceeds together with interest that would have accrued on such amounts through the next Monthly Payment Date.

          2.4.3 Prepayments After Default. If after an Event of Default, payment of all or any part of the principal of the Loan is tendered by Borrower (which tender Lender may reject to the extent permitted under applicable Legal Requirements), a purchaser at foreclosure or any other Person, such tender shall be deemed an attempt to circumvent the prohibition against prepayment set forth in Section 2.4.1 and Borrower, such purchaser at foreclosure or other Person shall pay (including, without limitation, (i) in the event that such prepayment is received on a Monthly Payment Date, interest accruing on such amount calculated through and including the end of the Interest Period in which such Monthly Payment Date occurs, or (ii) in the event that such prepayment is received on a date other than a Monthly Payment Date, interest accruing on such amount calculated through and including the end of the Interest Period in which the next Monthly Payment Date occurs), a prepayment fee equal to the Spread Maintenance Premium, if applicable, in addition to the outstanding principal balance, all accrued and unpaid interest and other amounts payable under the Loan Documents.

          Section 2.5 Interest Rate Cap. At all times during the term of the Loan Borrower shall maintain in effect an Interest Rate Protection Agreement having a term equal to the term of the Loan, with an initial notional amount equal to the amount of the Loan and with a Counterparty acceptable to Lender having a Minimum Counterparty Rating. If Borrower obtains one (1) interest rate cap, the LIBOR strike rate under the Interest Rate Protection Agreement shall be equal to or less than the Capped LIBOR Rate, or if Borrower obtains more than one (1) interest rate cap, the blended LIBOR strike rate under the Interest Rate Protection Agreement, as determined by Lender, shall be equal to or less than the Capped LIBOR Rate. The Interest Rate

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Protection Agreement shall be in form and substance substantially similar to the Interest Rate Protection Agreement in effect as of the date hereof. In the event of any downgrade or withdrawal of the rating of such Counterparty by any Rating Agency below the Minimum Counterparty Rating, Borrower shall replace the Interest Rate Protection Agreement not later than thirty (30) Business Days following receipt of notice from Lender of such downgrade or withdrawal with an Interest Rate Protection Agreement in form and substance satisfactory to Lender (and meeting the requirements set forth in this Section 2.5) from a Counterparty acceptable to Lender having a Minimum Counterparty Rating; provided, however, that if Lender is the Counterparty and any Rating Agency withdraws or downgrades the credit rating of Lender below the Minimum Counterparty Rating, Borrower shall not be required to replace the Counterparty under the Interest Rate Protection Agreement provided that within thirty (30) Business Days following Lender’s notice to Borrower of such downgrade or withdrawal Lender posts additional collateral acceptable to the Rating Agencies securing its obligations under the Interest Rate Protection Agreement.

          III. REPRESENTATIONS AND WARRANTIES

          Section 3.1 Borrower Representations. Borrower represents and warrants as of the date hereof and as of the Closing Date that:

          3.1.1 Organization. (a) Each of Borrower and each SPC Party is duly organized, validly existing and in good standing with full power and authority to own its assets and conduct its business, and is duly qualified in all jurisdictions in which the ownership or lease of its property or the conduct of its business requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect on its ability to perform its obligations hereunder, and Borrower has taken all necessary action to authorize the execution, delivery and performance of this Agreement and the other Loan Documents by it, and has the power and authority to execute, deliver and perform under this Agreement, the other Loan Documents and all the transactions contemplated hereby.

          (b) Borrower’s exact legal name is correctly set forth in the first paragraph of this Agreement. Borrower is an organization of the type specified in the first paragraph of this Agreement. Borrower is incorporated or organized under the laws of the state specified in the first paragraph of this Agreement. Borrower’s principal place of business and chief executive office, and the place where Borrower keeps its books and records, including recorded data of any kind or nature, regardless of the medium of recording, including software, writings, plans, specifications and schematics, has been for the preceding four (4) months (or, if less than four (4) months, the entire period of the existence of Borrower) and will continue to be the address of Borrower set forth in the first paragraph of this Agreement (unless Borrower notifies Lender in writing at least thirty (30) days prior to the date of such change). Borrower’s organizational identification number, if any, assigned by the state of its incorporation or organization is 4209558. Borrower’s federal tax identification number is 20-5458053.

          3.1.2 Proceedings. This Agreement and the other Loan Documents have been duly authorized, executed and delivered by Borrower and constitute a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization,

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moratorium or other similar laws affecting the enforcement of creditors’ rights generally, and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

          3.1.3 No Conflicts. The execution and delivery of this Agreement and the other Loan Documents by Borrower and the performance of its obligations hereunder and thereunder will not conflict with any provision of any law or regulation to which Borrower is subject, or conflict with, result in a breach of, or constitute a default under, any of the terms, conditions or provisions of any of Borrower’s organizational documents or any agreement or instrument to which Borrower is a party or by which it is bound, or any order or decree applicable to Borrower, or result in the creation or imposition of any lien on any of Borrower’s assets or property (other than pursuant to the Loan Documents).

          3.1.4 Litigation. There is no action, suit, proceeding or investigation pending or, to Borrower’s knowledge, threatened against Borrower in any court or by or before any other Governmental Authority that would have a Material Adverse Effect.

          3.1.5 Agreements. Borrower is not in default with respect to any order or decree of any court or any order, regulation or demand of any Governmental Authority, which default might have a Material Adverse Effect.

          3.1.6 Consents. No consent, approval, authorization or order of any court or Governmental Authority is required for the execution, delivery and performance by Borrower of, or compliance by Borrower with, this Agreement or the consummation of the transactions contemplated hereby, other than those which have been obtained by Borrower.

          3.1.7 Title. Borrower has good, marketable and insurable fee simple title to the real property comprising part of the Property and good title to the balance of the Property owned by it, free and clear of all Liens whatsoever except the Permitted Encumbrances. The Mortgage, when properly recorded in the appropriate records, will create (a) a valid, first priority, perfected lien on the Property, subject only to Permitted Encumbrances and (b) perfected security interests in and to, and perfected collateral assignments of, all personalty (including the Leases), all in accordance with the terms thereof, in each case subject only to any Permitted Encumbrances. There are no mechanics’, materialman’s or other similar liens or claims which have been filed for work, labor or materials affecting the Property which are or may be liens prior to, or equal or coordinate with, the lien of the Mortgage. None of the Permitted Encumbrances, individually or in the aggregate, materially interfere with the benefits of the security intended to be provided by the Mortgage and this Loan Agreement, materially and adversely affect the value of the Property, impair the use or operations of the Property or impair Borrower’s ability to pay its obligations in a timely manner. Borrower represents that there is no assessment currently due and payable to the Arlington Entertainment Area Management District.

          3.1.8 Intentionally Omitted.

          3.1.9 Intentionally Omitted.

          3.1.10 Financial Information. All financial data, including, without limitation, income and operating expense statements, that have been delivered to Lender in respect of the

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Property (i) are true, complete and correct in all material respects, (ii) accurately represent the financial condition of the Property as of the date of such reports, and (iii) have been prepared in accordance with the Uniform System of Accounts and reconciled in accordance with GAAP throughout the periods covered, except as disclosed therein. Borrower does not have any contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments that are known to Borrower and reasonably likely to have a Material Adverse Effect. Since the date of the financial statements, there has been no material adverse change in the financial condition, operations or business of Borrower or the Property from that set forth in said financial statements.

          3.1.11 Condemnation. No Condemnation or other proceeding has been commenced or, to Borrower’s best knowledge, is contemplated with respect to all or any portion of the Property or for the relocation of roadways providing access to the Property.

          3.1.12 Utilities and Public Access. The Property has rights of access to public ways and is served by water, sewer, sanitary sewer and storm drain facilities adequate to service the Property for its intended uses.

          3.1.13 Separate Lots. The Property is comprised of one (1) or more parcels which constitute separate tax lots and do not constitute a portion of any other tax lot not a part of the Property.

          3.1.14 Assessments. There are no pending or proposed special or other assessments which are currently due and payable for public improvements or otherwise affecting the Property, nor are there any contemplated improvements to the Property that may result in such special or other assessments.

          3.1.15 Enforceability. The Loan Documents are not subject to any right of rescission, set-off, counterclaim or defense by Borrower, including the defense of usury, nor would the operation of any of the terms of the Loan Documents, or the exercise of any right thereunder, render the Loan Documents unenforceable, subject to bankruptcy, insolvency and other limitations on creditors’ rights generally and to equitable principles, and Borrower has not asserted any right of rescission, set-off, counterclaim or defense with respect thereto.

          3.1.16 Assignment of Leases. The Assignment of Leases creates a valid assignment of, or a valid security interest in, certain rights under the Leases, subject only to a license granted to Borrower to exercise certain rights and to perform certain obligations of the lessor under the Leases, as more particularly set forth therein. No Person other than Lender has any interest in or assignment of the Leases or any portion of the Rents due and payable or to become due and payable thereunder.

          3.1.17 Insurance. Borrower has obtained and has delivered to Lender a certificate of insurance for all Policies, and will deliver to Lender certified copies or originals of all Policies within ten (10) days after request thereof reflecting the insurance coverages, amounts and other requirements set forth in this Agreement. In addition, Borrower shall make all Policies available to Lender at Borrower’s offices where the Policies are maintained within five (5) Business Days of Lender’s request therefor. No claims have been made under any of the

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Policies, and no Person, including Borrower, has done, by act or omission, anything which would impair the coverage of any of the Policies.

          3.1.18 Licenses. All permits and approvals, including without limitation, certificates of occupancy required by any Governmental Authority for the use, occupancy and operation of the Property in the manner in which the Property is currently being used, occupied and operated have been obtained and are in full force and effect.

          3.1.19 Flood Zone. Except as shown on the Survey, none of the Improvements on the Property is located in an area identified by the Federal Emergency Management Agency as a special flood hazard area.

          3.1.20 Physical Condition. Except as may be shown on the physical condition reports delivered to Lender, and to the knowledge of Borrower after due inquiry, (i) the Property, including, without limitation, all buildings, improvements, parking facilities, sidewalks, storm drainage systems, roofs, plumbing systems, HVAC systems, fire protection systems, electrical systems, equipment, elevators, exterior sidings and doors, landscaping, irrigation systems and all structural components, are in good condition, order and repair in all material respects; there exists no structural or other material defects or damages in the Property, whether latent or otherwise, and Borrower has not received notice from any insurance company or bonding company of any defects or inadequacies in the Property, or any part thereof, which would adversely affect the insurability of the same or cause the imposition of extraordinary premiums or charges thereon or of any termination or threatened termination of any policy of insurance or bond.

          3.1.21 Boundaries. Except as may be shown on the Survey, and except to the extent the same is not reasonably likely to result in a Material Adverse Effect, all of the improvements which were included in determining the appraised value of the Property lie wholly within the boundaries and building restriction lines of the Property, and no improvements on adjoining properties encroach upon the Property, and no easements or other encumbrances affecting the Property encroach upon any of the improvements, so as to affect the value or marketability of the Property except those which are insured against by title insurance each of which, whether or not insured, are shown on the Survey.

          3.1.22 Leases. Borrower represents and warrants to Lender with respect to the Leases that: (a) the rent roll attached hereto as Schedule I is true, complete and correct and the Property is not subject to any Leases other than the Leases described in Schedule I, (b) the Leases identified on Schedule I are in full force and effect and there are no defaults thereunder by either party, (c) the copies of the Leases delivered to Lender are true and complete, and there are no oral agreements with respect thereto, (d) no Rent (including security deposits) has been paid more than one (1) month in advance of its due date, (e) all work to be performed by Borrower under each Lease has been performed as required and has been accepted by the applicable Tenant, (f) any payments, free rent, partial rent, rebate of rent or other payments, credits, allowances or abatements required to be given by Borrower to any Tenant has already been received by such Tenant, (g) all security deposits are being held in accordance with Legal Requirements, (h) Borrower has no knowledge of any notice of termination or default with respect to any Lease, (i) Borrower has not assigned or pledged any of the Leases, the rents or any

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interests therein except to Lender, (j) no Tenant or other party has an option or right of first refusal or offer, to purchase all or any portion of the Property, (k) no Tenant under a Major Lease has the right to terminate its Lease prior to expiration of the stated term of such Lease, and (l) all existing Leases other than the Leases which are included as a Permitted Encumbrance and that certain Antennae License Agreement dated December 9, 1999 between EquiStar Virginia Company, LLC and Cook Inlet/VoiceStream PCS LLC are subordinate to the Mortgage either pursuant to their terms or a recorded subordination agreement.

          3.1.23 Filing and Recording Taxes. All transfer taxes, deed stamps, intangible taxes or other amounts in the nature of transfer taxes required to be paid under applicable Legal Requirements in connection with the transfer of the Property to Borrower have been paid or are being paid simultaneously herewith. All mortgage, mortgage recording, stamp, intangible or other similar tax required to be paid under applicable Legal Requirements in connection with the execution, delivery, recordation, filing, registration, perfection or enforcement of any of the Loan Documents, including, without limitation, the Mortgage, have been paid or are being paid simultaneously herewith. All Taxes due and owing in respect of the Property have been paid, or an escrow of funds in an amount sufficient to cover such payments has been established hereunder.

          3.1.24 Single Purpose. Borrower hereby represents and warrants to, and as applicable in the context covenants with, Lender that as of the date hereof and until such time as the Debt shall be paid in full:

          (a) Borrower does not own and will not own any asset or property other than (i) the Property, and (ii) incidental personal property necessary for the ownership or operation of the Property.

          (b) Borrower will not engage in any business other than the ownership, management and operation (including without limitation, alterations and renovations to the Property) of the Property and Borrower will conduct and operate its business as presently conducted and operated.

          (c) Except for capital contributions and distributions, Borrower will not enter into any contract or agreement with any Affiliate of Borrower, any constituent party of Borrower or any Affiliate of any constituent party, except upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arms-length basis with third parties other than any such party.

          (d) Borrower has not incurred and will not incur any Indebtedness other than (i) the Debt, (ii) unsecured trade payables and operational debt not evidenced by a note and in an aggregate amount not exceeding $494,000.00 of outstanding principal balance of the Loan at any one time, and (iii) unsecured Indebtedness incurred in the financing of equipment and other personal property used on the Property with annual payments not exceeding together with the amount set forth in clause (ii) above in the aggregate $494,000.00; provided that any Indebtedness incurred pursuant to subclauses (ii) and (iii) (other than any such amounts in the aggregate not to exceed $25,000.00 at any one time which are diligently being disputed in good faith and which are not likely to result in a Material Adverse Effect) shall be (x) paid within sixty

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(60) days of the date incurred and (y) incurred in the ordinary course of business. No Indebtedness other than the Debt may be secured (subordinate or pari passu) by the Property.

          (e) Borrower has not made and will not make any loans or advances to any third party (including any Affiliate or constituent party), and shall not acquire obligations or securities of its Affiliates.

          (f) Borrower is and will remain solvent and Borrower will pay its debts and liabilities (including, as applicable, shared personnel and overhead expenses) as the same shall become due from its own assets.

          (g) Borrower has done or caused to be done and will do all things necessary to observe organizational formalities and preserve its existence, and Borrower will not, nor will Borrower permit any constituent party (i.e., its general partner or limited partner) to amend, modify or otherwise change the partnership certificate, partnership agreement, articles of incorporation and bylaws, operating agreement, trust or other organizational documents of Borrower or such constituent party without the prior written consent of Lender and Borrower has received Rating Agency Confirmation in any manner that (i) violates the single purpose covenants set forth in this Section 3.1.24, or (ii) amends, modifies or otherwise changes any provision thereof that by its terms cannot be modified at any time when the Loan is outstanding or by its terms cannot be modified without Lender’s consent.

          (h) Borrower will maintain all of its books, records, financial statements and bank accounts separate from those of its Affiliates and any constituent party. Borrower’s assets will not be listed as assets on the financial statement of any other Person, provided, however, that Borrower’s assets may be included in a consolidated financial statement of its Affiliates provided that (i) appropriate notation shall be made on such consolidated financial statements to indicate the separateness of Borrower and such Affiliates and to indicate that Borrower’s assets and credit are not available to satisfy the debts and other obligations of such Affiliates or any other Person and (ii) such assets shall be listed on Borrower’s own separate balance sheet. Borrower will file its own tax returns (to the extent Borrower is required to file any such tax returns) and will not file a consolidated federal income tax return with any other Person, or, if Borrower is part of a consolidated group, will be shown on the tax returns of such consolidated group as a consolidated member of such group. Borrower shall maintain its books, records, resolutions and agreements as official records.

          (i) Borrower will be, and at all times will hold itself out to the public as, a legal entity separate and distinct from any other entity (including any Affiliate of Borrower or any constituent party of Borrower), shall correct any known misunderstanding regarding its status as a separate entity, shall conduct business in its own name, shall not identify itself as a division or part of another or any of its Affiliates as a division or part of itself and shall maintain and utilize separate stationery, invoices and checks bearing its own name.

          (j) Borrower will maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations.

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          (k) Neither Borrower nor any constituent party will seek or effect the liquidation, dissolution, winding up, consolidation or merger, in whole or in part, of Borrower.

          (l) Borrower will not commingle the funds and other assets of Borrower with those of any Affiliate or constituent party or any other Person, and will hold all of its assets in its own name (except as may be provided for in the Management Agreement or any replacement thereof acceptable to Lender) or pursuant to the Manager’s ordinary cash management practices.

          (m) Borrower has and will maintain its assets in such a manner that it will not be costly or difficult to segregate, ascertain or identify its individual assets from those of any Affiliate or constituent party or any other Person.

          (n) Borrower will not guarantee or become obligated for the debts of any other Person and does not and will not hold itself out to be responsible for or have its credit available to satisfy the debts or obligations of any other Person.

          (o) If Borrower is a limited partnership or a limited liability company, (other than a single member limited liability company), each general partner or managing member (each, an “SPC Party”) shall be a corporation or limited liability company whose sole asset is its interest in Borrower and each such SPC Party will at all times comply, and will cause Borrower to comply, with each of the representations, warranties, and covenants contained in this Section 3.1.24 as if such representation, warranty or covenant was made directly by such SPC Party. Upon the withdrawal or the disassociation of an SPC Party from Borrower, Borrower shall immediately appoint a new SPC Party whose articles of incorporation are substantially similar to those of such SPC Party and deliver a new non-consolidation opinion to the Rating Agency or Rating Agencies, as applicable, with respect to the new SPC Party and its equity owners.

          (p) Principal shall at all times cause there to be at least one duly appointed independent manager or member of the board of directors who is provided by a nationally recognized company that provides professional independent directors (each, an “Independent Director”) of each SPC Party and Principal reasonably satisfactory to Lender who shall not have been at the time of such individual’s appointment or at any time while serving as a manager or director of such SPC Party and Principal, and may not have been at any time during the preceding five years (i) a stockholder, director (other than as an Independent Director), officer, employee, partner, attorney or counsel of such SPC Party, Principal or any Affiliate of either of them, (ii) a customer, supplier or other Person who derives any of its purchases or revenues from its activities with such SPC Party, Principal or any Affiliate of either of them, (iii) a Person or other entity controlling or under common control with any such stockholder, partner, customer, supplier or other Person, or (iv) a member of the immediate family of any such stockholder, director, officer, employee, partner, customer, supplier or other Person. (For purposes of this subclause (p), the term “Affiliate” means any person controlling, under common control with, or controlled by the person in question; and the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of management, policies or activities of a person or entity, whether through ownership of voting securities, by contract or otherwise). A natural person who satisfies the foregoing definition other than subparagraph (ii) shall not be disqualified from serving as an Independent Director of Principal or the SPC Party if (a) such individual is an independent manager or director provided by a nationally-recognized company

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that provides professional independent directors in the ordinary course of its business or (b) a natural person who otherwise satisfies the foregoing definition except for being the independent director of a “special purpose entity” affiliated with Borrower that does not own a direct or indirect equity interest in Borrower or any co-Borrower shall not be disqualified from serving as an Independent Director of the SPC Party if such individual is at the time of initial appointment, or at any time while serving as a Independent Director of the SPC Party, an Independent Director of a “special purpose entity” affiliated with the Borrower or the SPC Party (other than any entity that owns a direct or indirect equity interest in borrower or any co-borrower) if such individual is an independent director provided by a nationally-recognized company that provides professional independent directors. A natural person who otherwise satisfies the foregoing definition other than subparagraph (i) by reason of being the independent director of a “special purpose entity” affiliated with the Company or the Member shall not be disqualified from serving as an Independent Manager if such individual is either (i) a Professional Independent Manager or (ii) the fees that such individual earns from serving as independent director of affiliates of the Company in any given year constitute in the aggregate less than five percent (5%) of such individual’s annual income for that year. For purposes of this paragraph, a “special purpose entity” is an entity whose organizational documents contain restrictions on its activities substantially similar to those set forth in the SPC Party’s organizational documents.

          (q) Borrower shall not cause or permit the manager or board of directors of any SPC Party and Borrower to take any action which, under the terms of any certificate of incorporation, by-laws or any voting trust agreement with respect to any common stock or under any organizational document of Borrower or SPC Party, requires a vote of the board of directors of each SPC Party and Principal unless at the time of such action there shall be at least one members who is an Independent Director.

          (r) Borrower shall conduct its business so that the assumptions made with respect to Borrower in the Insolvency Opinion shall be true and correct in all respects. In connection with the foregoing, Borrower hereby covenants and agrees that it will comply with or cause the compliance with, (i) all of the facts and assumptions (whether regarding the Borrower or any other Person) set forth in the Insolvency Opinion, (ii) all the representations, warranties and covenants in this Section 3.1.24, and (iii) all the organizational documents of the Borrower and any SPC Party.

          (s) Borrower will not permit any Affiliate or constituent party independent access to its bank accounts.

          (t) Borrower shall pay the salaries of its own employees (if any) from its own funds and maintain a sufficient number of employees (if any) in light of its contemplated business operations.

          (u) Borrower shall compensate each of its consultants and agents from its funds for services provided to it and pay from its own assets all obligations of any kind incurred.

          (v) Borrower hereby represents and warrants that since the date of its inception:

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     (i) Borrower has not owned any asset or property other than (i) the Property, and (ii) incidental personal property necessary for the ownership or operation of the Property.

     (ii) Borrower has not engaged in any business other than the acquisition, ownership, management and operation of the Property and Borrower has conducted and operated its business as presently conducted and operated.

     (iii) Borrower has not entered into any contract or agreement with any Affiliate of Borrower, any constituent party of Borrower or any Affiliate of any constituent party, except upon terms and conditions that were intrinsically fair and substantially similar to those that would be available on an arms-length basis with third parties other than any such party.

     (iv) Borrower has not incurred any Indebtedness other than (i) the mortgage debt encumbering the Property, (ii) unsecured trade payables and operational debt not evidenced by a note and (iii) Indebtedness incurred in the financing of equipment and other personal property used on the Property.

     (v) Borrower has not made any loans or advances to any third party (including any Affiliate or constituent party), and has not acquired obligations or securities of its Affiliates.

     (vi) Borrower has paid its debts and liabilities (including, as applicable, shared personnel and overhead expenses) from its assets as the same became due.

     (vii) Borrower has done all things necessary to observe organizational formalities and preserve its existence.

     (viii) Borrower has maintained all of its books, records, financial statements and bank accounts separate from those of its Affiliates and any constituent party. Borrower’s assets have not be listed as assets on the financial statement of any other Person. Borrower has filed its own tax returns (to the extent Borrower is required to file any such tax returns) and has not filed a consolidated federal income tax return with any other Person except in a consolidated financial statement of its Affiliates in which Borrower is noted as a separate member of such consolidated group. Borrower has maintained its books, records, resolutions and agreements as official records.

     (ix) Borrower has, at all times held itself out to the public as, a legal entity separate and distinct from any other entity (including any Affiliate of Borrower or any constituent party of Borrower), corrected any known misunderstanding regarding its status as a separate entity, conducted business in its own name, and has not identified itself or any of its Affiliates as a division or part of any other entity and has maintained and utilized separate stationery, invoices and checks bearing its own name.

     (x) Borrower has maintained adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its business operations.

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     (xi) Neither Borrower nor any constituent party has caused the dissolution, winding up, liquidation, consolidation or merger, in whole or in part, of Borrower.

     (xii) Except as permitted under Section 3.1.24(l) above, Borrower has not commingled the funds and other assets of Borrower with those of any Affiliate or constituent party or any other Person, and has held all of its assets in its own name.

     (xiii) Borrower has maintained its assets in such a manner that it will not be costly or difficult to segregate, ascertain or identify its individual assets from those of any Affiliate or constituent party or any other Person.

     (xiv) Borrower has not guaranteed or became obligated for the debts of any other Person and has not held itself out to be responsible for or have its credit available to satisfy the debts or obligations of any other Person.

     (xv) Borrower has not permitted any Affiliate or constituent party independent access to its bank accounts.

     (xvi) Borrower has paid the salaries of its own employees (if any) from its own funds and maintained a sufficient number of employees (if any) in light of its business operations.

     (xvii) Borrower has compensated each of its consultants and agents from its funds for services provided to it and paid from its own assets all obligations of any kind incurred.

          (w) All of the facts stated and all of the assumptions made in the Insolvency Opinion, including, but not limited to, in any exhibits attached thereto, are true and correct in all respects and all facts stated and all assumptions made in any subsequent non-consolidation opinion required to be delivered in connection with the Loan Documents (an “Additional Insolvency Opinion”), including, but not limited to, any exhibits attached thereto, will have been and shall be true and correct in all respects. Borrower has complied and will comply with, and Principal has complied and Borrower will cause Principal to comply with, all of the assumptions made with respect to Borrower and Principal in the Insolvency Opinion. Borrower will have complied and will comply with all of the assumptions made with respect to Borrower and Principal in any Additional Insolvency Opinion. Each entity other than Borrower and Principal with respect to which an assumption shall be made in any Additional Insolvency Opinion will have complied and will comply with all of the assumptions made with respect to it in any Additional Insolvency Opinion.

          3.1.25 Tax Filings. To the extent required, Borrower has filed (or has obtained effective extensions for filing) all federal, state and local tax returns required to be filed and has paid or made adequate provision for the payment of all federal, state and local taxes, charges and assessments payable by Borrower. Borrower believes that its tax returns (if any) properly reflect the income and taxes of Borrower for the periods covered thereby, subject only to reasonable adjustments required by the Internal Revenue Service or other applicable tax authority upon audit.

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          3.1.26 Solvency. Borrower (a) has not entered into the transaction or any Loan Document with the actual intent to hinder, delay, or defraud any creditor and (b) received reasonably equivalent value in exchange for its obligations under the Loan Documents. Giving effect to the Loan, the fair saleable value of Borrower’s assets exceeds and will, immediately following the making of the Loan, exceed Borrower’s total liabilities, including, without limitation, subordinated, unliquidated, disputed and contingent liabilities. The fair saleable value of Borrower’s assets is and will, immediately following the making of the Loan, be greater than Borrower’s probable liabilities, including the maximum amount of its contingent liabilities on its debts as such debts become absolute and matured. Borrower’s assets do not and, immediately following the making of the Loan will not, constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Borrower does not intend to, and does not believe that it will, incur Indebtedness and liabilities (including contingent liabilities and other commitments) beyond its ability to pay such Indebtedness and liabilities as they mature (taking into account the timing and amounts of cash to be received by Borrower and the amounts to be payable on or in respect of obligations of Borrower).

          3.1.27 Federal Reserve Regulations. No part of the proceeds of the Loan will be used for the purpose of purchasing or acquiring any “margin stock” within the meaning of Regulation U of the Board of Governors of the Federal Reserve System or for any other purpose which would be inconsistent with such Regulation U or any other Regulations of such Board of Governors, or for any purposes prohibited by Legal Requirements or by the terms and conditions of this Agreement or the other Loan Documents.

          3.1.28 Organizational Chart.. The organizational chart attached as Schedule III hereto, relating to Borrower and certain Affiliates and other parties, is true, complete and correct on and as of the date hereof.

          3.1.29 Bank Holding Company. Borrower is not a “bank holding company” or a direct or indirect subsidiary of a “bank holding company” as defined in the Bank Holding Company Act of 1956, as amended, and Regulation Y thereunder of the Board of Governors of the Federal Reserve System.

          3.1.30 No Other Debt. Borrower has not borrowed or received debt financing (other than permitted pursuant to this Agreement) that has not been heretofore repaid in full.

          3.1.31 Investment Company Act. Borrower is not (a) an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended; (b) a “holding company” or a “subsidiary company” of a “holding company” or an “affiliate” of either a “holding company” or a “subsidiary company” within the meaning of the Public Utility Holding Company Act of 1935, as amended; or (c) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money.

          3.1.32 Access/Utilities. All public utilities necessary to the continued use and enjoyment of the Property as presently used and enjoyed are located in valid easements or in the public right-of-way abutting the Property. All roads necessary for the full utilization of the Property for its current purpose have been completed and dedicated to public use and accepted

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by all governmental authorities or are the subject of access easements for the benefit of the Property.

          3.1.33 No Bankruptcy Filing. Borrower is not contemplating either the filing of a petition by it under any state or federal bankruptcy or insolvency laws or the liquidation of its assets or property, and Borrower does not have any knowledge of any Person contemplating the filing of any such petition against it.

          3.1.34 Full and Accurate Disclosure. To the best of Borrower’s knowledge, no information contained in this Agreement, the other Loan Documents, or any written statement furnished by or on behalf of Borrower pursuant to the terms of this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. There is no fact or circumstance presently known to Borrower which has not been disclosed to Lender and which will have a Material Adverse Effect.

          3.1.35 Foreign Person. Borrower is not a “foreign person” within the meaning of Section 1445(f)(3) of the Code.

          3.1.36 No Change in Facts or Circumstances; Disclosure. To the best of Borrower’s knowledge, there has been no material adverse change in any condition, fact, circumstance or event that would make the financial statements, rent rolls, reports, certificates or other documents submitted in connection with the Loan inaccurate, incomplete or otherwise misleading in any material respect or that otherwise materially and adversely affects the business operations or the financial condition of Borrower or the Property.

          3.1.37 Management Agreement. All of the representations and warranties with respect to the Management Agreement set forth in Article VII of this Agreement are true and correct in all respects.

          3.1.38 Intentionally Omitted.

          3.1.39 Intentionally Omitted.

          3.1.40 Intentionally Omitted.

          3.1.41 Patriot Act. (a) None of Borrower, any of their respective constituents or Affiliates, and to the best of Borrower’s knowledge, any of their respective brokers or other agents acting or benefiting in any capacity in connection with the Loan is a Prohibited Person.

          (b) None of Borrower, any of their respective constituents or Affiliates, any of their respective brokers or other agents acting in any capacity in connection with the Loan, (i) has conducted or will conduct any business or has engaged or will engage in any transaction or dealing with any Prohibited Person, including making or receiving any contribution of funds, goods or services to or for the benefit of any Prohibited Person, (ii) has dealt or will deal in, or otherwise has engaged or will engage in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order; or (iii) has engaged or will engage in or has conspired or will conspire to engage in any transaction that evades or avoids, or has the purpose

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of evading or avoiding, or attempts to violate, any of the prohibitions set forth in the Executive Order or the Patriot Act.

          (c) Borrower covenants and agrees to deliver to Lender any certification or other evidence reasonably requested from time to time by Lender in its reasonable discretion, confirming Borrower’s compliance with this Section 3.1.41.

          3.1.42 Certificate of Occupancy; Licenses. All material certifications, permits, licenses and approvals, including without limitation, certificates of completion and occupancy permits and any applicable liquor license required for the legal use, occupancy and operation of the Property as a hotel (collectively, the “Licenses”), have been obtained and are in full force and effect. Borrower shall keep and maintain all, or cause to be kept and maintained, Licenses necessary for the operation of the Property as a hotel with related retail uses. The use being made of the Property is in conformity with the certificate of occupancy issued for the Property.

          3.1.43 Franchise Agreement. The Franchise Agreement is in full force and effect and there is no default thereunder by any party thereto and no event has occurred that, with the passage of time and/or giving of notice, would constitute a default thereunder.

          3.1.44 Inventory. Borrower is the owner of all of the Equipment, Fixtures and Personal Property (as such terms are defined in the Mortgage) located on or at the Property, other than such items leased under equipment leases or provided under contracts disclosed to Lender, and shall not lease any Equipment, Fixtures or Personal Property other than as permitted hereunder. All of the Equipment, Fixtures and Personal Property are sufficient to operate the Property in the manner required hereunder and in the manner in which it is currently operated.

          Section 3.2 Survival of Representations. The representations and warranties set forth in Section 3.1 shall survive for so long as any amount remains payable to Lender under this Agreement or any of the other Loan Documents.

          IV. BORROWER COVENANTS

          Section 4.1 Borrower Affirmative Covenants. Borrower hereby covenants and agrees with Lender that:

          4.1.1 Existence; Compliance with Legal Requirements. Borrower shall do or cause to be done all things necessary to preserve, renew and keep in full force and effect its existence, rights, licenses, permits and franchises and comply with all Legal Requirements applicable to it and the Property, other than non-compliance not likely to result in a Material Adverse Effect.

          4.1.2 Taxes, Liens and Other Charges. Borrower shall pay all Taxes and Other Charges now or hereafter levied or assessed or imposed against the Property or any part thereof as the same become due and payable; provided, however, that notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents, Borrower’s obligation to directly pay Taxes and Other Charges shall be suspended for so long as no Event of Default has occurred and is continuing and Borrower complies with the terms and provisions of

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Section 6.2 hereof. Borrower shall furnish to Lender receipts for the payment of the Taxes and the Other Charges prior to the date the same shall become delinquent; provided, however, that so long as no Event of Default has occurred and is continuing, Borrower is not required to furnish such receipts for payment of Taxes and Other Charges in the event that such Taxes and Other Charges have been paid or were to have been paid by Lender pursuant to Section 6.2 hereof. Subject to Borrower’s right to contest such Taxes and Other Charges as hereinafter provided, Borrower shall not permit or suffer and shall promptly discharge any lien for Taxes or Other Charges against the Property (other than liens for Taxes or Other Charges not yet due or payable). After prior notice to Lender, Borrower, at its own expense, and notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents, may contest by appropriate legal proceeding, conducted in good faith and with due diligence, the amount or validity of any Taxes, Liens or Other Charges, provided that (a) no Default or Event of Default has occurred and remains uncured; (b) such proceeding shall be permitted under and be conducted in accordance with all applicable statutes, laws and ordinances; (c) neither the Property nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, canceled or lost; (d) Borrower shall promptly upon final determination thereof pay the amount of any such Taxes, Liens or Other Charges, together with all costs, interest and penalties which may be payable in connection therewith; (e) such proceeding shall suspend the collection of Taxes, Liens or Other Charges from the Property; (f) Borrower shall deposit with Lender cash, or other security as may be approved by Lender, in an amount equal to one hundred twenty percent (120%) of the contested amount (provided, that Borrower shall not be required to deposit any such cash or post security with respect to claims which in the aggregate do not exceed $125,000.00 ), to insure the payment of any such Taxes, Liens or Other Charges, together with all interest and penalties thereon, and (g) such contest by Borrower is not in violation of Leases or Operating Agreements. Lender may pay over any such cash or other security held by Lender to the claimant entitled thereto at any time when, in the judgment of Lender, the entitlement of such claimant is established.

          4.1.3 Litigation. Borrower shall give prompt notice to Lender of any litigation or governmental proceedings pending or threatened against Borrower which if adversely determined would have a Material Adverse Effect.

          4.1.4 Access to Property. Borrower shall permit agents, representatives and employees of Lender to inspect the Property or any part thereof at reasonable hours upon reasonable advance notice not to unreasonably interfere with guests at the Hotel or business operations at the Hotel.

          4.1.5 Further Assurances; Supplemental Mortgage Affidavits. Borrower shall, at Borrower’s sole cost and expense:

          (a) execute and deliver to Lender such documents, instruments, certificates, assignments and other writings, and do such other acts necessary or desirable, to evidence, preserve and/or protect the collateral at any time securing or intended to secure the obligations of Borrower under the Loan Documents, as Lender may reasonably require, provided the same do not increase in a material manner Borrower’s obligations or decrease in a material manner Borrower’s rights under this Agreement and the other Loan Documents; and

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          (b) execute and deliver to Lender such documents, instruments, certificates, assignments and other writings, and do such other acts necessary or desirable, to evidence, preserve and/or protect the collateral at any time securing or intended to secure the obligations of Borrower under the Loan Documents, as Lender may reasonably require including, without limitation, and to extent permitted by law the execution and delivery of all such writings necessary to transfer any liquor licenses with respect to the Property into the name of Lender or its designee after the occurrence of an Event of Default, provided the same do not increase in a material manner Borrower’s obligations or decrease in a material manner Borrower’s rights under this Agreement and the other Loan Documents.

          4.1.6 Financial Reporting.

          (a) GAAP. Borrower shall keep and maintain or shall cause to be kept and maintained, in accordance with the Uniform System of Accounts and reconciled in accordance with GAAP, proper and accurate books, records and accounts reflecting all of the financial affairs of Borrower and all items of income and expense in connection with the operation on an individual basis of the Property. All financial statements delivered to Lender in accordance with this Section 4.1.6 shall be prepared in accordance with the Uniform System of Accounts and reconciled in accordance with GAAP in the United States of America as in effect on the date so indicated and consistently applied (or such other accounting basis reasonably acceptable for Lender).

          (b) Monthly Reports. Prior to a Securitization, within thirty (30) days after the end of each calendar month, Borrower shall furnish to Lender a current (as of the calendar month just ended), a detailed operating statement (showing monthly activity and year-to-date) stating Gross Income from Operations, Operating Expenses and Net Cash Flow for the calendar month just ended, a report of occupancy for the subject month including an average daily rate, and, as requested by Lender, a written statement setting forth any variance from the Annual Budget and other documentation supporting the information disclosed in the most recent financial statements. In addition, such statement shall also be accompanied by (i) a calculation reflecting the Debt Service Coverage Ratio as of the last day of such month and (ii) a certificate of the chief financial officer (or such other officer acceptable to Lender) of Borrower or the general partner of Borrower stating that the representations and warranties of Borrower set forth in Section 3.1.24 are true and correct as of the date of such certificate and that, other than amounts in dispute to the extent permitted under Section 3.1.24(d), there are no trade payables outstanding for more than sixty (60) days.

          (c) Quarterly Reports. Within forty-five (45) days after the end of each calendar quarter, Borrower shall furnish to Lender a detailed operating statement (showing quarterly activity and year-to-date) stating Gross Income from Operations, Operating Expenses, Net Cash Flow, and capital expenditures for the calendar quarter just ended. Borrower’s quarterly statements shall be accompanied by (i) a comparison of the budgeted income and expenses and the actual income and expenses for the corresponding calendar quarter on in the immediately prior calendar year, (ii) a calculation reflecting the Debt Service Coverage Ratio as of the last day of such quarter; (iii) if there are then Major Leases, a current rent roll for the Property; and (iv) a certificate executed by the chief financial officer (or such other officer acceptable to Lender of Borrower or the general partner of Borrower stating that each such

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quarterly statement presents fairly the financial condition and the results of operations of the Borrower and the Property and has been prepared in accordance with GAAP.

          (d) Annual Reports. Within ninety (90) days after the end of each calendar year of Borrower’s operation of the Property, Borrower will furnish to Lender a complete copy of Borrower’s annual financial statements audited or if not audited accompanied by an Agreed-Upon-Procedures report prepared by a “big four” accounting firm or other independent certified public accountant reasonably acceptable to Lender in accordance with the Uniform System of Accounts and reconciled in accordance with GAAP for such calendar year which financial statements shall contain, if audited, a balance sheet, a detailed operating statement stating Gross Income from Operations, Operating Expenses and Net Cash Flow for each of Borrower and the Property. Borrower’s annual financial statements shall be accompanied by (i) a comparison of the budgeted income and expenses and the actual income and expenses for the prior calendar year, (ii) a certificate executed by the chief financial officer of Borrower or the general partner of Borrower stating that each such annual financial statement presents fairly the financial condition and the results of operations of Borrower and the Property and has been prepared in accordance with GAAP, and (iii) with respect to any audited annual financial statement an unqualified opinion of a “big four” accounting firm or other independent certified public accountant reasonably acceptable to Lender.

          (e) Certification; Supporting Documentation. Each such financial statement shall be in scope and detail reasonably satisfactory to Lender and certified by the chief financial representative of Borrower.

          (f) Additional Reports. Borrower shall deliver to Lender as soon as reasonably available but in no event later than thirty (30) days after such items become available to Borrower in final form:

     (i) copies of any final engineering or environmental reports prepared for Borrower with respect to the Property;

     (ii) a copy of any written notice received by Borrower from any environmental authority having jurisdiction over the Property with respect to a condition existing or alleged to exist or emanate from or at the Property;

     (iii) the most current Smith Travel Research Reports then available to Borrower reflecting market penetration and relevant hotel properties competing with the Property;

     (iv) if requested by Lender, a summary report listing only Tenants under Major Leases and the square footage occupied by such Tenants; and

     (v) any and all franchise inspection reports.

          (g) Access. Lender shall have the right from time to time at all times during normal business hours and upon reasonable prior notice upon reasonable notice (provided no Event of Default has occurred and is continuing) to examine such books, records and accounts at the office of Borrower or other Person maintaining such books, records and accounts and to

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make such copies or extracts thereof as Lender shall desire; provided however, so long as no Event of Default has occurred or is continuing, Lender’s right shall not unreasonably interfere with guests at the Hotel or business operations at the Hotel. Borrower shall pay any costs and expenses incurred by Lender to examine Borrower’s accounting records with respect to the Property, as Lender shall determine to be necessary or appropriate in the protection of Lender’s interest.

          (h) Format of Delivery. Any reports, statements or other information required to be delivered under this Agreement shall be delivered (i) in paper form (or other electronic format acceptable to Lender), (ii) on a diskette, and (iii) if requested by Lender and within the capabilities of Borrower’s data systems without change or modification thereto, in electronic format reasonably acceptable to Lender.

          (i) Annual Budget. Borrower shall submit (i) a preliminary version of the Annual Budget to Lender not later than fifteen (15) days prior to the commencement of each Fiscal Year and (ii) the Annual Budget to Lender no later than thirty-one (31) days after the commencement of the Fiscal Year.

          (j) Other Required Information. Borrower shall furnish to Lender, within five (5) Business Days after request (or as soon thereafter as may be reasonably possible), such further detailed information with respect to the operation of the Property and the financial affairs of Borrower as may be reasonably requested by Lender, including, without limitation, a comparison of the budgeted income and expenses and the actual income and expenses for a quarter and year to date for the Property, together with a detailed explanation of any variances of more than five percent (5%) between budgeted and actual amounts for such period and year to date.

          4.1.7 Title to the Property. Borrower will warrant and defend the validity and priority of the Liens of the Mortgage and the Assignment of Leases on the Property against the claims of all Persons whomsoever, subject only to Permitted Encumbrances.

          4.1.8 Estoppel Statement. (a) After request by Lender, Borrower shall within five (5) Business Days furnish Lender with a statement, duly acknowledged and certified, stating (i) the unpaid principal amount of the Note, (ii) the Applicable Interest Rate of the Note, (iii) the date installments of interest and/or principal were last paid, (iv) any offsets or defenses to the payment of the Debt, if any, and (v) that this Agreement and the other Loan Documents have not been modified or if modified, giving particulars of such modification.

          (b) Borrower shall deliver to Lender, within thirty (30) days after request, an estoppel certificate from each Tenant under any Major Lease (provided that Borrower shall only be required to use commercially reasonable efforts to obtain an estoppel certificate from any Tenant not required to provide an estoppel certificate under its Lease); provided that such certificate may be in the form required under such Lease; provided further that Borrower shall not be required to deliver such certificates more frequently than two (2) times in any calendar year.

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          4.1.9 Leases. (a) All Major Leases shall in all respects be approved by Lender and shall be on a standard Lease form previously approved by Lender with no modifications (except as approved by Lender). Such Lease form shall provide that (i) the Major Lease is subordinate to the Mortgage, (ii) the tenant shall attorn to Lender, and (iii) that any cancellation, surrender, or amendment of such Major Lease without the prior written consent of Lender shall be voidable by Lender. Borrower shall hold, in trust, all tenant security deposits in a segregated account, and, to the extent required by applicable law, shall not commingle any such funds with any other funds of Borrower. Within ten (10) days after Lender’s request, Borrower shall furnish to Lender a statement of all tenant security deposits, and copies of all Major Leases not previously delivered to Lender, certified by Borrower as being true and correct. Notwithstanding anything contained in the Loan Documents, Lender’s approval shall not be required for future Leases or Lease extensions if the following conditions are satisfied: (A) there exists no Default or Event of Default; (B) the Lease does not conflict with any restrictive covenant affecting the Property or any other Lease for space in the Property; and (C) if the Lease is not a Major Lease. Lender shall execute and deliver a Subordination Non-Disturbance and Attornment Agreement in the form annexed hereto as Schedule IV to Tenants under future Major Leases approved by Lender promptly upon request with such commercially reasonable changes as may be requested by Tenants, from time to time, and which are reasonably acceptable to Lender.

          (b) Borrower (i) shall perform in all material respects the obligations which Borrower is required to perform under the Leases; (ii) shall enforce in all material respects the obligations to be performed by the tenants; (iii) shall promptly furnish to Lender any notice of default or termination received by Borrower from any tenant, and any notice of default or termination given by Borrower to any tenant; (iv) shall not collect any rents for more than thirty (30) days in advance of the time when the same shall become due, except for bona fide security deposits not in excess of an amount equal to two months rent; (v) shall not enter into any ground Lease or master Lease of any part of the Property; (vi) shall not further assign or encumber any Lease; (vii) shall not, except with Lender’s prior written consent, cancel or accept surrender or termination of any Major Lease; and (viii) shall not, except with Lender’s prior written consent, modify or amend any Major Lease (except for minor modifications and amendments entered into in the ordinary course of business, consistent with prudent property management practices, not affecting the economic terms of the Lease). Any action in violation of clauses (v), (vi), (vii), and (viii) of this Section 4.1.9(b) shall be void at the election of Lender.

          4.1.10 Alterations. Lender’s prior approval shall be required in connection with any alterations to any Improvements (except the (i) PIP Repairs (other than as provided in Section 6.4) and (ii) tenant improvements under any Lease approved by Lender or under any Lease for which approval was not required by Lender under this Agreement, with respect to each of which Lender’s approval shall not be required) adversely affecting structural components of the Property, utilities, HVAC or the exterior of the building (a) that would have a Material Adverse Effect on Borrower’s financial condition, the value of the Property or the ongoing revenues and expenses of the Property or (b) the cost of which (including any related alteration, improvement or replacement) is reasonably anticipated to exceed the Alteration Threshold, which approval may be granted or withheld in Lender’s sole discretion. Lender shall not unreasonably withhold consent to any Alteration required pursuant to any future Product Improvement Plan imposed pursuant to the Franchise Agreement then in effect. If the total unpaid amounts incurred and to be incurred with respect to any alteration to the Improvements

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for which Lender’s consent is required, shall at any time exceed the Alteration Threshold, Borrower shall promptly deliver to Lender as security for the payment of such amounts and as additional security for Borrower’s obligations under the Loan Documents any of the following: (i) cash, (ii) Letters of Credit (iii) U.S. Obligations, (iv) other securities acceptable to Lender, provided that Lender shall have received a Rating Agency Confirmation as to the form and issuer of same, or (v) a completion bond, provided that Lender shall have received a Rating Agency Confirmation as to the form and issuer of same. Such security shall be in an amount equal to the excess of the total unpaid amounts incurred and to be incurred with respect to such alterations to the Improvements (other than such amounts to be paid or reimbursed by Tenants under the Leases) over the Alteration Threshold. Any security delivered to Lender in connection with alterations which are required to be performed pursuant to a Property Improvement Plan, shall be disbursed by Lender to Borrower in accordance with the terms and provisions of Section 6.4 hereof.

          4.1.11 Material Agreements. Borrower shall (a) promptly perform and/or observe all of the material covenants and agreements required to be performed and observed by it under each Material Agreement and Operating Agreement to which it is a party, and do all things necessary to preserve and to keep unimpaired its rights thereunder, to the extent that failure to do so would likely result in a Material Adverse Effect, (b) promptly notify Lender in writing of the giving of any notice of any material default by any party under any Material Agreement and Operating Agreement of which it is aware and (c) promptly enforce the performance and observance of all of the material covenants and agreements required to be performed and/or observed by the other party under each Material Agreement and Operating Agreement to which it is a party in a commercially reasonable manner.

          4.1.12 Performance by Borrower. Borrower shall in a timely manner observe, perform and fulfill each and every covenant, term and provision of each Loan Document executed and delivered by Borrower, and shall not enter into or otherwise suffer or permit any amendment, waiver, supplement, termination or other modification of any Loan Document executed and delivered by Borrower without the prior consent of Lender.

          4.1.13 Costs of Enforcement/Remedying Defaults. In the event (a) that the Mortgage is foreclosed in whole or in part or the Note or any other Loan Document is put into the hands of an attorney for collection, suit, action or foreclosure, (b) of the foreclosure of any Lien or Mortgage prior to or subsequent to the Mortgage in which proceeding Lender is made a party, (c) of the bankruptcy, insolvency, rehabilitation or other similar proceeding in respect of Borrower or Guarantor or an assignment by Borrower or Guarantor for the benefit of its creditors, or (d) Lender shall remedy or attempt to remedy any Event of Default hereunder, Borrower shall be chargeable with and agrees to pay all costs incurred by Lender as a result thereof, including costs of collection and defense (including reasonable attorneys’, experts’, consultants’ and witnesses’ fees and disbursements) in connection therewith and in connection with any appellate proceeding or post-judgment action involved therein, which shall be due and payable on demand, together with interest thereon from the date incurred by Lender at the Default Rate, and together with all required service or use taxes.

          4.1.14 Business and Operations. Borrower will engage in the business as and to the extent the same are necessary for the ownership, maintenance, operation and leasing

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(including, without limitation, alterations and renovations) and leasing of the Property. Borrower will qualify to do business and will remain in good standing under the laws of each jurisdiction as and to the extent the same are required for the ownership and leasing of the related Property. Borrower shall at all times cause the Property to be maintained as a first-class hotel.

          4.1.15 Loan Fees. Borrower shall pay all fees and costs (including, without limitation, all origination and commitment fees) required of Borrower pursuant to the terms of that certain application letter between Interstate Hotels & Resorts and Lender dated September 21, 2006.

          4.1.16 Intentionally Omitted.

          4.1.17 Handicapped Access. (a) Borrower covenants and agrees that the Property shall at all times strictly comply to the extent applicable with the requirements of the Americans with Disabilities Act of 1990, the Fair Housing Amendments Act of 1988, all state and local laws and ordinances related to handicapped access and all rules, regulations, and orders issued pursuant thereto including, without limitation, the Americans with Disabilities Act Accessibility Guidelines for Buildings and Facilities (collectively, “Access Laws”).

          (b) Notwithstanding any provisions set forth herein or in any other document regarding Lender’s approval of alterations of the Property, Borrower shall not alter the Property in any manner which would increase Borrower’s responsibilities for compliance with the applicable Access Laws without the prior written approval of Lender. The foregoing shall apply to tenant improvements constructed by Borrower or by any of its tenants, but shall not apply to the PIP Repairs. Lender may condition any such approval upon receipt of a certificate of Access Law compliance from an architect, engineer, or other person acceptable to Lender.

          (c) Borrower covenants and agrees to give prompt notice to Lender of the receipt by Borrower of any written complaints related to violation of any Access Laws and of the commencement of any proceedings or investigations which relate to compliance with applicable Access Laws.

          4.1.18 Certain Hotel/Franchise Covenants. Borrower further covenants and agrees with Lender as follows:

          (a) Borrower shall cause the hotel located on the Property to be operated pursuant to the Franchise Agreement and the Management Agreement.

          (b) Borrower shall:

     (i) promptly perform and/or observe all of the covenants and agreements required to be performed and observed by it under the Franchise Agreement and the Management Agreement and do all things necessary to preserve and to keep unimpaired its rights thereunder;

     (ii) promptly notify Lender of any default under the Franchise Agreement or the Management Agreement of which it is aware;

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     (iii) promptly deliver to Lender a copy of each financial statement, business plan, capital expenditures plan, notice, report and estimate received by Borrower under the Franchise Agreement or the Management Agreement; and

     (iv) promptly enforce the performance and observance of all of the covenants and agreements required to be performed and/or observed by the franchisor under the Franchise Agreement and the manager under the Management Agreement.

          (c) Borrower shall not, without Lender’s prior consent:

     (i) surrender, terminate or cancel the Franchise Agreement or the Management Agreement which consent shall not be unreasonably withheld, provided that Borrower enters into a Replacement Franchise Agreement with a Qualified Franchisor;

     (ii) reduce or consent to the reduction of the term of the Franchise Agreement or the Management Agreement;

     (iii) increase or consent to the increase of the amount of any charges under the Franchise Agreement or the Management Agreement except pursuant to the provisions thereof; or

     (iv) otherwise modify, change, supplement, alter or amend, or waive or release any of its rights and remedies under, the Franchise Agreement or the Management Agreement in any material respect.

          (d) Borrower shall not, without Lender’s prior consent, enter into transactions with any Affiliate, including without limitation any arrangement providing for the managing of the hotel on the Property, the rendering or receipt of services or the purchase or sale of inventory, except any such transaction in the ordinary course of business of Borrower if the monetary or business consideration arising therefrom would be substantially as advantageous to Borrower as the monetary or business consideration that would obtain in a comparable transaction with a person not an affiliate of Borrower.

          (e) Borrower shall maintain the Management Agreement for the operation of the Property in full force and effect and timely perform all of Borrower’s obligations thereunder and enforce performance of all obligations of the Manager. Borrower is simultaneously herewith entering into and causing the Manager to enter into an assignment and subordination of such Management Agreement in form satisfactory to Lender, assigning and subordinating the manager’s interest in the Property and all fees and other rights of the Manager pursuant to such Management Agreement to the rights of Lender.

          (f) Following the occurrence and during the continuance of an Event of Default, Borrower shall not exercise any rights, make any decisions, grant any approvals or otherwise take any action under the Management Agreement or the Franchise Agreement without the prior written consent of Lender, which consent may be granted, conditioned or withheld in Lender’s sole discretion.

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          4.1.19 Notice of Certain Events. Borrower shall promptly notify Lender of (a) any Default or Event of Default, together with a detailed statement of the steps being taken to cure such Default or Event of Default; (b) any notice of default received by Borrower under other obligations relating to the Property or otherwise material to Borrower’s business (which is likely to result in a Material Adverse Effect); and (c) any legal, judicial or regulatory proceedings pending or to the extent the same is likely to result in a Material Adverse Effect, threatened in writing, including any dispute between Borrower and any Governmental Authority, affecting Borrower or the Property.

          4.1.20 Further Assurances. Borrower shall promptly (a) cure any defects in the execution and delivery of the Loan Documents, and (b) execute and deliver, or cause to be executed and delivered, all such other documents, agreements and instruments as Lender may reasonably request to further evidence and more fully describe the collateral for the Loan, to correct any omissions in the Loan Documents, to perfect, protect or preserve any Liens created under any of the Loan Documents, or to make any recordings, file any notices, or obtain any consents, as may be necessary or appropriate in connection therewith, so long as Borrower’s obligations under this Agreement and the other Loan Documents are not increased in a material manner thereby and Borrower’s rights under this Agreement and the other Loan Documents are not decreased in a material manner thereby. From and after the occurrence of and during the continuance of an Event of Default, Borrower grants Lender an irrevocable power of attorney coupled with an interest for the purpose of exercising and perfecting any and all rights and remedies available to Lender under the Loan Documents, at law and in equity, including without limitation such rights and remedies available to Lender pursuant to Sections 10.2, 10.3, and 10.4.

          4.1.21 Taxes on Security. Borrower shall pay all taxes, charges, filing, registration and recording fees, excises and levies payable with respect to the Note or the Liens created or secured by the Loan Documents, other than income, franchise and doing business taxes imposed on Lender. If there shall be enacted any law (a) deducting the Loan from the value of the Property for the purpose of taxation, (b) affecting any Lien on the Property, or (c) changing existing laws of taxation of mortgages, deeds of trust, security deeds, or debts secured by real property, or changing the manner of collecting any such taxes, Borrower shall promptly pay to Lender, on demand, all taxes, costs and charges for which Lender is or may be liable as a result thereof; however, if such payment would be prohibited by law or would render the Loan usurious, then instead of collecting such payment, Lender may declare all amounts owing under the Loan Documents to be immediately due and payable.

          4.1.22 Principal Place of Business, State of Organization. Borrower will not cause or permit any change to be made in its name, identity (including its trade name or names), place of organization or formation (as set forth in Section 3.1.1 hereof) of Borrower’s corporate, partnership or other structure unless Borrower shall have first notified Lender in writing of such change at least thirty (30) days prior to the effective date of such change, and shall have first taken all action required by Lender for the purpose of perfecting or protecting the lien and security interests of Lender pursuant to this Agreement, and the other Loan Documents and, in the case of a change in Borrower’s structure, but subject to the provisions of Article VIII hereof, without first obtaining the prior consent of Lender. Upon Lender’s request, Borrower shall execute and deliver additional financing statements, security agreements and other instruments which may be necessary to effectively evidence or perfect Lender’s security interest in the

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Property as a result of such change of principal place of business or place of organization. Borrower’s principal place of business and chief executive office, and the place where Borrower keeps its books and records, including recorded data of any kind or nature, regardless of the medium or recording, including software, writings, plans, specifications and schematics, has been for the preceding four months (or, if less, the entire period of the existence of Borrower) and will continue to be the address of Borrower set forth at the introductory paragraph of this Agreement (unless Borrower notifies Lender in writing at least thirty (30) days prior to the date of such change). Borrower’s organizational identification number, if any, assigned by the state of incorporation or organization is correctly set forth in the introductory paragraph of this Agreement. Borrower shall promptly notify Lender of any change in its organizational identification number. If Borrower does not now have an organizational identification number and later obtains one, Borrower promptly shall notify Lender of such organizational identification number. At the request of Lender, Borrower shall execute a certificate in form satisfactory to Lender listing the trade names under which Borrower intends to operate the Property, and representing and warranting that Borrower does business under no other trade name with respect to the Property.

          4.1.23 No Plan Assets. As of the date hereof and throughout the term of the Loan (a) Borrower is not and will not be an “employee benefit plan,” as defined in Section 3(3) of ERISA, subject to Title I of ERISA, (b) none of the assets of Borrower constitutes or will constitute “plan assets” of one or more such plans within the meaning of 29 C.F.R. Section 2510.3-101, (c) Borrower is not and will not be a “governmental plan” within the meaning of Section 3(32) of ERISA, and (d) transactions by or with Borrower are not and will not be subject to any state statute regulating investments of, or fiduciary obligations with respect to, governmental plans.

          4.1.24 Compliance. Borrower and the Property and the use thereof comply in all material respects with all applicable Legal Requirements, including, without limitation, building and zoning ordinances and codes. Borrower is not in default or violation of any order, writ, injunction, decree or demand of any Governmental Authority, the violation of which would have a Material Adverse Effect. There has not been and shall never be committed by Borrower or any other person in occupancy of or involved with the operation or use of the Property any act or omission affording the federal government or any state or local government the right of forfeiture as against the Property or any part thereof or any monies paid in performance of Borrower’s obligations under any of the Loan Documents. Borrower hereby covenants and agrees not to commit, permit or suffer to exist any act or omission affording such right of forfeiture.

          Section 4.2 Borrower Negative Covenants. Borrower covenants and agrees with Lender that:

          4.2.1 Liens. Subject to Section 4.1.2 above, Borrower shall not create, incur, assume or suffer to exist any Lien on any portion of the Property except for Permitted Encumbrances.

          4.2.2 Dissolution. Borrower shall not (a) engage in any dissolution, liquidation or consolidation or merger with or into any other business entity, (b) engage in any business activity not related to the ownership, maintenance, operation and leasing (including without

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limitation alterations and renovations) of the Property, (c) transfer, lease or sell, in one transaction or any combination of transactions, all or substantially all of the property or assets of Borrower except to the extent expressly permitted by the Loan Documents, or (d) cause, permit or suffer any SPC Party to (i) dissolve, wind up or liquidate or take any action, or omit to take an action, as a result of which such SPC Party would be dissolved, wound up or liquidated in whole or in part, or (ii) amend, modify, waive or terminate the certificate of incorporation or bylaws of such SPC Party, in each case without obtaining the prior consent of Lender.

          4.2.3 Change in Business. Borrower shall not enter into any line of business other than the ownership, maintenance, operation and leasing (including without limitation alterations and renovations) of the Property.

          4.2.4 Debt Cancellation. Borrower shall not cancel or otherwise forgive or release any claim or debt (other than termination of Leases in accordance herewith) owed to Borrower by any Person, except for adequate consideration and in the ordinary course of Borrower’s business.

          4.2.5 Affiliate Transactions. Borrower shall not enter into, or be a party to, any transaction with an Affiliate of Borrower or any of the partners of Borrower except in the ordinary course of business and on terms which are fully disclosed to Lender in advance and are no less favorable to Borrower or such Affiliate than would be obtained in a comparable arm’s-length transaction with an unrelated third party.

          4.2.6 Zoning. Borrower shall not initiate or consent to any zoning reclassification of any portion of the Property or seek any variance under any existing zoning ordinance or use or permit the use of any portion of the Property in any manner that could result in such use becoming a non-conforming use under any zoning ordinance or any other applicable land use law, rule or regulation, without the prior written consent of Lender.

          4.2.7 Assets. Borrower shall not purchase or own any property other than the Property and any property necessary or incidental for the operation of the Property.

          4.2.8 No Joint Assessment. Borrower shall not suffer, permit or initiate the joint assessment of the Property (a) with any other real property constituting a tax lot separate from the Property, and (b) with any portion of the Property which may be deemed to constitute personal property, or any other procedure whereby the lien of any taxes which may be levied against such personal property shall be assessed or levied or charged to the Property.

          4.2.9 Intentionally Omitted.

          4.2.10 ERISA. (a) Borrower shall not engage in any transaction which would cause any obligation, or action taken or to be taken, hereunder (or the exercise by Lender of any of its rights under the Note, this Agreement or the other Loan Documents) to be a non-exempt (under a statutory or administrative class exemption) prohibited transaction under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

          (b) Borrower shall deliver to Lender such certifications or other evidence from time to time throughout the term of the Loan, as requested by Lender in its sole discretion,

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that (i) Borrower is not an “employee benefit plan” as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, or a “governmental plan” within the meaning of Section 3(32) of ERISA; (ii) Borrower is not subject to any state statute regulating investments of, or fiduciary obligations with respect to, governmental plans; and (iii) one or more of the following circumstances is true:

          (A) Equity interests in Borrower are publicly offered securities, within the meaning of 29 C.F.R. §2510.3-101(b)(2);

          (B) Less than twenty-five percent (25%) of each outstanding class of equity interests in Borrower is held by “benefit plan investors” within the meaning of 29 C.F.R. §2510.3-101(f)(2); or

          (C) Borrower qualifies as an “operating company” or a “real estate operating company” within the meaning of 29 C.F.R. §2510.3-101(c) or (e).

          4.2.11 Material Agreements. Borrower shall not, without Lender’s prior written consent: (a) enter into, surrender or terminate any Material Agreement or Operating Agreement to which it is a party (unless the other party thereto is in material default and the termination of such agreement would be commercially reasonable), (b) increase or consent to the increase of the amount of any charges under any Material Agreement or Operating Agreement to which it is a party, except as provided therein or on an arm’s-length basis and commercially reasonable terms; or (c) otherwise modify, change, supplement, alter or amend, or waive or release any of its rights and remedies under any Material Agreement or Operating Agreement to which it is a party in any material respect, except on an arms’-length basis and commercially reasonable terms.

          V. INSURANCE, CASUALTY AND CONDEMNATION

          Section 5.1 Insurance.

          5.1.1 Insurance Policies. (a) Borrower shall obtain and maintain, or cause to be maintained, insurance for Borrower and the Property providing at least the following coverages:

     (i) comprehensive all risk insurance on the Improvements and the personal property at the Property (A) in an amount equal to one hundred percent (100%) of the “Full Replacement Cost,” which for purposes of this Agreement shall mean actual replacement value (exclusive of costs of excavations, foundations, underground utilities and footings) with a waiver of depreciation, but the amount shall in no event be less than the outstanding principal balance of the Loan; (B) containing an agreed amount endorsement with respect to the Improvements and personal property at the Property waiving all co-insurance provisions; (C) providing for no deductible in excess of One Hundred Thousand and No/100 Dollars ($100,000) for any one loss except for perils of flood ,earthquake and windstorm which deductible shall not exceed 5% of the insurable value per loss for all such insurance coverage; and (D) containing an “Ordinance or Law Coverage” or “Enforcement” endorsement if any of the Improvements or the use of the Property shall at any time constitute legal non-conforming structures or uses. In addition,

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Borrower shall obtain: (y) if any portion of the Improvements is currently or at any time in the future located in a federally designated “special flood hazard area”, flood hazard insurance in an amount equal to the lesser of (1) the outstanding principal balance of the Note or (2) the maximum amount of such insurance available under the National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 or the National Flood Insurance Reform Act of 1994, as each may be amended or such greater amount as Lender shall require; and (z) earthquake insurance in amounts sufficient to cover the total insured value of the hotel, which includes replacement costs and business interruption proceeds and in form and substance satisfactory to Lender in the event the Property is located in an area with a high degree of seismic activity, provided that the insurance pursuant to clauses (y) and (z) hereof shall be on terms consistent with the comprehensive all risk insurance policy required under this subsection (i).

     (ii) commercial general liability insurance against claims for personal injury, bodily injury, death or property damage occurring upon, in or about the Property, such insurance (A) to be on the so-called “occurrence” form with an occurrence limit of not less than One Million and No/100 Dollars ($1,000,000) and an aggregate limit of not less than Two Million and No/100 Dollars ($2,000,000); (B) to continue at not less than the aforesaid limit until required to be changed by Lender by reason of changed economic conditions making such protection inadequate; and (C) to cover at least the following hazards: (1) premises and operations; (2) products and completed operations on an “if any” basis; and (3) blanket contractual liability for all legal contracts subject to policy terms and conditions;

     (iii) business income insurance (A) with loss payable to Lender; (B) covering all risks required to be covered by the insurance provided for in subsection (i) above for a period commencing at the time of loss for such length of time as it takes to repair or replace with the exercise of due diligence and dispatch; (C) containing an extended period of indemnity endorsement which provides that after the physical loss to the Improvements and Personal Property has been repaired, the continued loss of income will be insured until such income either returns to the same level it was at prior to the loss, or the expiration of twelve (12) months from the date that the Property is repaired or replaced and operations are resumed, whichever first occurs, and notwithstanding that the policy may expire prior to the end of such period; and (D) in an amount equal to one hundred percent (100%) of the projected gross income from the Property for a period from the date of loss to a date (assuming total destruction) which is six (6) months from the date that the Property is repaired or replaced and operations are resumed. The amount of such business income insurance shall be determined prior to the date hereof and at least once each year thereafter based on Borrower’s reasonable estimate of the gross income from the Property for the succeeding eighteen (18) month period. All proceeds payable to Lender pursuant to this subsection shall be held by Lender and shall be applied to the obligations secured by the Loan Documents from time to time due and payable hereunder and under the Note; provided, however, that nothing herein contained shall be deemed to relieve Borrower of its obligations to pay the obligations secured by the Loan Documents on the respective dates of payment provided for in the Note and the other Loan Documents except to the extent such amounts are actually paid out of the proceeds of such business income insurance;

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     (iv) at all times during which structural construction, repairs or alterations are being made with respect to the Improvements, and only if the Property coverage form does not otherwise apply, (A) owner’s contingent or protective liability insurance covering claims not covered by or under the terms or provisions of the above mentioned commercial general liability insurance policy; and (B) the insurance provided for in subsection (i) above written in a so-called builder’s risk completed value form (1) on a non-reporting basis, (2) against all risks insured against pursuant to subsection (i) above, (3) including permission to occupy the Property, and (4) with an agreed amount endorsement waiving co-insurance provisions;

     (v) workers’ compensation, subject to the statutory limits of the state in which the Property is located, and employer’s liability insurance with a limit of at least One Million and No/100 Dollars ($1,000,000.00) per accident and per disease per employee, and One Million and No/100 Dollars ($1,000,000.00) for disease aggregate in respect of any work or operations on or about the Property, or in connection with the Property or its operation (if applicable);

     (vi) comprehensive boiler and machinery insurance, if applicable, in amounts as shall be reasonably required by Lender on terms consistent with the commercial property insurance policy required under subsection (i) above;

     (vii) umbrella liability insurance in addition to primary coverage in an amount not less than Thirty Million and No/100 Dollars ($30,000,000.00) per occurrence on terms consistent with the commercial general liability insurance policy required under subsection (ii) above and (viii) below;

     (viii) motor vehicle liability coverage for all owned and non-owned vehicles, including rented and leased vehicles containing minimum limits per occurrence of One Million and No/100 Dollars ($1,000,000.00);

     (ix) so-called “dramshop” insurance or other liability insurance required in connection with the sale of alcoholic beverages;

     (x) insurance against employee dishonesty in an amount not less than one (1) month of Gross Income From Operations from the Property and with a deductible not greater than Five Hundred Thousand and No/100 Dollars ($500,000.00);

     (xi) the insurance required under this Section 5.1.1(a) shall cover perils of terrorism and acts of terrorism and Borrower shall maintain insurance for loss resulting from perils and acts of terrorism on terms (including amounts) consistent with those required under this Section 5.1.1(a) at all times during the term of the Loan; and

     (xii) upon sixty (60) days’ notice, such other reasonable insurance and in such reasonable amounts as Lender from time to time may reasonably request against such other insurable hazards which at the time are commonly insured against for property similar to the Property located in or around the region in which the Property is located.

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          (b) All insurance provided for in Section 5.1.1(a) shall be obtained under valid and enforceable policies (collectively, the “Policies” or in the singular, the “Policy”) and, to the extent not specified above, shall be subject to the reasonable approval of Lender as to deductibles, loss payees and insureds. Prior to the expiration dates of the Policies theretofore furnished to Lender, certificates of insurance evidencing the Policies and upon request accompanied by evidence satisfactory to Lender of payment of the premiums then due thereunder (the “Insurance Premiums”), shall be delivered by Borrower to Lender.

          (c) Any blanket insurance Policy shall specifically otherwise provide coverage in amount and scope as would a separate Policy insuring only the Property in compliance with the provisions of Section 5.1.1(a).

          (d) All Policies of insurance provided for or contemplated by Section 5.1.1(a) shall be primary coverage and, except for the Policy referenced in Section 5.1.1(a)(v), shall name Borrower as the insured and Lender and its successors and/or assigns as the additional insured, as its interests may appear, and in the case of property damage, boiler and machinery, flood, earthquake and terrorism insurance, shall contain a so-called New York standard non-contributing mortgagee clause in favor of Lender providing that the loss thereunder shall be payable to Lender. Borrower shall not procure or permit any of its constituent entities to procure any other insurance coverage which would be on the same level of payment as the Policies or would adversely impact in any way the ability of Lender or Borrower to collect any proceeds under any of the Policies.

          (e) All Policies of insurance provided for in Section 5.1.1(a), except for the Policies referenced in Section 5.1.1(a)(v) and (a)(viii) shall contain clauses or endorsements to the effect that:

     (i) no act or negligence of Borrower, or anyone acting for Borrower, or of any Tenant or other occupant, or failure to comply with the provisions of any Policy, which might otherwise result in a forfeiture of the insurance or any part thereof, shall in any way affect the validity or enforceability of the insurance insofar as Lender is concerned;

     (ii) the Policy shall not be canceled or permitted to lapse without at least thirty (30) days’ written notice to Borrower or Borrower’s Affiliate. Borrower or Borrower’s Affiliate will in turn promptly provide notice of same to Lender; and

     (iii) Lender shall not be liable for any Insurance Premiums thereon or subject to any assessments thereunder.

          (f) If at any time Lender is not in receipt of written evidence that all insurance required hereunder is in full force and effect, Lender shall have the right, without notice to Borrower, to take such action as Lender deems necessary to protect its interest in the Property, including, without limitation, the obtaining of such insurance coverage as Lender in its sole discretion deems appropriate and all premiums incurred by Lender in connection with such action or in obtaining such insurance and keeping it in effect shall be paid by Borrower to Lender

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upon demand and until paid shall be secured by the Mortgage and shall bear interest at the Default Rate.

          (g) In the event of foreclosure of the Mortgage or other transfer of title to the Property in extinguishment in whole or in part of the Debt, all right, title and interest of Borrower in and to the Policies that are not blanket Policies then in force concerning the Property and all proceeds payable thereunder shall thereupon vest in the purchaser at such foreclosure or Lender or other transferee in the event of such other transfer of title.

          5.1.2 Insurance Company. The Policies shall be issued by financially sound and responsible insurance companies authorized to do business in the state in which the Property is located and having a claims paying ability rating of “A-” or better by S&P and the equivalent rating by one of the other Rating Agencies; provided, however, Max Re shall be an acceptable insurance company as long as their ratings do not drop below A-XII by A.M. Best.

          Section 5.2 Casualty and Condemnation.

          5.2.1 Casualty. If the Property shall sustain a Casualty, Borrower shall give prompt notice of such Casualty to Lender and shall promptly commence and diligently prosecute to completion the repair and restoration of the Property as nearly as possible to the condition the Property was in immediately prior to such Casualty (a “Restoration”) and otherwise in accordance with Section 5.3, it being understood, however, that Borrower shall not be obligated to restore the Property to the precise condition of the Property prior to such Casualty provided the Property is restored, to the extent practicable, to be of at least equal value and of substantially the same character as prior to the Casualty. Borrower shall pay all costs of such Restoration whether or not such costs are covered by insurance. Lender may, but shall not be obligated to, make proof of loss if not made promptly by Borrower. In the event of a Casualty where the loss does not exceed Restoration Threshold, Borrower may settle and adjust such claim; provided that (a) no Event of Default has occurred and is continuing and (b) such adjustment is carried out in a commercially reasonable and timely manner. In the event of a Casualty where the loss exceeds the Restoration Threshold or if an Event of Default then exists, Borrower may settle and adjust such claim only with the prior written consent of Lender (which consent shall not be unreasonably withheld or delayed) and Lender shall have the opportunity to participate, at Borrower’s cost, in any such adjustments. Notwithstanding any Casualty, Borrower shall continue to pay the Debt at the time and in the manner provided for its payment in the Note and in this Agreement.

          5.2.2 Condemnation. Borrower shall give Lender prompt notice of any actual or threatened Condemnation by any Governmental Authority of all or any part of the Property and shall deliver to Lender a copy of any and all papers served in connection with such proceedings. Borrower may settle and compromise any Condemnation under Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) without the consent of Lender. If the Condemnation is equal to or greater than Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00), Borrower may settle and compromise the Condemnation only with prior written the consent of Lender (which consent shall not be unreasonably withheld or delayed) and Lender shall have the opportunity to participate, at Borrower’s cost, in any litigation and settlement discussions in respect thereof and Borrower shall from time to time deliver to Lender all

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instruments requested by Lender to permit such participation. Borrower shall, at its expense, diligently prosecute any such proceedings, and shall consult with Lender, its attorneys and experts, and cooperate with them in the carrying on or defense of any such proceedings. From and after and during the continuance of an Event of Default, Lender is hereby irrevocably appointed as Borrower’s attorney-in-fact, coupled with an interest, with exclusive power to collect, receive and retain any Award and to make any compromise or settlement in connection with any such Condemnation. Notwithstanding any Condemnation, Borrower shall continue to pay the Debt at the time and in the manner provided for its payment in the Note and in this Agreement. Lender shall not be limited to the interest paid on the Award by any Governmental Authority but shall be entitled to receive out of the Award interest at the rate or rates provided herein or in the Note. If the Property or any portion thereof is taken by any Governmental Authority, Borrower shall promptly commence and diligently prosecute the Restoration of the Property and otherwise comply with the provisions of Section 5.3. If the Property is sold, through foreclosure or otherwise, prior to the receipt by Lender of the Award, Lender shall have the right, whether or not a deficiency judgment on the Note shall have been sought, recovered or denied, to receive the Award, or a portion thereof sufficient to pay the Debt.

          5.2.3 Casualty Proceeds. The Net Proceeds shall be held by Lender in an interest-bearing account and, until disbursed in accordance with the provisions of this Section 5.3, shall constitute additional security for the Debt and Other Obligations under the Loan Documents.

          Section 5.3 Delivery of Net Proceeds.

          5.3.1 Minor Casualty or Condemnation. If a Casualty or Condemnation has occurred to the Property and the Net Proceeds shall be less than the Restoration Threshold and the costs of completing the Restoration shall be less than the Restoration Threshold, and provided (a) no Event of Default shall have occurred and remain uncured and (b) the Casualty or Condemnation shall have occurred prior to the Maturity Date, the Net Proceeds will be disbursed by Lender to Borrower. Promptly after receipt of the Net Proceeds, Borrower shall commence and satisfactorily complete with due diligence the Restoration in accordance with the terms of this Agreement. If any Net Proceeds are received by Borrower and may be retained by Borrower pursuant to the terms hereof, such Net Proceeds shall, until completion of the Restoration, be held in trust for Lender and shall be segregated from other funds of Borrower to be used to pay for the cost of Restoration in accordance with the terms hereof.

          5.3.2 Major Casualty or Condemnation. (a) If a Casualty or Condemnation has occurred to the Property and the Net Proceeds are equal to or greater than the Restoration Threshold or the costs of completing the Restoration is equal to or greater than the Restoration Threshold, Lender shall make the Net Proceeds available for the Restoration, provided that each of the following conditions are met:

     (i) no Event of Default shall have occurred and be continuing;

     (ii) (A) in the event the Net Proceeds are insurance proceeds, less than twenty-five percent (25%) of the total floor area of the Improvements at the Property has been damaged, destroyed or rendered unusable as a result of such Casualty or (B) in the event

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the Net Proceeds are an Award, less than ten percent (10%) of the land constituting the Property is taken, and such land is located along the perimeter or periphery of the Property, and no portion of the Improvements (other than driveways and parking in excess of Legal Requirements) is the subject of the Condemnation;

     (iii) all Major Leases shall remain in full force and effect during and after the completion of the Restoration without abatement of rent beyond the time required for Restoration, notwithstanding the occurrence of such Casualty or Condemnation;

     (iv) Borrower shall commence the Restoration as soon as reasonably practicable (but in no event later than sixty (60) days after such Casualty or Condemnation, whichever the case may be, occurs) and shall diligently pursue the same to satisfactory completion;

     (v) Lender shall be satisfied that any operating deficits and all payments of principal and interest under the Note will be paid during the period required for Restoration from (A) the Net Proceeds, or (B) other funds of Borrower;

     (vi) Lender shall be satisfied that the Restoration will be completed on or before the earliest to occur of (A) the date six (6) months prior to the Maturity Date, (B) the earliest date required for such completion under the terms of any Lease, (C) such time as may be required under applicable Legal Requirements in order to repair and restore the Property to the condition it was in immediately prior to such Casualty or to as nearly as possible the condition it was in immediately prior to such Condemnation, as applicable or (D) the expiration of the insurance coverage referred to in Section 5.1.1(a)(iii);

     (vii) the Property and the use thereof after the Restoration will be in compliance with and permitted under all applicable Legal Requirements;

     (viii) the Restoration shall be done and completed by Borrower in an expeditious and diligent fashion and in compliance with all applicable Legal Requirements

     (ix) such Casualty or Condemnation, as applicable, does not result in the loss of access to the Property or the related Improvements;

     (x) all Operating Agreements shall remain in full force and effect;

     (xi) After giving effect to such Restoration, the Debt Service Coverage Ratio for the Property shall be equal to the greater of (i) the Debt Service Coverage Ratio for the twelve (12) full calendar months immediately preceding the Closing Date, and (ii) the Debt Service Coverage Ratio for the Property for the twelve (12) full calendar months immediately preceding the Casualty or Condemnation of the Property; and

     (xii) Lender shall be satisfied that, upon the completion of the Restoration, the Loan to Value Ratio for the Property is not greater than 65%, as determined by Lender in its sole discretion.

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          (b) The Net Proceeds shall be paid directly to Lender and held by Lender in an interest-bearing account and, until disbursed in accordance with the provisions of this Section 5.3.2, shall constitute additional security for the Debt. The Net Proceeds (including all interest earned thereon) shall be disbursed by Lender to, or as directed by, Borrower from time to time during the course of the Restoration, upon receipt of evidence satisfactory to Lender that (i) all requirements set forth in Section 5.3.2(a) have been satisfied, (ii) all materials installed and work and labor performed (except to the extent that they are to be paid for out of the requested disbursement) in connection with the Restoration have been paid for in full, and (iii) there exist no notices of pendency, stop orders, mechanic’s or materialman’s liens or notices of intention to file same, or any other liens or encumbrances of any nature whatsoever on the Property arising out of the Restoration which have not either been fully bonded to the satisfaction of Lender and discharged of record or in the alternative fully insured to the satisfaction of Lender by the title company issuing the Title Insurance Policy.

          (c) All plans and specifications required in connection with the Restoration shall be subject to prior approval of Lender and an independent architect selected by Lender (the “Casualty Consultant”). The plans and specifications shall require that the Restoration be completed in a first-class workmanlike manner at least equivalent to the quality and character of the original work in the Improvements (provided, however, that in the case of a partial Condemnation, the Restoration shall be done to the extent reasonable practicable after taking into account the consequences of such partial Condemnation), so that upon completion thereof, the Property shall be at least equal in value and general utility to the Property prior to the damage or destruction; it being understood, however, that Borrower shall not be obligated to restore the Property to the precise condition of the Property prior to such Casualty provided the Property is restored, to the extent practicable, to be of at least equal value and of substantially the same character as prior to the Casualty. Borrower shall restore all Improvements such that when they are fully restored and/or repaired, such Improvements and their contemplated use fully comply with all applicable material Legal Requirements. The identity of the contractors, subcontractors and materialmen engaged in the Restoration, as well as the contracts under which they have been engaged, shall be subject to approval of Lender and the Casualty Consultant. All costs and expenses incurred by Lender in connection with recovering, holding and advancing the Net Proceeds for the Restoration including, without limitation, reasonable attorneys’ fees and disbursements and the Casualty Consultant’s fees and disbursements, shall be paid by Borrower.

          (d) In no event shall Lender be obligated to make disbursements of the Net Proceeds in excess of an amount equal to the costs actually incurred from time to time for work in place as part of the Restoration, as certified by the Casualty Consultant, less the Casualty Retainage. The term “Casualty Retainage” shall mean, as to each contractor, subcontractor or materialman engaged in the Restoration, an amount equal to ten percent (10%) of the hard construction costs actually incurred for work in place as part of the Restoration, as certified by the Casualty Consultant, until the Restoration has been completed. The Casualty Retainage shall in no event, and notwithstanding anything to the contrary set forth above in this Section 5.3.2(d), be less than the amount actually held back by Borrower from contractors, subcontractors and materialmen engaged in the Restoration. The Casualty Retainage shall not be released until the Casualty Consultant certifies to Lender that the Restoration has been completed in accordance with the provisions of this Section 5.3.2(d) and that all approvals necessary for the re-occupancy and use of the Property have been obtained from all appropriate Governmental Authorities, and

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Lender receives evidence satisfactory to Lender that the costs of the Restoration have been paid in full or will be paid in full out of the Casualty Retainage; provided, however, that Lender will release the portion of the Casualty Retainage being held with respect to any contractor, subcontractor or materialman engaged in the Restoration as of the date upon which the Casualty Consultant certifies to Lender that the contractor, subcontractor or materialman has satisfactorily completed all work and has supplied all materials in accordance with the provisions of the contractor’s, subcontractor’s or materialman’s contract, the contractor, subcontractor or materialman delivers the lien waivers and evidence of payment in full of all sums due to the contractor, subcontractor or materialman as may be reasonably requested by Lender or by the title company issuing the Title Insurance Policy, and Lender receives an endorsement to the Title Insurance Policy insuring the continued priority of the lien of the Mortgage and evidence of payment of any premium payable for such endorsement. If required by Lender, the release of any such portion of the Casualty Retainage shall be approved by the surety company, if any, which has issued a payment or performance bond with respect to the contractor, subcontractor or materialman.

          (e) Lender shall not be obligated to make disbursements of the Net Proceeds more frequently than once every calendar month.

          (f) If at any time the Net Proceeds or the undisbursed balance thereof shall not, in the opinion of Lender in consultation with the Casualty Consultant, be sufficient to pay in full the balance of the costs which are estimated by the Casualty Consultant to be incurred in connection with the completion of the Restoration, Borrower shall deposit the deficiency (the “Net Proceeds Deficiency”) with Lender before any further disbursement of the Net Proceeds shall be made. The Net Proceeds Deficiency deposited with Lender shall be held by Lender and shall be disbursed for costs actually incurred in connection with the Restoration on the same conditions applicable to the disbursement of the Net Proceeds, and until so disbursed pursuant to this Section 5.3.2 shall constitute additional security for the Debt.

          (g) The excess, if any, of the Net Proceeds and the remaining balance, if any, of the Net Proceeds Deficiency deposited with Lender after the Casualty Consultant certifies to Lender that the Restoration has been completed in accordance with the provisions of this Section 5.3.2, and the receipt by Lender of evidence satisfactory to Lender that all costs incurred in connection with the Restoration have been paid in full, shall be remitted by Lender to Borrower, provided no Event of Default shall have occurred and shall be continuing under any of the Loan Documents; provided, however, the amount of such excess returned to Borrower in the case of a Condemnation shall not exceed the amount of Net Proceeds Deficiency deposited by Borrower with the balance being applied to the Debt in the manner provided for in subsection 5.3.2(h).

          (h) All Net Proceeds not required (i) to be made available for the Restoration or (ii) to be returned to Borrower as excess Net Proceeds pursuant to Section 5.3.2(g) shall be retained and applied by Lender toward the payment of the Debt, whether or not then due and payable, in such order, priority and proportions as Lender in its sole discretion shall deem proper, or, at the discretion of Lender, the same may be paid, either in whole or in part, to Borrower for such purposes as Lender shall designate.

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          VI. RESERVE FUNDS

          Section 6.1 Required Repair Funds

          6.1.1 Deposit of Required Repair Funds. Borrower shall perform the repairs at the Property as set forth on Schedule II hereto (such repairs hereinafter referred to as “Required Repairs”) and, subject to Force Majeure (provided no such Force Majeure causes an event of default under the Franchise Agreement), shall complete each of the Required Repairs on or before the respective deadline for each repair as set forth on Schedule II hereof. On the Closing Date, Borrower has deposited with Lender the sum of $54,993.75, which amount is one hundred and twenty-five percent (125%) of the cost to perform such Required Repairs as set forth on Schedule II hereto in order to perform the Required Repairs. Amounts deposited pursuant to this Section 6.1.1 are referred to herein as the “Required Repair Funds”.

          6.1.2 Release of Required Repair Funds. With respect to any item of Required Repairs which has been completed, Lender shall, from time to time, disburse to Borrower portions of the Required Repair Funds upon satisfaction by Borrower of each of the following conditions: (a) Borrower shall submit a request for payment to Lender at least ten (10) days prior to the date on which Borrower requests such payment be made and specifies the Required Repairs to be paid, (b) on the date such request is received by Lender and on the date such payment is to be made, no Event of Default shall exist and remain uncured, (c) Lender shall have received a certificate from Borrower (i) stating that all Required Repairs to be funded by the requested disbursement have been completed in a good and workmanlike manner and in accordance with all applicable Legal Requirements, such certificate to be accompanied by a copy of any license, permit or other approval by any Governmental Authority required in connection with the Required Repairs, (ii) identifying each Person that supplied materials or labor in connection with the Required Repairs to be funded by the requested disbursement, and (iii) stating that each such Person has been paid in full or will be paid in full upon such disbursement, such certificate to be accompanied by lien waivers or other evidence of payment satisfactory to Lender, (d) at Lender’s option, a title search for the Property indicating that the Property is free from all liens, claims and other encumbrances other than the Permitted Exceptions or not previously approved by Lender, (e) at Lender’s option, if the cost of any Required Repair exceeds Fifty Thousand and No/100 Dollars ($50,000.00), Lender shall have received a report satisfactory to Lender in its reasonable discretion from an architect or engineer approved by Lender in respect of such architect or engineer’s inspection of the required repairs, and (f) Lender shall have received such other evidence as Lender shall reasonably request that the Required Repairs to be funded by the requested disbursement have been completed and are paid for or will be paid upon such disbursement to Borrower. Lender shall not be required to disburse Required Repair Funds more frequently than once each calendar month, and the requested disbursement must be at least in an amount equal to the Minimum Disbursement Amount (or a lesser amount if the total Required Repair Funds is less than the Minimum Disbursement Amount, in which case only one disbursement of the amount remaining in the account shall be made). From and after and during the continuance of an Event of Default, Lender shall have the right, but not the obligation, to make any of the Required Repairs in the event Borrower fails to perform same in accordance with Section 6.1.1.

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          6.1.3 Balance in the Required Repair Account. The insufficiency of any balance in the Require Repair Account shall not relieve Borrower from its obligation to fulfill all preservation and maintenance covenants in the Loan Documents. Upon completion of the Required Repairs, provided no Event of Default has occurred and is continuing, the balance, if any, in the Required Repair Account will be disbursed to Borrower.

          Section 6.2 Tax Funds.

          6.2.1 Deposits of Tax Funds. On the Closing Date, Borrower shall deposit with Lender the amount of Five Hundred Two Thousand Seven Hundred Sixty-Eight and 35/100 Dollars ($502,768.35) and, on each Monthly Payment Date Borrower shall deposit with Lender an amount equal to one-twelfth of the Taxes that Lender estimates will be payable during the next ensuing twelve (12) months in order to accumulate sufficient funds to pay all such Taxes at least ten (10) days prior to their respective due dates. Amounts deposited pursuant to this Section 6.2.1 are referred to herein as the “Tax Funds”. If at any time Lender reasonably determines that the Tax Funds will not be sufficient to pay the Taxes, Lender shall notify Borrower of such determination and the monthly deposits for Taxes shall be increased by the amount that Lender estimates is sufficient to make up the deficiency at least ten (10) days prior to the respective due dates for the Taxes; provided that if Borrower receives notice of any deficiency after the date that is ten (10) days prior to the date that Taxes are due, Borrower will deposit such amount within two (2) Business Days after its receipt of such notice.

          6.2.2 Release of Tax Funds. Lender shall have the right to apply the Tax Funds to payments of Taxes, and provided that no Event of Default has occurred and is continuing and sufficient Tax Funds are on deposit with Lender with respect to any such payment, Lender shall apply the Tax Funds to payments of Taxes. In making any payment relating to Taxes, Lender may do so according to any bill, statement or estimate procured from the appropriate public office (with respect to Taxes) without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim thereof. If the amount of the Tax Funds shall exceed the amounts due for Taxes, Lender shall, in its sole discretion, return any excess to Borrower or credit such excess against future payments to be made to the Tax Funds. Any Tax Funds remaining after the Debt has been paid in full shall be returned to Borrower. Borrower shall not be required to pay any fines or penalties which are assessed due to Lender’s failure to pay Taxes on or before the due date thereof.

          Section 6.3 Insurance Funds.

          6.3.1 Deposits of Insurance Funds. On the Closing Date, Borrower shall deposit with Lender the amount of One Hundred Twenty Thousand One and 25/100 Dollars ($121,001.25) and, on each Monthly Payment Date Borrower shall deposit with Lender an amount equal to one-twelfth of the Insurance Premiums that Lender estimates will be payable for the renewal of the coverage afforded by the Policies upon the expiration thereof in order to accumulate sufficient funds to pay all such Insurance Premiums at least thirty (30) days prior to the expiration of the Policies. Amounts deposited pursuant to this Section 6.3.1 are referred to herein as the “Insurance Funds”. If at any time Lender reasonably determines that the Insurance Funds will not be sufficient to pay the Insurance Premiums, Lender shall notify

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Borrower of such determination and the monthly deposits for Insurance Premiums shall be increased by the amount that Lender estimates is sufficient to make up the deficiency at least thirty (30) days prior to expiration of the Policies.

          6.3.2 Release of Insurance Funds. Lender shall have the right to apply the Insurance Funds to payment of Insurance Premiums, and, provided, that no Event of Default has occurred and is continuing and sufficient Insurance Funds are on deposit with Lender with respect to any such payment, Lender shall apply the Insurance Funds to payment of Insurance Premiums. In making any payment relating to Insurance Premiums, Lender may do so according to any bill, statement or estimate procured from the insurer or its agent, without inquiry into the accuracy of such bill, statement or estimate. If the amount of the Insurance Funds shall exceed the amounts due for Insurance Premiums, Lender shall, in its sole discretion, return any excess to Borrower or credit such excess against future payments to be made to the Insurance Funds. Any Insurance Funds remaining after the Debt has been paid in full shall be returned to Borrower.

          Section 6.4 Capital Expenditure Funds.

          6.4.1 Deposits of Capital Expenditure Funds. On the Closing Date, Borrower shall deposit with Lender an amount equal to Two Million Six Hundred Sixty-Two Thousand and Seven Hundred Sixty-Seven 05/100 Dollars ($2,262,767.05) to be used to pay for the cost of Capital Expenditures required to be performed under the Franchise Agreement, as more particularly described in the section of the Product Improvement Plan attached hereto as Schedule II, which Capital Expenditures are hereby approved by the Lender subject to the provisions of this Section 6.4.1 (the “PIP Repairs”). Amounts deposited pursuant to this Section 6.4.1 are referred to herein as the “Capital Expenditure Funds”. In lieu of making the deposit (or any portion thereof) to the Capital Expenditure Funds required pursuant to this Section 6.4, Borrower may deliver to Lender a Letter of Credit in an amount equal to the amount that is otherwise required to be deposited into the Capital Expenditure Funds issued by a Approved Bank, which Letter of Credit shall be otherwise acceptable in form and substance to Lender and Borrower shall pay to Lender all of Lender’s reasonable out of pocket costs and expenses in connection therewith, including any fee charged by the Rating Agencies. Any such Letter of Credit shall be additional security for Borrower’s obligations under the Loan Documents. Lender shall have the right to draw in full upon any Letter of Credit: (A) if Lender has not received at least thirty (30) days prior to the date on which the then outstanding Letter of Credit is scheduled to expire, a notice from the issuing financial institution that it has renewed the applicable Letter of Credit; (B) upon receipt of notice from the issuing financial institution that the applicable Letter of Credit will be terminated; (C) ten (10) days after Lender has given notice to Borrower that the financial institution issuing the applicable Letter of Credit ceases to meet the rating requirement set forth in this Section 6.4; and (D) upon the occurrence of an Event of Default.

          6.4.2 Release of Capital Expenditure Funds. (a) Lender shall direct Agent to disburse Capital Expenditure Funds only for PIP Repairs.

          (b) Lender shall direct Agent to disburse to Borrower the Capital Expenditure Funds from time to time upon satisfaction by Borrower of each of the following conditions: (i) Borrower shall submit a request for payment to Lender at least ten (10) days prior to the date on which Borrower requests such payment be made and specifies the PIP Repairs to be paid, (ii) on the date such request is received by Lender and on the date such payment is to be made,

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no Event of Default shall exist and remain uncured, (iii) Lender shall have received a certificate from Borrower (A) stating that the items to be funded by the requested disbursement are PIP Repairs, (B) stating that all PIP Repairs at the Property to be funded by the requested disbursement have been completed in a good and workmanlike manner and in accordance with all applicable Legal Requirements, such certificate to be accompanied by a copy of any license, permit or other approval required by any Governmental Authority in connection with the PIP Repairs, (C) identifying each Person that supplied materials or labor in connection with the PIP Repairs to be funded by the requested disbursement, and (D) stating that each such Person has been paid in full or will be paid in full upon such disbursement, such certificate to be accompanied by, unless such Person is being paid out of the disbursement being made, lien waivers or other evidence of payment satisfactory to Lender, (iv) at Lender’s option, a title search for the Property indicating that the Property is free from all Liens, claims and other encumbrances other than the Permitted Exceptions or otherwise not previously approved by Lender, (v) at Lender’s option, if the cost of any individual PIP Repair exceeds Fifty Thousand and No/100 Dollars ($50,000.00), Lender shall have received a report satisfactory to Lender in its reasonable discretion from an architect or engineer approved by Lender in respect of such architect or engineer’s inspection of the PIP Repairs, and (vi) Lender shall have received such other evidence as Lender shall reasonably request that the PIP Repairs at the Property to be funded by the requested disbursement have been completed and are paid for or will be paid upon such disbursement to Borrower. Lender shall not be required to disburse Capital Expenditure Funds more frequently than once each calendar month, and must be at least an amount greater than the Minimum Disbursement Amount (or a lesser amount if the total amount of Capital Expenditure Funds is less than the Minimum Disbursement Amount, in which case only one disbursement of the amount remaining in the account shall be made).

          (c) Nothing in this Section 6.4.2 shall (i) make Lender responsible for making or completing the Capital Expenditures Work; (ii) require Lender to expend funds in addition to the Capital Expenditure Funds to complete any Capital Expenditures Work; (iii) obligate Lender to proceed with the Capital Expenditures Work; or (iv) obligate Lender to demand from Borrower additional sums to complete any Capital Expenditures Work.

          (d) Borrower shall permit Lender and Lender’s agents and representatives (including, without limitation, Lender’s engineer, architect, or inspector) or third parties to enter onto the Property during normal business hours (subject to the rights of Tenants under their Leases) and not to unreasonably interfere with Hotel guests or business operations at the Property to inspect the progress of any Capital Expenditures Work and all materials being used in connection therewith and to examine all plans and shop drawings relating to such Capital Expenditures Work. Borrower shall cause all contractors and subcontractors to cooperate with Lender or Lender’s representatives or such other Persons described above in connection with inspections described in this Section 6.4.2(d).

          (e) If a PIP Repairs disbursement will exceed Fifty Thousand and No/100 Dollars ($50,000.00), Lender may require an inspection of the Property at Borrower’s expense prior to making a disbursement of Capital Expenditure Funds in order to verify completion of the Capital Expenditures Work for which reimbursement is sought. Lender may require that such inspection be conducted by an appropriate independent qualified professional selected by Lender and may require a certificate of completion by an independent qualified professional architect

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acceptable to Lender prior to the disbursement of Capital Expenditure Funds. Borrower shall pay the expense of the inspection as required hereunder, whether such inspection is conducted by Lender or by an independent qualified professional architect.

          (f) In addition to any insurance required under the Loan Documents, Borrower shall provide or cause to be provided workmen’s compensation insurance, builder’s risk, and public liability insurance and other insurance to the extent required under applicable law in connection with Capital Expenditures Work. All such policies shall be in form and amount reasonably satisfactory to Lender.

          6.4.3 Balance in the Capital Expenditure Account. The insufficiency of any balance in the Capital Expenditure Account shall not relieve Borrower from its obligation to fulfill all preservation and maintenance covenants in the Loan Documents. Upon completion of the PIP Repairs, provided no Event of Default has occurred and is continuing, the balance, if any, in the Capital Expenditure Reserve Account will be disbursed to Borrower.

          Section 6.5 Replacements and Replacement Reserve.

          6.5.1 Replacement Reserve Fund. Borrower shall pay to Lender on each Payment Date one twelfth (1/12) of the amount equal to four percent (4%) of annual Gross Income from Operations (the “Replacement Reserve Monthly Deposit”) to fund the costs of Capital Expenditures, replacements, repairs, furniture, fixtures and hotel equipment required to be made to the Properties and the Improvements during the calendar year (collectively, the “Replacements”). Amounts so deposited shall hereinafter be referred to as Borrower’s “Replacement Reserve Fund” and the account in which such amounts are held shall hereinafter be referred to as Borrower’s “Replacement Reserve Account”.

          6.5.2 Disbursements from Replacement Reserve Account. (a) Lender shall make disbursements from the Replacement Reserve Account from time to time to pay Borrower only for the costs of the Replacements. Lender shall not be obligated to make disbursements from the Replacement Reserve Account to reimburse Borrower for the costs of routine maintenance to the Property or replacements of inventory or for costs which are to be reimbursed from the Capital Expenditure Funds.

          (b) Lender shall, upon written request from Borrower and satisfaction of the requirements set forth in this Section 6.5.2, disburse to Borrower amounts from the Replacement Reserve Account necessary to pay for the actual approved costs of Replacements or to reimburse Borrower therefor, upon completion of such Replacements (or, upon partial completion in the case of Replacements made pursuant to Section 6.5.2(e) hereof) as determined by Lender. In no event shall Lender be obligated to disburse funds from the Replacement Reserve Account if a Default or an Event of Default exists.

          (c) Each request for disbursement from the Replacement Reserve Account shall be in a form specified or approved by Lender and shall specify (i) the specific Replacements for which the disbursement is requested, (ii) the quantity and price of each item purchased, if the Replacement includes the purchase or replacement of specific items, (iii) the price of all materials (grouped by type or category) used in any Replacement other than the

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purchase or replacement of specific items, and (iv) the cost of all contracted labor or other services applicable to each Replacement for which such request for disbursement is made. With each request Borrower shall certify that all Replacements have been made in accordance with all applicable Legal Requirements of any Governmental Authority having jurisdiction over the Property. Each request for disbursement shall include copies of invoices for all items or materials purchased and all contracted labor or services provided and, unless Lender has agreed to issue joint checks as described below in connection with a particular Replacement, each request shall include evidence satisfactory to Lender of payment of all such amounts. Except as provided in Section 6.5.2(e) hereof, each request for disbursement from the Replacement Reserve Account shall be made only after completion of the Replacement for which disbursement is requested. Borrower shall provide Lender evidence of completion of the subject Replacement satisfactory to Lender in its reasonable judgment.

          (d) Borrower shall pay all invoices in connection with the Replacements with respect to which a disbursement is requested prior to submitting such request for disbursement from the Replacement Reserve Account or, at the request of Borrower, Lender will issue checks, payable to the contractor, supplier, materialman, mechanic, subcontractor or other party to whom payment is due in connection with a Replacement. In the case of payments made by joint check, Lender may require a waiver of lien from each Person receiving payment prior to Lender’s disbursement in excess of Fifty Thousand and 00/100 Dollars ($50,000.00) from the Replacement Reserve Account. In addition, as a condition to any disbursement, Lender may require Borrower to obtain lien waivers from each contractor, supplier, materialman, mechanic or subcontractor who receives payment in an amount equal to or greater than One Hundred Thousand and 00/100 Dollars ($100,000.00) for completion of its work or delivery of its materials. Any lien waiver delivered hereunder shall conform to the requirements of applicable law and shall cover all work performed and materials supplied (including equipment and fixtures) for the Property by that contractor, supplier, subcontractor, mechanic or materialman through the date covered by the current reimbursement request (or, in the event that payment to such contractor, supplier, subcontractor, mechanic or materialmen is to be made by a joint check, the release of lien shall be effective through the date covered by the previous release of funds request).

          (e) If (i) the cost of a Replacement exceeds Fifty Thousand and 00/100 Dollars ($50,000.00), (ii) the contractor performing such Replacement requires periodic payments pursuant to terms of a written contract, and (iii) Lender has approved in writing in advance such periodic payments, a request for reimbursement from the Replacement Reserve Account may be made after completion of a portion of the work under such contract, provided (A) such contract requires payment upon completion of such portion of the work, (B) the materials for which the request is made are on site at the Property and are properly secured or have been installed in the Property, (C) all other conditions in this Agreement for disbursement have been satisfied, (D) funds remaining in the Replacement Reserve Account are, in Lender’s judgment, sufficient to complete such Replacement and other Replacements when required, and (E) if required by Lender, each contractor or subcontractor receiving payments in excess of $100,000.00 under such contract shall provide a waiver of lien with respect to amounts which have been paid to that contractor or subcontractor.

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          (f) Borrower shall not make a request for disbursement from the Replacement Reserve Account more frequently than once in any calendar month and (except in connection with the final disbursement) the total cost of all Replacements in any request shall not be less than the Minimum Disbursement Amount.

          6.5.3 Performance of Replacements. (a) Borrower shall make Replacements when required in order to keep the Property in condition and repair consistent with other first class, full service hotel in the same market segment in the metropolitan area in which the Property is located, and to keep the Property or any portion thereof from deteriorating. Borrower shall complete all Replacements in a good and workmanlike manner as soon as practicable following the commencement of making each such Replacement.

          (b) Lender reserves the right, at its option, to approve all contracts or work orders with materialmen, mechanics, suppliers, subcontractors, contractors or other parties providing labor or materials in connection with the Replacements costing in excess of $100,000.00. Upon Lender’s request, Borrower shall assign any contract or subcontract to Lender.

          (c) In the event Lender determines in its reasonable discretion that any Replacement is not being performed in a workmanlike or timely manner or that any Replacement has not been completed in a workmanlike or timely manner, Lender shall have the option to withhold disbursement for such unsatisfactory Replacement until such faulty work is corrected and upon the occurrence and continuing of an Event of Default to proceed under existing contracts or to contract with third parties to complete such Replacement and to apply the Replacement Reserve Fund toward the labor and materials necessary to complete such Replacement, without providing any prior notice to Borrower and to exercise any and all other remedies available to Lender upon an Event of Default hereunder.

          (d) In order to facilitate Lender’s completion or making of such Replacements pursuant to Section 6.5.3(c) above, Borrower grants from and after the occurrence and during the continuance of an Event of Default Lender the right to enter onto the Property and perform any and all work and labor necessary to complete or make such Replacements and/or employ watchmen to protect the Property from damage. All sums so expended by Lender, to the extent not from the Replacement Reserve Fund, shall be deemed to have been advanced under the Loan to Borrower and secured by the Mortgage. For this purpose from and after the occurrence and during the continuance of an Event of Default Borrower constitutes and appoints Lender its true and lawful attorney in fact with full power of substitution to complete or undertake such Replacements in the name of Borrower. Such power of attorney shall be deemed to be a power coupled with an interest and cannot be revoked.

          (e) Nothing in this Section 6.5.3 shall: (i) make Lender responsible for making or completing any Replacements; (ii) require Lender to expend funds in addition to the Replacement Reserve Fund to make or complete any Replacement; (iii) obligate Lender to proceed with any Replacements; or (iv) obligate Lender to demand from Borrower additional sums to make or complete any Replacement.

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          (f) Upon reasonable prior notice to Borrower, Borrower shall permit Lender and Lender’s agents and representatives (including, without limitation, Lender’s engineer, architect, or inspector) or third parties making Replacements pursuant to this Section 6.5.3 to enter onto the Property during normal business hours (subject to the rights of tenants under their Leases, and without disturbing guests of the Hotel or unreasonably interfering with business operations at the Hotel) to inspect the progress of any Replacements and all materials being used in connection therewith, to examine all plans and shop drawings relating to such Replacements which are or may be kept at the Property, and to complete any Replacements which Lender has a right to complete pursuant to this Section 6.5.3. Borrower shall cause all contractors and subcontractors to cooperate with Lender or Lender’s representatives or such other persons described above in connection with inspections described in this Section 6.5.3(f) or the completion of Replacements pursuant to this Section 6.5.3.

          (g) Lender may require an inspection of the Property at Borrower’s expense prior to making a monthly disbursement from the Replacement Reserve Account in order to verify completion of the Replacements costing in excess of $50,000.00 for which reimbursement is sought. Lender may require that such inspection be conducted by an appropriate independent qualified professional selected by Lender and/or may require a copy of a certificate of completion by an independent qualified professional acceptable to Lender prior to the disbursement of any amounts from the Replacement Reserve Account. Borrower shall pay the expense of the inspection as required hereunder, whether such inspection is conducted by Lender or by an independent qualified professional.

          (h) The Replacements and all materials, equipment, fixtures, or any other item comprising a part of any Replacement shall be constructed, installed or completed, as applicable, free and clear of all mechanic’s, materialmen’s or other liens (except for those Liens which have been approved in writing by Lender and those Liens being contested by Borrower pursuant to Section 4.1.2 hereof).

          (i) Before each disbursement from the Replacement Reserve Account, Lender may require Borrower to provide Lender with a search of title to the Property effective to the date of the disbursement, which search shows that no mechanic’s or materialmen’s liens or other liens of any nature have been placed against the Property since the date of recordation of the related Mortgage and that title to the Property is free and clear of all Liens (other than the lien of the related Mortgage and any other Liens previously approved in writing by Lender, if any).

          (j) In addition to any insurance required under the Loan Documents, Borrower shall provide or cause to be provided workmen’s compensation insurance, builder’s risk, and public liability insurance and other insurance to the extent required under applicable law in connection with a particular Replacement. All such policies shall be in form and amount reasonably satisfactory to Lender. All such policies which can be endorsed with standard mortgagee clauses making loss payable to Lender or its assigns shall be so endorsed. Certified copies of such policies shall be delivered to Lender.

          6.5.4 Balance in the Replacement Reserve Account. The insufficiency of any balance in the Replacement Reserve Account shall not relieve Borrower from its obligation to fulfill all preservation and maintenance covenants in the Loan Documents. Upon payment of the

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Debt in full, the balance, if any, in the Replacement Reserve Account will be disbursed to Borrower.

          Section 6.6 Intentionally Omitted.

          Section 6.7 Security Interest in Reserve Funds.

          6.7.1 Grant of Security Interest. Borrower hereby pledges to Lender, and grants a security interest in, any and all monies now or hereafter deposited in the Funds as additional security for the payment of the Loan. The Funds shall be held in Lender’s name and may be commingled with Lender’s own funds at financial institutions selected by Lender in its sole discretion. Upon the occurrence of an Event of Default, Lender may apply any sums then present in the Funds to the payment of the Loan in any order in its sole discretion. Until expended or applied as above provided, the Funds shall constitute additional security for the Loan. Lender shall have no obligation to release any of the Funds while any Event of Default or Default then exists.

          6.7.2 Income Taxes. Borrower shall report on its federal, state and local income tax returns all interest or income earned by Borrower on the applicable Reserve Funds.

          6.7.3 Prohibition Against Further Encumbrance. Borrower shall not, without the prior consent of Lender, further pledge, assign or grant any security interest in the Reserve Funds or permit any lien or encumbrance to attach thereto, or any levy to be made thereon, or any UCC-1 Financing Statements, except those naming Lender as the secured party, to be filed with respect thereto.

          VII. PROPERTY MANAGEMENT

          Section 7.1 The Management Agreement. Borrower shall cause Manager to manage the Property in accordance with the Management Agreement. Borrower shall (a) diligently perform and observe all of the terms, covenants and conditions of the Management Agreement on the part of Borrower to be performed and observed, (b) promptly notify Lender of any notice to Borrower of any default by Borrower in the performance or observance of any of the terms, covenants or conditions of the Management Agreement on the part of Borrower to be performed and observed, and (c) promptly deliver to Lender a copy of each financial statement, business plan, capital expenditures plan, report and estimate received by it under the Management Agreement. If Borrower shall default in the performance or observance of any material term, covenant or condition of the Management Agreement on the part of Borrower to be performed or observed, then, without limiting Lender’s other rights or remedies under this Agreement or the other Loan Documents, and without waiving or releasing Borrower from any of its obligations hereunder or under the Management Agreement, Lender shall have the right, but shall be under no obligation, to pay any sums and to perform any act as may be appropriate to cause all the material terms, covenants and conditions of the Management Agreement on the part of Borrower to be performed or observed.

          Section 7.2 The Franchise Agreement. Borrower shall (a) diligently perform and observe all of the terms, covenants and conditions of the Franchise Agreement on the part of

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Borrower to be performed and observed, (b) promptly notify Lender of any notice to Borrower of any default by Borrower in the performance or observance of any of the terms, covenants or conditions of the Franchise Agreement on the part of Borrower to be performed and observed, and (c) promptly deliver to Lender a copy of each financial statement, business plan, capital expenditures plan, report and estimate received by it under the Franchise Agreement. If Borrower shall default in the performance or observance of any material term, covenant or condition of the Franchise Agreement on the part of Borrower to be performed or observed, then, without limiting Lender’s other rights or remedies under this Agreement or the other Loan Documents, and without waiving or releasing Borrower from any of its obligations hereunder or under the Franchise Agreement, Lender shall have the right, but shall be under no obligation, to pay any sums and to perform any act as may be appropriate to cause all the material terms, covenants and conditions of the Franchise Agreement on the part of Borrower to be performed or observed.

          Section 7.3 Prohibition Against Termination or Modification. (a) Borrower shall not surrender, terminate, cancel, modify, renew, amend or extend the Management Agreement, or enter into any other agreement relating to the management or operation of the Property with Manager or any other Person, or consent to the assignment by the Manager of its interest under the Management Agreement, in each case without the express consent of Lender, which consent shall not be unreasonably withheld; provided, however, with respect to a new manager such consent may be conditioned upon Borrower delivering a Rating Agency Confirmation as to such new manager and management agreement and, if such new manager is an Affiliate of Borrower, upon delivery of a non-consolidation opinion acceptable to the Rating Agencies. If at any time Lender consents to the appointment of a new manager, such new manager and Borrower shall, as a condition of Lender’s consent, execute a subordination of management agreement in the form then used by Lender.

          (b) Borrower shall not surrender, terminate, cancel, modify, renew, amend or extend the Franchise Agreement, or enter into any other agreement relating to the management or operation of the Property with Franchisor or any other Person, or consent to the assignment by the Franchisor of its interest under the Franchise Agreement (except to the extent such assignment is permitted thereunder), in each case without the express consent of Lender, which consent shall not be unreasonably withheld; provided, however, with respect to a new franchisor such consent may be conditioned upon Borrower delivering a Rating Agency Confirmation as to such new franchisor and franchise agreement and, if such new franchisor is an Affiliate of Borrower, upon delivery of a non-consolidation opinion acceptable to the Rating Agencies. If at any time Lender consents to the appointment of a new franchisor, such new franchisor and Borrower shall, as a condition of Lender’s consent, execute a subordination of franchise agreement in the form of the comfort letter delivered to Lender on the Closing Date or the form of comfort letter then used by such new franchisor subject to the reasonable approval of Lender.

          Section 7.4 Replacement of Manager. Lender shall have the right to require Borrower to replace the Manager with a Person which is not an Affiliate of, but is chosen by, Borrower and approved by Lender upon the occurrence of any one or more of the following events: (a) at any time following the occurrence of an Event of Default and/or (b) if Manager shall be in default under the Management Agreement beyond any applicable notice and cure

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period or if at any time the Manager has engaged in gross negligence, fraud or willful misconduct.

          Section 7.5 Matters Concerning Franchisor. If (i) Franchisor shall become bankrupt or insolvent or (ii) a default on the part of Franchisor occurs under the Franchise Agreement beyond all applicable notice and cure period which would give Borrower the right to terminate the Franchise pursuant to the terms thereof, Borrower shall, at the request of Lender, shall use diligent good faith efforts to terminate the Franchise Agreement, and upon the effectiveness of any such termination replace the Franchisor with a franchisor selected by Borrower and approved by Lender on terms and conditions satisfactory to Lender, it being understood and agreed that the franchise fee for such replacement franchisor shall not exceed then prevailing market rates.

          VIII. PERMITTED TRANSFERS

          Section 8.1 Transfer or Encumbrance of Property. (a) Unless the same is a Permitted Transfer, without the prior written consent of Lender, neither Borrower nor any other Person having an ownership or beneficial interest in Borrower shall (i) directly or indirectly sell, transfer, convey, mortgage, pledge, or assign the Property, any part thereof or any interest therein (including any partnership or any other ownership interest in Borrower); (ii) further encumber, alienate, grant a Lien or grant any other interest in the Property or any part thereof (including any partnership or other ownership interest in Borrower), whether voluntarily or involuntarily; or (iii) enter into any easement or other agreement granting rights in or restricting the use or development of the Property.

          (b) As used in this Article VIII, “transfer” shall include (i) an installment sales agreement wherein Borrower agrees to sell the Property or any part thereof for a price to be paid in installments; (ii) an agreement by Borrower leasing all or a substantial part of the Property for other than actual occupancy by a space tenant thereunder or a sale, assignment or other transfer of, or the grant of a security interest in, Borrower’s right, title and interest in and to any Leases or any Rents; (iii) if Borrower or any general partner or managing member of Borrower is a corporation, the voluntary or involuntary sale, conveyance or transfer of such corporation’s stock (or the stock of any corporation directly or indirectly controlling such corporation by operation of law or otherwise) or the creation or issuance of new stock such that such corporation’s stock shall be vested in a party or parties who are not now stockholders or any change in the control of such corporation; and (iv) if Borrower or any general partner or managing member of Borrower is a limited or general partnership, joint venture or limited liability company, the change, removal, resignation or addition of a general partner, managing partner, limited partner, joint venturer or member or the transfer of the partnership interest of any general partner, managing partner or limited partner or the transfer of the interest of any joint venture or member.

          (c) Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default hereunder in order to declare the Debt immediately due and payable upon Borrower’s sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property, other than a Permitted Transfer, without Lender’s consent. This provision shall apply to every sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property, other than a Permitted Transfer, regardless of whether voluntary or not,

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or whether or not Lender has consented to any previous sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property.

          (d) Lender’s consent to one sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property for which Lender’s consent is required shall not be deemed to be a waiver of Lender’s right to require such consent to any future occurrence of same for which Lender’s consent is required. Any sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property made in contravention of this paragraph shall be null and void and of no force and effect.

          (e) Borrower agrees to bear and shall pay or reimburse Lender on demand for all reasonable expenses (including, without limitation, reasonable attorneys’ fees and disbursements, title search costs and title insurance endorsement premiums) incurred by Lender in connection with the review, approval and documentation of any such sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer.

          (f) Lender’s consent to the sale or transfer of the Property will not be unreasonably withheld if after consideration of all relevant factors and provided that Borrower satisfies the following conditions:

     (i) no Event of Default or event which with the giving of notice or the passage of time would constitute an Event of Default shall have occurred and remain uncured;

     (ii) the proposed transferee (“Transferee”) shall be a reputable entity or person of good character, creditworthy, with sufficient financial worth considering the obligations assumed and undertaken, as evidenced by financial statements and other information reasonably requested by Lender;

     (iii) the Transferee and its property manager shall have sufficient experience in the ownership and management of properties similar to the Property, and Lender shall be provided with reasonable evidence thereof (and Lender reserves the right to approve the Transferee without approving the substitution of the property manager);

     (iv) Lender shall have received confirmation in writing from the Rating Agencies to the effect that such transfer will not result in a re-qualification, reduction or withdrawal of any rating initially assigned or to be assigned in a Securitization;

     (v) Lender shall have received evidence satisfactory to it (which shall include a legal non-consolidation opinion acceptable to Lender) that the single purpose nature and bankruptcy remoteness of Borrower its shareholders, partners, or members, as the case may be, following such transfers are in accordance with the standards of the Rating Agencies;

     (vi) the Transferee shall have executed and delivered to Lender an assumption agreement in form and substance acceptable to Lender, evidencing such Transferee’s agreement to abide and be bound by the terms of the Note, the Mortgage and the other

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Loan Documents, together with such legal opinions and title insurance endorsements as may be reasonably requested by Lender;

     (vii) Lender shall have received on or prior to the date of the sale or transfer (A) an assumption fee equal to one percent (1%) of the then unpaid principal balance of the Note, (B) a rating confirmation fee for each of the Rating Agencies delivering a confirmation pursuant to clause (iv) above, which confirmation fees shall be equal to the then customary fees charged by each applicable Rating Agency for such a confirmation and (C) the payment of all costs and expenses incurred by Lender and the Rating Agencies in connection with such assumption (including reasonable attorneys’ fees and costs); and

     (viii) the Transferee and Borrower shall company with the provisions of Section 3.1.41 hereof.

          (g) In addition, Lender’s consent shall not be required with respect to the following Transfers (each, a “Permitted Transfer”):

     (i) the one time conveyance of the entire Property (a) to a Permitted Transferee provided that Borrower and such Transferee complies with the conditions set forth in clauses (i) through (viii) in Section 8.1(f) above;

     (ii) (A) a transfer, in one or a series of related transactions, of not more than forty-nine percent (49%) of the stock, general partnership interest or managing membership interest (as the case may be) in a Restricted Party; provided, however, no such transfers shall result in the change of voting control in the Restricted Party, and as a condition to each such transfer, Lender shall receive written notice of such transfer not less than thirty (30) days prior written notice of such proposed transfer, (B) a transfer, in one or a series of related transactions, of not more than forty-nine percent (49%) of the limited partnership interests or non-managing membership interests (as the case may be) in a Restricted Party; provided, however, as a condition to each such transfer, Lender shall receive written notice of such transfer not less than thirty (30) days prior written notice of such proposed transfer; provided; however, with respect to any such transfers under clauses (A) and (B) above, at all times, Interstate Hotels & Resorts, Inc. (“IHR”) shall continue to control Borrower and own directly or indirectly 51% of the legal and beneficial interest in Borrower;

     (iii) the merger or consolidation of IHR, Interstate Operating Company, LP (“IOC”), and/or Interstate Property Corporation (“IPC”) provided, that: (A) after such merger, consolidation, Borrower and Principal shall continue to comply with the terms of Section 3.1.24 hereof, (B) following such merger or reorganization IHR shall Control and own, directly or indirectly, not less than 51% of the direct or indirect legal and beneficial ownership interests of Borrower, IOC, IPC and Principal, or such merger or consolidation is to a Permitted Transferee or to a Person Controlled by a Permitted Transferee which Permitted Transferee shall Control and own, directly or indirectly, not less than 51% of the direct or indirect legal and beneficial ownership interests of Borrower and Principal,

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and (C) the surviving entity is primarily involved in, or has a significant business line involving, the ownership and operation of real estate similar to the Property; and

     (iv) (A) the issuance or sale of stock in IHR; (B) the issuance or sale of limited partnership interests in IOC, provided that with respect to the issuance or sale of limited partnership interests in IOC, immediately after such issuance or sale IHR shall continue to Control and own, directly or indirectly, not less than 51% of the direct or indirect legal and beneficial interests in IOC, Borrower and Principal; (C) the issuance or sale of stock in IPC, provided that with respect to the issuance or sale of stock in IPC, immediately after such issuance or sale IHR shall continue to Control and own, directly or indirectly, not less than 51% of the direct or indirect legal and beneficial interests in IPC, Borrower and Principal, or (D) the sale, transfer, alienation, pledge, mortgaging, granting of a security interest in, hypothecation or encumbrance of any partnership interest in IOC to a Permitted Transferee which is not directly or indirectly owned legally or beneficially by IHR, provided that after any such sale, transfer, alienation, pledge or encumbrance IHR shall continue to Control and own, directly or indirectly, not less than 51% of the direct or indirect legal and beneficial interests in IOC, Borrower and Principal.

          IX. SALE AND SECURITIZATION OF MORTGAGE

          Section 9.1 Sale of Mortgage and Securitization. (a) Lender shall have the right (i) to sell or otherwise transfer the Loan or any portion thereof as a whole loan, (ii) to sell participation interests in the Loan or (iii) to securitize the Loan or any portion thereof in one or more private or public single-asset or pooled-loan securitizations. (The transactions referred to in clauses (i), (ii) and (iii) shall hereinafter be referred to collectively as “Secondary Market Transactions” and the transaction referred to in clause (iii) shall hereinafter be referred to as a “Securitization.” Any certificates, notes or other securities issued in connection with a Securitization are hereinafter referred to as “Securities”).

          (b) If requested by Lender, Borrower shall assist Lender in satisfying the market standards to which Lender customarily adheres or which may be reasonably required in the marketplace or by the Rating Agencies in connection with any Secondary Market Transactions, including, without limitation, to:

     (i) (A) provide updated financial and other information with respect to the Property, the business operated at the Property, Borrower and the Manager, (B) provide updated budgets relating to the Property and (C) provide updated appraisals, market studies, environmental reviews (Phase I’s and, if appropriate, Phase II’s), property condition reports and other due diligence investigations of the Property (the “Updated Information”), together with appropriate verification of the Updated Information through letters of auditors or opinions of counsel acceptable to Lender and the Rating Agencies;

     (ii) provide opinions of counsel, which may be relied upon by Lender, the Rating Agencies and their respective counsel, agents and representatives, as to non-consolidation, fraudulent conveyance, and “true sale” or any other opinion customary in

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Secondary Market Transactions or required by the Rating Agencies with respect to the Property and Borrower and Affiliates, which counsel and opinions shall be satisfactory to Lender and the Rating Agencies;

     (iii) provide updated, as of the closing date of the Secondary Market Transaction, representations and warranties made in the Loan Documents and such additional representations and warranties as the Rating Agencies may require (provided, however, that Borrower shall only be required to provide such updated or additional representations and warranties to the extent the same are then true and correct and to the extent not then true and correct shall provide an explanation satisfactory to Lender with respect thereto);

     (iv) execute such amendments to the Loan Documents and Borrower’s organizational documents reasonably requested by Lender, including, without limitation, the modification of all operative dates (including, without limitation, the Monthly Payment Date, the Interest Period, the Determination Date and the Maturity Date) under the Loan Documents by up to ten (10) days (such modification a “Re-Dating”), the execution of one or more replacement loan agreements, as may be requested by Lender or the Rating Agencies to effect the Securitization and/or deliver one or more new component notes to replace the original note or modify the original note to reflect multiple components of the Loan (and such new notes or modified note shall initially have the same weighted average coupon of the original note, but such new notes or modified note may change the interest rate, Monthly Payment Date and amortization of the Loan), such that the pricing and marketability of the Securities and the size of each class of Securities and the rating assigned to each such class by the Rating Agencies shall provide the most favorable rating levels and achieve the optimum rating levels for the Loan; provided, however, any such amendments or agreements will not materially alter the payment terms set forth in this Agreement or the other Loan Documents or materially and adversely affect Borrower or reduce in a material manner Borrower’s rights under this Agreement and the other Loan Documents, or impose additional material obligations or liabilities upon Borrower or materially reduce the rights of Borrower. In connection with a Securitization, Borrower shall cooperate with Lender to implement any Re-Dating (including obtaining a modification of any Interest Rate Cap Agreement), and to satisfy all requirements of each of the Rating Agencies with respect to the Loan and the Securitization as required by this Section 9.1. If Borrower shall fail to cooperate with Lender as set forth in this Section 9.1 within ten (10) Business Days of each initial request by Lender, Lender is hereby appointed as Borrower’s attorney in fact to execute any and all documents necessary to accomplish the Re-Dating, including, without limitation, obtaining a modification of any Interest Rate Cap Agreement. For purposes of this subsection (v), (y) the phrase “initial request” shall mean the initial request made by Lender with respect to a particular issue with reasonable specificity and shall include all related issues arising directly or logically therefrom such that issues arising directly or logically therefrom shall not serve to extend the ten (10) Business Day deadline imposed pursuant to this subsection (v) and (z) the ten (10) Business Day deadline referred to in this subsection (v) shall be extended with respect to any “initial request” to the extent reasonably necessary to enable Borrower to comply with such request. Notwithstanding the foregoing, in the event that the Securitization is a participation or syndication of the

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Loan, then for so long as UBS retains an ownership interest in the Loan, which interest is not immaterial, Borrower shall deal solely with UBS and the Servicer of UBS for all purposes under this Agreement and the other Loan Documents, provided that Borrower shall cooperate with UBS with respect to reasonable requests made to UBS by any of the other interest holders in the Loan.

     (v) attend management meetings and conduct tours of the Property.

          (c) If, at the time one or more Disclosure Documents are being prepared for a securitization, Lender reasonably expects that Borrower alone or Borrower and one or more affiliates of Borrower collectively, or the Property alone or the Property and any other parcel(s) of real property, together with improvements thereon and personal property related thereto, that is “related”, within the meaning of the definition of Significant Obligor, to the Property (a “Related Property”) collectively, will be a Significant Obligor, Borrower shall furnish to Lender upon request (i) the selected financial data or, if applicable, net operating income, required under Item 1112(b)(1) of Regulation AB and meeting the requirements thereof, if Lender expects that the principal amount of the Loan, together with any loans made to an affiliate of Borrower or secured by a Related Property that is included in a securitization with the Loan (a “Related Loan”), as of the cut-off date for such securitization may, or if the principal amount of the Loan together with any Related Loans as of the cut-off date for such securitization and at any time during which the Loan and any Related Loans are included in a securitization does, equal or exceed ten percent (10%) (but less than twenty percent (20%)) of the aggregate principal amount of all mortgage loans included or expected to be included, as applicable, in the securitization or (ii) the financial statements required under Item 1112(b)(2) of Regulation AB and meeting the requirements thereof, if Lender expects that the principal amount of the Loan together with any Related Loans as of the cut-off date for such securitization may, or if the principal amount of the Loan together with any Related Loans as of the cut-off date for such securitization and at any time during which the Loan and any Related Loans are included in a securitization does, equal or exceed twenty percent (20%) of the aggregate principal amount of all mortgage loans included or expected to be included, as applicable, in the securitization. Such financial data or financial statements shall be furnished to Lender (A) within ten (10) Business Days after notice from Lender in connection with the preparation of Disclosure Documents for the securitization, (B) not later than thirty (30) days after the end of each fiscal quarter of Borrower and (C) not later than seventy-five (75) days after the end of each fiscal year of Borrower; provided, however, that Borrower shall not be obligated to furnish financial data or financial statements pursuant to clauses (B) or (C) of this sentence with respect to any period for which a filing pursuant to the Securities Exchange Act of 1934 in connection with or relating to the securitization (an “Exchange Act Filing”) is not required. As used herein, “Regulation AB” shall mean Regulation AB under the Securities Act of 1933 and the Securities Exchange Act of 1934 (as amended). As used herein, “Disclosure Document” shall mean a prospectus, prospectus supplement, private placement memorandum, or similar offering memorandum or offering circular, in each case in preliminary or final form, used to offer securities in connection with a securitization. As used herein, “Significant Obligor” shall have the meaning set forth in Item 1101(k) of Regulation AB.

          (d) If requested by Lender, Borrower shall furnish, or shall cause the applicable tenant to furnish, to Lender financial data and/or financial statements in accordance

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with Regulation AB (as defined above) for any tenant of any Property if, in connection with a securitization, Lender expects there to be, with respect to such tenant or group of affiliated tenants, a concentration within all of the mortgage loans included or expected to be included, as applicable, in such securitization such that such tenant or group of affiliated tenants would constitute a Significant Obligor (as defined above); provided, however, that in the event the related lease does not require the related tenant to provide the foregoing information, Borrower shall use commercially reasonable efforts to cause the applicable tenant to furnish such information.

          (e) All reasonable third party costs and expenses incurred by Borrower in connection with Borrower’s complying with requests made under this Section 9.1 (including, without limitation, the fees and expenses of the Rating Agencies) shall be paid by Lender.

          Section 9.2 Securitization Indemnification. (a) Borrower understands that information provided to Lender by Borrower and its agents, counsel and representatives may be included in disclosure documents in connection with the Securitization, including, without limitation, an offering circular, a prospectus, prospectus supplement, private placement memorandum or other offering document (each, an “Disclosure Document”) and may also be included in filings with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the “Securities Act”), or the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and may be made available to investors or prospective investors in the Securities (or any class thereof), the Rating Agencies, and service providers relating to the Securitization.

          (b) Borrower, within three (3) Business Days of receipt of an Disclosure Document, shall provide in connection with each of (i) a preliminary and a final private placement memorandum or (ii) a preliminary and final prospectus or prospectus supplement, as applicable, an agreement (A) certifying that Borrower has examined such Disclosure Documents specified by Lender and that each such Disclosure Document, as it relates to Borrower, Borrower Affiliates, the Property, Manager and all other aspects of the Loan, does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, (B) indemnifying Lender (and for purposes of this Section 9.2, Lender hereunder shall include its officers and directors), the Affiliate of Lender that has filed the registration statement relating to the Securitization (the “Registration Statement”), each of its directors, each of its officers who have signed the Registration Statement and each Person that controls the Affiliate within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively, the “Lender Group”), and Lender, and any other placement agent or underwriter with respect to the Securitization, each of their respective directors and each Person who controls Lender or any other placement agent or underwriter within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act (collectively, the “Underwriter Group”) for any losses, claims, damages or liabilities (collectively, the “Liabilities”) to which Lender, the Lender Group or the Underwriter Group may become subject insofar as the Liabilities arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such sections, all as they relate to Borrower, Borrower Affiliates, the Property, Manager and all other aspects of the Loan, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated in such sections or necessary in order to make the statements

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in such sections, in light of the circumstances under which they were made, not misleading, all as they relate to Borrower, Borrower Affiliates, the Property, Manager and all other aspects of the Loan, and (C) agreeing to reimburse Lender, the Lender Group and/or the Underwriter Group for any legal or other expenses reasonably incurred by Lender, the Lender Group and the Underwriter Group in connection with investigating or defending the Liabilities; provided, however, that Borrower will be liable in any such case under clause (B) or (C) above only to the extent that any such loss claim, damage or liability arises out of or is based upon any such untrue statement or omission made therein in reliance upon and in conformity with information furnished to Lender by or on behalf of Borrower in connection with the preparation of the Disclosure Document or in connection with the underwriting or closing of the Loan, including, without limitation, financial statements of Borrower, operating statements and rent rolls with respect to the Property. This indemnity agreement will be in addition to any liability which Borrower may otherwise have.

          (c) In connection with Exchange Act Filings, Borrower shall (i) indemnify Lender, the Lender Group and the Underwriter Group for Liabilities to which Lender, the Lender Group or the Underwriter Group may become subject insofar as the Liabilities arise out of or are based upon the omission or alleged omission to state in the Disclosure Document a material fact required to be stated in the Disclosure Document in order to make the statements in the Disclosure Document, in light of the circumstances under which they were made, not misleading, all as they relate to Borrower, Borrower Affiliates, the Property, Manager and all other aspects of the Loan, and (ii) reimburse Lender, the Lender Group or the Underwriter Group for any legal or other expenses reasonably incurred by Lender, the Lender Group or the Underwriter Group in connection with defending or investigating the Liabilities, all as they relate to Borrower, Borrower Affiliates, the Property, Manager and all other aspects of the Loan.

          (d) Promptly after receipt by an indemnified party under this Section 9.2 of notice of the making of any claim or the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 9.2, notify the indemnifying party in writing thereof, but the omission to so notify the indemnifying party will not relieve the indemnifying party from any liability which the indemnifying party may have to any indemnified party hereunder except to the extent that failure to notify causes prejudice to the indemnifying party. In the event that any claim is made or action is brought against any indemnified party, and it notifies the indemnifying party, and such indemnified party seeks or intends to seek indemnity from the indemnifying party, of the commencement thereof, the indemnifying party will be entitled, jointly with any other indemnifying party, to participate therein and, to the extent that it (or they) may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. After notice from the indemnifying party to such indemnified party under this Section 9.2, such indemnified party shall pay for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there are any legal defenses available to it and/or other indemnified parties that are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assert such legal defenses and to

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otherwise participate in the defense of such action on behalf of such indemnified party at the cost of the indemnifying party. The indemnifying party shall not be liable for the expenses of more than one separate counsel unless an indemnified party shall have reasonably concluded that there may be legal defenses available to it that are different from or additional to those available to another indemnified party.

          (e) In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in Section 9.2(b) or (c) is for any reason held to be unenforceable as to an indemnified party in respect of any losses, claims, damages or liabilities (or action in respect thereof) referred to therein which would otherwise be indemnifiable under Section 9.2(b) or (c), the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages or liabilities (or action in respect thereof); provided, however, that no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. In determining the amount of contribution to which the respective parties are entitled, the following factors shall be considered: (i) Lender’s and Borrower’s relative knowledge and access to information concerning the matter with respect to which the claim was asserted; (ii) the opportunity to correct and prevent any statement or omission; and (iii) any other equitable considerations appropriate in the circumstances. Lender and Borrower hereby agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation.

          (f) The liabilities and obligations of both Borrower and Lender under this Section 9.2 shall survive the termination of this Agreement and the satisfaction and discharge of the Debt.

          X. DEFAULTS

          Section 10.1 Event of Default. (a) Each of the following events shall constitute an event of default hereunder (an “Event of Default”):

     (i) if (A) any monthly installment of principal and/or interest due under the Note or the payment due on the Maturity Date is not paid when due or (B) any other portion of the Debt is not paid when due and such non-payment in Section 10.1(b) continues for ten (10) Business Days following notice to Borrower that the same is due and payable;

     (ii) subject to Borrower’s right to contest in Section 4.1.2 hereof, if any of the Taxes or Other Charges are not paid when due, unless the same were not paid by Lender pursuant to Section 6.2;

     (iii) if the Policies are not kept in full force and effect, unless the failure of such Policies to be in full force and effect were the result of Lender’s failure to pay the premiums therefore pursuant to Section 6.3;

     (iv) if Borrower breaches or permits or suffers a breach of Article 6 of the Mortgage;

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     (v) if any representation or warranty made by Borrower herein or in any other Loan Document, or in any report, certificate, financial statement or other instrument, agreement or document furnished to Lender shall have been false or misleading in any material respect as of the date the representation or warranty was made (or, if such representation or warranty relates to an earlier date, then as of such earlier date);

     (vi) if Borrower or any SPC Party shall make an assignment for the benefit of creditors;

     (vii) if Borrower fails or admits its inability to pay debts generally as they become due;

     (viii) if a receiver, liquidator or trustee shall be appointed for Borrower or any SPC Party or if Borrower or any SPC Party shall be adjudicated a bankrupt or insolvent, or if any petition for bankruptcy, reorganization or arrangement pursuant to federal bankruptcy law, or any similar federal or state law, shall be filed by or against, consented to, or acquiesced in by, Borrower or any SPC Party, or if any proceeding for the dissolution or liquidation of Borrower or any SPC Party shall be instituted; provided, however, if such appointment, adjudication, petition or proceeding was involuntary and not consented to by Borrower and SPC Party, upon the same not being discharged, stayed or dismissed within sixty (60) days or if an order for relief is entered;

     (ix) if Borrower attempts to assign its rights under this Agreement or any of the other Loan Documents or any interest herein or therein in contravention of the Loan Documents;

     (x) subject to Borrower’s right to contest Section 4.1.2 hereof, a default under any agreement the result of which creates a Lien or encumbrance on the Property which has not been satisfied within ten (10) days after creation thereof;

     (xi) if any of the assumptions contained in the Insolvency Opinion, or in any other non-consolidation opinion delivered to Lender in connection with the Loan, or in any other non-consolidation delivered subsequent to the closing of the Loan, is or shall become untrue in any material respect;

     (xii) if Borrower breaches any representation, warranty or covenant contained in Section 3.1.24 hereof, provided, however, such violation or breach shall not constitute an Event of Default in the event that (1) such violation or breach is not knowing and intentional, (2) such violation or breach is immaterial, (3) such violation or breach shall be remedied within a timely manner and (4) within fifteen (15) Business Days of the request of Lender, Borrower delivers to Lender an Additional Insolvency Opinion, or a modification of the Insolvency Opinion, to the effect that such breach or violation shall not change the opinions rendered in the Insolvency Opinion, which opinion or modification and any counsel delivering such opinion or modification shall be acceptable to Lender in its reasonable discretion;

     (xiii) intentionally omitted;

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     (xiv) intentionally omitted;

     (xv) intentionally omitted;

     (xvi) if Borrower shall continue to be in Default under any of the other terms, covenants or conditions of this Agreement not specified in subsections (i) to (xv) above, for ten (10) days after notice to Borrower from Lender, in the case of any Default which can be cured by the payment of a sum of money, or for thirty (30) days after notice from Lender in the case of any other Default; provided, however, that if such non-monetary Default is susceptible of cure but cannot reasonably be cured within such thirty (30) day period and provided, further, that Borrower shall have commenced to cure such Default within such thirty (30) day period and thereafter diligently and expeditiously proceeds to cure the same, such thirty (30) day period shall be extended for such time as is reasonably necessary for Borrower in the exercise of due diligence to cure such Default, such additional period not to exceed sixty (60) days beyond the original thirty (30) day period;

     (xvii) if there shall be a Default under any of the other Loan Documents beyond any applicable cure periods contained in such Loan Documents, whether as to Borrower or the Property, or if any other such event shall occur or condition shall exist, if the effect of such event or condition is to accelerate the maturity of any portion of the Debt or to permit Lender to accelerate the maturity of all or any portion of the Debt;

     (xviii) if a material default has occurred and continues beyond any applicable cure period under the Franchise Agreement which default permits the Franchisor to terminate or cancel the Franchise Agreement;

     (xix) if a material default has occurred and continues beyond any applicable cure period under the Management Agreement which default permits the Manager to terminate or cancel the Management Agreement;

     (xx) if Borrower ceases to do business as a hotel at the Property or terminates such business for any reason whatsoever (other than temporary cessation in connection with any continuous and diligent renovation or restoration of the Property following a Casualty or Condemnation); or

     (xxi) if Borrower fails to obtain or maintain an Interest Rate Protection Agreement or replacement thereof in accordance with Section 2.5 hereof.

          (b) Upon the occurrence of an Event of Default (other than an Event of Default described in Section 10.1(a)(vi), (vii) or (viii) above) and at any time thereafter Lender may, in addition to any other rights or remedies available to it pursuant to this Agreement and the other Loan Documents or at law or in equity, take such action, without notice or demand, that Lender deems advisable to protect and enforce its rights against Borrower and in and to the Property, including, without limitation, declaring the Debt to be immediately due and payable, and Lender may enforce or avail itself of any or all rights or remedies provided in the Loan Documents against Borrower and the Property, including, without limitation, all rights or remedies available at law or in equity; and upon any Event of Default described in Section 10.1(a)(vi), (vii) or (viii) above, the Debt and all other obligations of Borrower hereunder and

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under the other Loan Documents shall immediately and automatically become due and payable, without notice or demand, and Borrower hereby expressly waives any such notice or demand, anything contained herein or in any other Loan Document to the contrary notwithstanding.

          Section 10.2 Remedies. (a) Upon the occurrence and during the continuance of an Event of Default, all or any one or more of the rights, powers, privileges and other remedies available to Lender against Borrower under this Agreement or any of the other Loan Documents executed and delivered by, or applicable to, Borrower or at law or in equity may be exercised by Lender at any time and from time to time, whether or not all or any of the Debt shall be declared due and payable, and whether or not Lender shall have commenced any foreclosure proceeding or other action for the enforcement of its rights and remedies under any of the Loan Documents with respect to the Property. Any such actions taken by Lender shall be cumulative and concurrent and may be pursued independently, singly, successively, together or otherwise, at such time and in such order as Lender may determine in its sole discretion, to the fullest extent permitted by law, without impairing or otherwise affecting the other rights and remedies of Lender permitted by law, equity or contract or as set forth herein or in the other Loan Documents. Without limiting the generality of the foregoing, if an Event of Default is continuing (i) Lender is not subject to any “one action” or “election of remedies” law or rule, and (ii) all liens and other rights, remedies or privileges provided to Lender shall remain in full force and effect until Lender has exhausted all of its remedies against the Property and the Mortgage has been foreclosed, sold and/or otherwise realized upon in satisfaction of the Debt or the Debt has been paid in full.

          (b) Lender shall have the right from time to time to partially foreclose the Mortgage in any manner and for any amounts secured by the Mortgage then due and payable as determined by Lender in its sole discretion including, without limitation, the following circumstances: (i) in the event Borrower defaults beyond any applicable grace period in the payment of one or more scheduled payments of principal and interest, Lender may foreclose the Mortgage to recover such delinquent payments, or (ii) in the event Lender elects to accelerate less than the entire outstanding principal balance of the Loan, Lender may foreclose the Mortgage to recover so much of the principal balance of the Loan as Lender may accelerate and such other sums secured by the Mortgage as Lender may elect. Notwithstanding one or more partial foreclosures, the Property shall remain subject to the Mortgage to secure payment of sums secured by the Mortgage and not previously recovered.

          (c) Subject to Section 9.1 (except if in connection with an Event of Default) Lender shall have the right from time to time to sever the Note and the other Loan Documents into one or more separate notes, mortgages and other security documents (the “Severed Loan Documents”) in such denominations as Lender shall determine in its sole discretion for purposes of evidencing and enforcing its rights and remedies provided hereunder. Borrower shall execute and deliver to Lender from time to time, promptly after the request of Lender, a severance agreement and such other documents as Lender shall request in order to effect the severance described in the preceding sentence, all in form and substance reasonably satisfactory to Lender. From and after and during the continuance of an Event of Default, Borrower hereby absolutely and irrevocably appoints Lender as its true and lawful attorney, coupled with an interest, in its name and stead to make and execute all documents necessary or desirable to effect the aforesaid severance, Borrower ratifying all that its said attorney shall do by virtue thereof; provided,

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however, Lender shall not make or execute any such documents under such power until three (3) days after notice has been given to Borrower by Lender of Lender’s intent to exercise its rights under such power. Provided no Event of Default has occurred and is continuing, (i) Borrower shall not be obligated to pay any costs or expenses incurred in connection with the preparation, execution, recording or filing of the Severed Loan Documents, (ii) the Severed Loan Documents shall not contain any representations, warranties or covenants not contained in the Loan Documents and any such representations and warranties contained in the Severed Loan Documents will be given by Borrower only as of the Closing Date and (iii) the Severed Loan Documents will not materially increase the Borrower’s obligations under this Agreement and the other Loan Documents nor materially increase the Borrower’s rights under this Agreement and the other Loan Documents.

          (d) Any amounts recovered from the Property or any other collateral for the Loan after an Event of Default may be applied by Lender toward the payment of any interest and/or principal of the Loan and/or any other amounts due under the Loan Documents in such order, priority and proportions as Lender in its sole discretion shall determine.

          Section 10.3 Right to Cure Defaults. From and after and during the continuance of an Event of Default, Lender may, but without any obligation to do so and without notice to or demand on Borrower and without releasing Borrower from any obligation hereunder or being deemed to have cured any Event of Default hereunder, make, do or perform any obligation of Borrower hereunder in such manner and to such extent as Lender may deem necessary. From and after and during the continuance of an Event of Default, Lender is authorized to enter upon the Property for such purposes, or appear in, defend, or bring any action or proceeding to protect its interest in the Property for such purposes, and the cost and expense thereof (including reasonable attorneys’ fees to the extent permitted by law), with interest as provided in this Section 10.3, shall constitute a portion of the Debt and shall be due and payable to Lender upon demand. All such costs and expenses incurred by Lender in remedying such Event of Default or such failed payment or act or in appearing in, defending, or bringing any action or proceeding shall bear interest at the Default Rate, for the period after such cost or expense was incurred into the date of payment to Lender. All such costs and expenses incurred by Lender together with interest thereon calculated at the Default Rate shall be deemed to constitute a portion of the Debt and be secured by the liens, claims and security interests provided to Lender under the Loan Documents and shall be immediately due and payable upon demand by Lender therefore.

          Section 10.4 Remedies Cumulative. The rights, powers and remedies of Lender under this Agreement shall be cumulative and not exclusive of any other right, power or remedy which Lender may have against Borrower pursuant to this Agreement or the other Loan Documents, or existing at law or in equity or otherwise. Lender’s rights, powers and remedies may be pursued singly, concurrently or otherwise, at such time and in such order as Lender may determine in Lender’s sole discretion. No delay or omission to exercise any remedy, right or power accruing upon an Event of Default shall impair any such remedy, right or power or shall be construed as a waiver thereof, but any such remedy, right or power may be exercised from time to time and as often as may be deemed expedient. A waiver of one Default or Event of Default with respect to Borrower shall not be construed to be a waiver of any subsequent Default or Event of Default by Borrower or to impair any remedy, right or power consequent thereon.

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          XI. MISCELLANEOUS

          Section 11.1 Successors and Assigns. All covenants, promises and agreements in this Agreement, by or on behalf of Borrower, shall inure to the benefit of the legal representatives, successors and assigns of Lender.

          Section 11.2 Lender’s Discretion. Whenever pursuant to this Agreement Lender exercises any right given to it to approve or disapprove, or any arrangement or term is to be satisfactory to Lender, the decision of Lender to approve or disapprove or to decide whether arrangements or terms are satisfactory or not satisfactory shall (except as is otherwise specifically herein provided) be in the sole discretion of Lender and shall be final and conclusive. Prior to a Securitization, whenever pursuant to this Agreement the Rating Agencies are given any right to approve or disapprove, or any arrangement or term is to be satisfactory to the Rating Agencies, the decision of Lender to approve or disapprove or to decide whether arrangements or terms are satisfactory or not satisfactory, based upon Lender’s determination of Rating Agency criteria, shall be substituted therefore.

          Section 11.3 Governing Law. (A) THIS AGREEMENT WAS NEGOTIATED IN THE STATE OF NEW YORK, AND MADE BY LENDER AND ACCEPTED BY BORROWER IN THE STATE OF NEW YORK, AND THE PROCEEDS OF THE NOTE DELIVERED PURSUANT HERETO WERE DISBURSED FROM THE STATE OF NEW YORK, WHICH STATE THE PARTIES AGREE HAS A SUBSTANTIAL RELATIONSHIP TO THE PARTIES AND TO THE UNDERLYING TRANSACTION EMBODIED HEREBY, AND IN ALL RESPECTS, INCLUDING, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE (WITHOUT REGARD TO PRINCIPLES OF CONFLICT LAWS) AND ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA, EXCEPT THAT AT ALL TIMES THE PROVISIONS FOR THE CREATION, PERFECTION, AND ENFORCEMENT OF THE LIENS AND SECURITY INTERESTS CREATED WITH RESPECT TO THE PROPERTY; PURSUANT TO THE MORTGAGE AND THE ASSIGNMENT OF LEASES SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE IN WHICH THE PROPERTY IS LOCATED, AS AND TO THE EXTENT PROVIDED IN THE MORTGAGE AND THE ASSIGNMENT OF LEASES, IT BEING UNDERSTOOD THAT, TO THE FULLEST EXTENT PERMITTED BY THE LAW OF SUCH STATE, THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE CONSTRUCTION, VALIDITY AND ENFORCEABILITY OF ALL LOAN DOCUMENTS AND ALL OF THE OBLIGATIONS ARISING HEREUNDER OR THEREUNDER. TO THE FULLEST EXTENT PERMITTED BY LAW, BORROWER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT AND THE NOTE, AND THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY AND CONSTRUED IN

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ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

          (B) ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER OR BORROWER ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY AT LENDER’S OPTION BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN THE CITY OF NEW YORK, COUNTY OF NEW YORK, PURSUANT TO SECTION 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW AND BORROWER WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING. BORROWER DOES HEREBY DESIGNATE AND APPOINT:

DECAMPO, DIAMOND & ASH
747 THIRD AVENUE
37TH FLOOR
NEW YORK, NY 10017
ATTENTION: WILLIAM H. DIAMOND, ESQ.

AS ITS AUTHORIZED AGENT TO ACCEPT AND ACKNOWLEDGE ON ITS BEHALF SERVICE OF ANY AND ALL PROCESS WHICH MAY BE SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY FEDERAL OR STATE COURT IN NEW YORK, NEW YORK, AND AGREES THAT SERVICE OF PROCESS UPON SAID AGENT AT SAID ADDRESS AND WRITTEN NOTICE OF SAID SERVICE MAILED OR DELIVERED TO BORROWER IN THE MANNER PROVIDED HEREIN SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON BORROWER, IN ANY SUCH SUIT, ACTION OR PROCEEDING IN THE STATE OF NEW YORK. BORROWER (I) SHALL GIVE PROMPT NOTICE TO LENDER OF ANY CHANGED ADDRESS OF ITS AUTHORIZED AGENT HEREUNDER, (II) MAY AT ANY TIME AND FROM TIME TO TIME DESIGNATE A SUBSTITUTE AUTHORIZED AGENT WITH AN OFFICE IN NEW YORK, NEW YORK (WHICH SUBSTITUTE AGENT AND OFFICE SHALL BE DESIGNATED AS THE PERSON AND ADDRESS FOR SERVICE OF PROCESS), AND (III) SHALL PROMPTLY DESIGNATE SUCH A SUBSTITUTE IF ITS AUTHORIZED AGENT CEASES TO HAVE AN OFFICE IN NEW YORK, NEW YORK OR IS DISSOLVED WITHOUT LEAVING A SUCCESSOR.

          Section 11.4 Modification, Waiver in Writing. No modification, amendment, extension, discharge, termination or waiver of any provision of this Agreement or of any other Loan Document, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in a writing signed by the party against whom enforcement is sought, and then such waiver or consent shall be effective only in the specific instance, and for the purpose, for which given. Except as otherwise expressly provided herein, no notice to, or demand on Borrower, shall entitle Borrower to any other or future notice or demand in the same, similar or other circumstances.

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          Section 11.5 Delay Not a Waiver. Neither any failure nor any delay on the part of Lender in insisting upon strict performance of any term, condition, covenant or agreement, or exercising any right, power, remedy or privilege hereunder, or under any other Loan Document, shall operate as or constitute a waiver thereof, nor shall a single or partial exercise thereof preclude any other future exercise, or the exercise of any other right, power, remedy or privilege. In particular, and not by way of limitation, by accepting payment after the due date of any amount payable under this Agreement or any other Loan Document, Lender shall not be deemed to have waived any right either to require prompt payment when due of all other amounts due under this Agreement or the other Loan Documents, or to declare a default for failure to effect prompt payment of any such other amount. Lender shall have the right to waive or reduce any time periods that Lender is entitled to under the Loan Documents in its sole and absolute discretion.

          Section 11.6 Notices. All notices, demands, requests, consents, approvals or other communications (any of the foregoing, a “Notice”) required, permitted, or desired to be given hereunder shall be in writing sent by telefax (with answer back acknowledged) or by registered or certified mail, postage prepaid, return receipt requested, or delivered by hand or reputable overnight courier addressed to the party to be so notified at its address hereinafter set forth, or to such other address as such party may hereafter specify in accordance with the provisions of this Section 11.6. Any Notice shall be deemed to have been received: (a) three (3) days after the date such Notice is mailed, (b) on the date of sending by telefax if sent during business hours on a Business Day (otherwise on the next Business Day), (c) on the date of delivery by hand if delivered during business hours on a Business Day (otherwise on the next Business Day), and (d) on the next Business Day if sent by an overnight commercial courier, in each case addressed to the parties as follows:

If to Lender:	UBS REAL ESTATE SECURITIES INC.
	1285 Avenue of the Americas
	New York, New York 10019
	Attention: Jeffrey N. Lavine
	Facsimile No.: (212) 713-4062
with a copy to:	Cadwalader, Wickersham & Taft LLP
	One World Financial Center
	New York, New York 10281
	Attention: William P. McInerney, Esq.
	Facsimile No.: (212) 504-6666
If to Borrower:	INTERSTATE ARLINGTON, LP
	c/o Interstate Hotels & Resorts Inc.
	4501 North Fairfax Drive
	Arlington, VA 22203
	Attention: Christopher L. Bennett, Esq.
	Facsimile No.: (703) 542-0965

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with a copy to:	DECAMPO, DIAMOND & ASH
	747 Third Avenue
	37th Floor
	New York, NY 10017
	Attention: William H. Diamond, Esq.
	Facsimile No.: (973) 758-1728

          Section 11.7 Trial by Jury. BORROWER AND LENDER EACH HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THE LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY BORROWER AND LENDER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. EACH PARTY IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER.

          Section 11.8 Headings. The Article and/or Section headings and the Table of Contents in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.

          Section 11.9 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

          Section 11.10 Preferences. Lender shall have the continuing and exclusive right to apply or reverse and reapply any and all payments by Borrower to any portion of the obligations of Borrower hereunder. To the extent Borrower makes a payment or payments to Lender, which payment or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the obligations hereunder or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment or proceeds had not been received by Lender.

          Section 11.11 Waiver of Notice. Borrower shall not be entitled to any notices of any nature whatsoever from Lender except with respect to matters for which this Agreement or the other Loan Documents specifically and expressly provide for the giving of notice by Lender to Borrower and except with respect to matters for which Borrower is not, pursuant to applicable Legal Requirements, permitted to waive the giving of notice. Borrower hereby expressly waives the right to receive any notice from Lender with respect to any matter for which this Agreement

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or the other Loan Documents do not specifically and expressly provide for the giving of notice by Lender to Borrower.

          Section 11.12 Remedies of Borrower. In the event that a claim or adjudication is made that Lender or its agents have acted unreasonably or unreasonably delayed acting in any case where, by law or under this Agreement or the other Loan Documents, Lender or such agent, as the case may be, has an obligation to act reasonably or promptly, neither Lender nor its agents shall be liable for any monetary damages, and Borrower’s sole remedy shall be limited to commencing an action seeking injunctive relief or declaratory judgment. Any action or proceeding to determine whether Lender has acted reasonably shall be determined by an action seeking declaratory judgment.

          Section 11.13 Expenses; Indemnity. (a) Borrower shall pay or, if Borrower fails to pay, reimburse Lender upon receipt of notice from Lender, for all reasonable costs and expenses (including reasonable attorneys’ fees and disbursements but excluding Lender’s internal costs of overhead) incurred by Lender in connection with (i) Borrower’s ongoing performance of and compliance with Borrower’s agreements and covenants contained in this Agreement and the other Loan Documents on its part to be performed or complied with after the Closing Date, including, without limitation, confirming compliance with environmental and insurance requirements; (ii) Lender’s ongoing performance of and compliance with all agreements and covenants contained in this Agreement and the other Loan Documents on its part to be performed or complied with after the Closing Date with respect to the negotiation, preparation, execution, delivery and administration of any consents, amendments, waivers or other modifications to this Agreement and the other Loan Documents and any other documents or matters requested by Borrower; (iii) the filing and recording fees and expenses, title insurance and reasonable fees and expenses of counsel for providing to Lender all required legal opinions, and other similar expenses incurred, in creating and perfecting the Liens in favor of Lender pursuant to this Agreement and the other Loan Documents; (iv) enforcing or preserving any rights, in response to third party claims or the prosecuting or defending of any action or proceeding or other litigation or otherwise, in each case against, under or affecting Borrower, this Agreement, the other Loan Documents, the Property, or any other security given for the Loan; and (v) enforcing any obligations of or collecting any payments due from Borrower under this Agreement, the other Loan Documents or with respect to the Property or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a “work-out” or of any insolvency or bankruptcy proceedings; provided, however, that Borrower shall not be liable for the payment of any such costs and expenses to the extent the same arise by reason of the gross negligence, illegal acts, fraud or willful misconduct of Lender. Any costs due and payable to Lender shall be paid to Lender within ten (10) days of Lender’s demand therefor.

          (b) Borrower shall indemnify, defend and hold harmless Lender and its officers, directors, agents, employees (and the successors and assigns of the foregoing) (the “Lender Indemnitees”) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for the Lender Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Lender Indemnitees shall be

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designated a party thereto), that may be imposed on, incurred by, or asserted against the Lender Indemnitees in any manner relating to or arising out of (i) any breach by Borrower of its obligations under, or any material misrepresentation by Borrower contained in, this Agreement or the other Loan Documents, or (ii) the use or intended use of the proceeds of the Loan (collectively, the “Indemnified Liabilities”); provided, however, that Borrower shall not have any obligation to the Lender Indemnitees hereunder to the extent that such Indemnified Liabilities arise from the gross negligence, illegal acts, fraud or willful misconduct of the Lender Indemnitees. To the extent that the undertaking to indemnify, defend and hold harmless set forth in the preceding sentence may be unenforceable because it violates any law or public policy, Borrower shall pay the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by the Lender Indemnitees.

          Section 11.14 Schedules Incorporated. The Schedules annexed hereto are hereby incorporated herein as a part of this Agreement with the same effect as if set forth in the body hereof.

          Section 11.15 Offsets, Counterclaims and Defenses. Any assignee of Lender’s interest in and to this Agreement and the other Loan Documents shall take the same free and clear of all offsets, counterclaims or defenses which are unrelated to such documents which Borrower may otherwise have against any assignor of such documents, and no such unrelated counterclaim or defense shall be interposed or asserted by Borrower in any action or proceeding brought by any such assignee upon such documents and any such right to interpose or assert any such unrelated offset, counterclaim or defense in any such action or proceeding is hereby expressly waived by Borrower.

          Section 11.16 No Joint Venture or Partnership; No Third Party Beneficiaries. (a) Borrower and Lender intend that the relationships created hereunder and under the other Loan Documents be solely that of borrower and lender. Nothing herein or therein is intended to create a joint venture, partnership, tenancy-in-common, or joint tenancy relationship between Borrower and Lender nor to grant Lender any interest in the Property other than that of mortgagee, beneficiary or lender.

          (b) This Agreement and the other Loan Documents are solely for the benefit of Lender and Borrower and nothing contained in this Agreement or the other Loan Documents shall be deemed to confer upon anyone other than Lender and Borrower any right to insist upon or to enforce the performance or observance of any of the obligations contained herein or therein. All conditions to the obligations of Lender to make the Loan hereunder are imposed solely and exclusively for the benefit of Lender and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that Lender will refuse to make the Loan in the absence of strict compliance with any or all thereof and no other Person shall under any circumstances be deemed to be a beneficiary of such conditions, any or all of which may be freely waived in whole or in part by Lender if, in Lender’s sole discretion, Lender deems it advisable or desirable to do so.

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          Section 11.17 Publicity. All news releases, publicity or advertising by Borrower or its Affiliates through any media intended to reach the general public which refers to the Loan Documents or the financing evidenced by the Loan Documents, to Lender or any of its Affiliates shall be subject to the prior written approval of Lender. Borrower authorizes Lender to issue press releases, advertisements and other promotional materials in connection with Lender’s own promotional and marketing activities, including in connection with a Secondary Market Transaction, and such materials may describe the Loan in general terms or in detail and Lender’s participation therein in the Loan. All references to Lender contained in any press release, advertisement or promotional material issued by Borrower shall be approved in writing by Lender in advance of issuance.

          Section 11.18 Waiver of Marshalling of Assets. To the fullest extent permitted by law, Borrower, for itself and its successors and assigns, waives all rights to a marshalling of the assets of Borrower, Borrower’s partners and others with interests in Borrower, and of the Property, and shall not assert any right under any laws pertaining to the marshalling of assets, the sale in inverse order of alienation, homestead exemption, the administration of estates of decedents, or any other matters whatsoever to defeat, reduce or affect the right of Lender under the Loan Documents to a sale of the Property for the collection of the Debt without any prior or different resort for collection or of the right of Lender to the payment of the Debt out of the net proceeds of the Property in preference to every other claimant whatsoever.

          Section 11.19 Waiver of Offsets/Defenses/Counterclaims. Borrower hereby waives the right to assert a counterclaim, other than a compulsory counterclaim, in any action or proceeding brought against it by Lender or its agents or otherwise to offset any obligations to make the payments required by the Loan Documents. No failure by Lender to perform any of its obligations hereunder shall be a valid defense to, or result in any offset against, any payments which Borrower is obligated to make under any of the Loan Documents.

          Section 11.20 Conflict; Construction of Documents; Reliance. In the event of any conflict between the provisions of this Agreement and any of the other Loan Documents, the provisions of this Agreement shall control. The parties hereto acknowledge that they were represented by competent counsel in connection with the negotiation, drafting and execution of the Loan Documents and that such Loan Documents shall not be subject to the principle of construing their meaning against the party which drafted same. Borrower acknowledges that, with respect to the Loan, Borrower shall rely solely on its own judgment and advisors in entering into the Loan without relying in any manner on any statements, representations or recommendations of Lender or any parent, subsidiary or Affiliate of Lender. Lender shall not be subject to any limitation whatsoever in the exercise of any rights or remedies available to it under any of the Loan Documents or any other agreements or instruments which govern the Loan by virtue of the ownership by it or any parent, subsidiary or Affiliate of Lender of any equity interest any of them may acquire in Borrower, and Borrower hereby irrevocably waives the right to raise any defense or take any action on the basis of the foregoing with respect to Lender’s exercise of any such rights or remedies. Borrower acknowledges that Lender engages in the business of real estate financings and other real estate transactions and investments which may be viewed as adverse to or competitive with the business of Borrower or its Affiliates.

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          Section 11.21 Brokers and Financial Advisors. Borrower hereby represents that it has dealt with no financial advisors, brokers, underwriters, placement agents, agents or finders in connection with the transactions contemplated by this Agreement. Borrower shall indemnify, defend and hold Lender harmless from and against any and all claims, liabilities, costs and expenses of any kind (including Lender’s expenses and reasonable attorneys’ fees) in any way relating to or arising from a claim by any Person that such Person acted on behalf of Borrower or Lender (which has been disclosed by Lender to Borrower) in connection with the transactions contemplated herein. The provisions of this Section 11.21 shall survive the expiration and termination of this Agreement and the payment of the Debt.

          Section 11.22 Exculpation. Notwithstanding anything to the contrary contained in this Agreement, in the Note or in any other Loan Document, but subject to the qualifications below, Lender shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in the Note, this Agreement, the Mortgage or the other Loan Documents by any action or proceeding wherein a money judgment shall be sought against Borrower, except that Lender may bring a foreclosure action, an action for specific performance or any other appropriate action or proceeding to enable Lender to enforce and realize upon its interest under the Note, this Agreement, the Mortgage and the other Loan Documents, or in the Property, the Rents, or any other collateral given to Lender pursuant to the Loan Documents; provided, however, that, except as specifically provided herein, any judgment in any such action or proceeding shall be enforceable against Borrower only to the extent of Borrower’s interest in the Property, in the Rents, Net Proceeds and in any other collateral given to Lender, and Lender, by accepting the Note, this Agreement, the Mortgage and the other Loan Documents, shall not sue for, seek or demand any deficiency judgment against Borrower in any such action or proceeding under or by reason of or under or in connection with the Note, this Agreement, the Mortgage or the other Loan Documents. The provisions of this Section shall not, however, (a) constitute a waiver, release or impairment of any obligation evidenced or secured by any of the Loan Documents; (b) impair the right of Lender to name Borrower as a party defendant in any action or suit for foreclosure and sale under the Mortgage; (c) affect the validity or enforceability of any guaranty made in connection with the Loan or any of the rights and remedies of Lender thereunder; (d) impair the right of Lender to obtain the appointment of a receiver; (e) impair the enforcement of the Assignment of Leases; (f) constitute a prohibition against Lender to seek a deficiency judgment against Borrower in order to fully realize the security granted by the Mortgage or to commence any other appropriate action or proceeding in order for Lender to exercise its remedies against the Property; or (g) constitute a waiver of the right of Lender to enforce the liability and obligation of Borrower, by money judgment or otherwise, to the extent of any loss, damage, cost, expense, liability, claim or other obligation incurred by Lender (including attorneys’ fees and costs reasonably incurred) arising out of or in connection with and Borrower shall be personally liable for the following:

     (i) fraud or intentional misrepresentation by Borrower or any guarantor in connection with the Loan;

     (ii) the gross negligence or willful misconduct of Borrower;

     (iii) the intentional breach of any representation, warranty, covenant or indemnification provision in the Environmental Indemnity or in the Mortgage concerning

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environmental laws, hazardous substances and asbestos and any indemnification of Lender with respect thereto in either document;

     (iv) the removal or disposal of any portion of the Property after an Event of Default;

     (v) the misapplication or conversion by Borrower of (A) any insurance proceeds paid by reason of any loss, damage or destruction to the Property, (B) any Awards or other amounts received in connection with the Condemnation of all or a portion of the Property, or (C) any Rents following an Event of Default or any Rents collected for more than one month in advance to the extent such Rents or any other payments in respect of the Leases and other income of the Property or any other collateral are not applied to the costs of maintenance and operation of the Property and to the payment of taxes, lien claims, insurance premiums, Debt Service and other amounts due under the Loan Documents;

     (vi) subject to the provisions of Section 4.1.2 of this Agreement, failure to pay and discharge any mechanic’s or materialmen’s Liens on any portion of the Property;

     (vii) any security deposits, advance deposits or any other deposits collected with respect to the Property which are not delivered to Lender upon a foreclosure of the Property or action in lieu thereof, except to the extent any such security deposits were applied in accordance with the terms and conditions of any of the Leases prior to the occurrence of the Event of Default that gave rise to such foreclosure or action in lieu thereof;

     (viii) Borrower’s indemnification of Lender set forth in Section 9.2 hereof;

     (ix) Subject to Sections 4.1.2, 6.2, 6.3 and 7.1, Borrower’s failure to maintain insurance as required by this Agreement or to pay any Taxes or Other Charges affecting the Property;

     (x) damage or destruction to the Property caused by the gross negligence or willful misconduct of Borrower, its agents, employees, or contractors;

     (xi) any intentional failure of Borrower to maintain its status as a single purpose entity as required by, and in accordance with, the terms hereof; or

     (xii) Borrower’s commission of a criminal act;

     (xiii) the breach of any representation, warranty or covenant set forth in Section 3.1.24 hereof; or

     (xiv) Borrower’s failure to permit on-site inspections of the Property, failure to provide financial information, failure to maintain its status as a single purpose entity or failure to appoint a new property manager upon the request of Lender after an Event of Default, each as required by, and in accordance with the terms and provisions of, this Agreement and the Mortgage;

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          Notwithstanding anything to the contrary in this Agreement, the Note or any of the Loan Documents, (A) Lender shall not be deemed to have waived any right which Lender may have under Section 506(a), 506(b), 1111(b) or any other provisions of the Bankruptcy Code to file a claim for the full amount of the Debt or to require that all collateral shall continue to secure all of the Debt owing to Lender in accordance with the Loan Documents, and (B) the Debt shall be fully recourse to Borrower in the event that: (i) Borrower fails to obtain Lender’s prior consent to any subordinate financing or other voluntary Lien encumbering the Property other than the Permitted Encumbrances or as otherwise specifically permitted by this Agreement; (ii) Borrower fails to obtain Lender’s prior consent to any assignment, transfer, or conveyance of the Property or any interest therein as required by the Mortgage or this Agreement other than to any such assignment, transfer or conveyance for which Lender’s consent is not required under this Agreement ; (iii) Borrower files a voluntary petition under the Bankruptcy code or any other Federal or state bankruptcy or insolvency law; (iv) an Affiliate, officer, director, or representative which controls, directly or indirectly, Borrower files, or joins in the filing of, an involuntary petition against Borrower under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law, or solicits or causes to be solicited petitioning creditors for any involuntary petition against Borrower from any Person; (v) Borrower files an answer consenting to or otherwise acquiescing in or joining in any involuntary petition filed against it, by any other Person under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law, or solicits or causes to be solicited petitioning creditors for any involuntary petition from any Person; (vi) any Affiliate, officer, director, or representative which controls Borrower consents to or acquiesces in or joins in an application for the appointment of a custodian, receiver, trustee, or examiner for Borrower or any portion of the Property; or (vii) Borrower makes an assignment for the benefit of creditors, or admits, in writing or in any legal proceeding, its insolvency or inability to pay its debts as they become due.

          Section 11.23 Prior Agreements. This Agreement and the other Loan Documents contain the entire agreement of the parties hereto and thereto in respect of the transactions contemplated hereby and thereby, and all prior agreements among or between such parties, whether oral or written, including, without limitation, the Application Letter dated September 7, 2006 between Borrower and Lender, are superseded by the terms of this Agreement and the other Loan Documents.

          Section 11.24 Servicer. (a) At the option of Lender, the Loan may be serviced by a servicer (the “Servicer”) selected by Lender and Lender may delegate all or any portion of its responsibilities under this Agreement and the other Loan Documents to the Servicer pursuant to a servicing agreement (the “Servicing Agreement”) between Lender and Servicer. Borrower shall be responsible for the monthly or annual servicing fees relating to or arising under the Servicing Agreement (such money or annual fees not to exceed one basis point (0.01%) of the original principal amount of the Loan). Servicer shall, however, be entitled to reimbursement of costs and expenses as and to the same extent (but without duplication) as Lender is entitled thereto under the applicable provisions of this Agreement and the other Loan Documents. Lender or Servicer shall deliver notice to Borrower of the appointment of such Servicer.

          (b) Servicer shall have the right to exercise all rights of Lender and enforce all obligations of Borrower pursuant to the provisions of this Agreement, the Note and the other Loan Documents.

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          (c) Provided Borrower shall have been given notice of Servicer’s address by Lender, Borrower shall deliver to Servicer duplicate originals of all notices and other instruments (other than promissory notes) which Borrower may or shall be required to deliver to Lender pursuant to this Agreement, the Note and the other Loan Documents (and no delivery of such notices or other instruments by Borrower shall be of any force or effect unless delivered to Lender and Servicer as provided above).

          Section 11.25 Joint and Several Liability. If more than one Person has executed this Agreement as “Borrower,” the representations, covenants, warranties and obligations of all such Persons hereunder shall be joint and several.

          Section 11.26 Creation of Security Interest. Notwithstanding any other provision set forth in this Agreement, the Note, the Mortgage or any of the other Loan Documents, Lender may at any time create a security interest in all or any portion of its rights under this Agreement, the Note, the Mortgage and any other Loan Document (including, without limitation, the advances owing to it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System.

          Section 11.27 Assignments and Participations. (a) The Lender may assign to one or more Persons all or a portion of its rights and obligations under this Loan Agreement.

          (b) Upon such execution and delivery, from and after the effective date specified in such Assignment and Acceptance, the assignee thereunder shall be a party hereto and have the rights and obligations of Lender hereunder.

          (c) Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 11.27, disclose to the assignee or participant or proposed assignee or participant, as the case may be, any information relating to Borrower or any of its Affiliates or to any aspect of the Loan that has been furnished to the Lender by or on behalf of the Borrower or any of its Affiliates.

          Section 11.28 Intentionally Omitted.

          Section 11.29 Component Notes. (a) Borrower covenants and agrees that in connection with any Securitization of the Loan, upon Lender’s request and at Lender’s cost, Borrower shall deliver one or more new component notes to replace the original note or modify the original note to reflect multiple components of the Loan or create one or more additional mezzanine loans (including amending Borrower’s organizational structure to provide for one or more additional mezzanine borrowers) (each a “Resizing Event”). Lender agrees that such new notes or modified note or mezzanine notes shall immediately after the Resizing Event have the same initial weighted average coupon as the original note prior to such Resizing Event, notwithstanding that such new notes or modified note or mezzanine notes or may, in connection with the application of principal to such new notes or modified note or mezzanine notes, subsequently cause the weighted average spread of such new notes or modified note or mezzanine notes to change (but not increase, except that the weighted average spread may subsequently increase due to involuntary prepayments or if an Event of Default shall occur) and apply principal, interest rates and amortization of the Loan between such new components and/or

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mezzanine loans in a manner specified by Lender in its sole discretion such that the pricing and marketability of the Securities and the size of each class of Securities and the rating assigned to each such class by the Rating Agencies shall provide the most favorable rating levels and achieve the optimum bond execution for the Loan. In connection with any Resizing Event, Borrower covenants and agrees to resize the Interest Rate Protection Agreement to reflect the newly created components and/or mezzanine loans. Such Resizing Event shall not materially increase Borrower’s obligations or materially decrease Borrower’s rights hereunder.

          (b) It shall be an Event of Default under this Agreement, the Note, the Mortgage and the other Loan Documents if Borrower fails to comply with any of the terms, covenants or conditions of this Section 11.29 within ten (10) Business Days of notice thereof.

          Section 11.30 Mezzanine Loan Option. Lender shall have the right, at no material cost to Borrower, at any time to divide the Loan into two parts (the “Mezzanine Option”): a mortgage loan (the "Mortgage Loan”) and a mezzanine loan (the “Mezzanine Loan”). The principal amount of the Mortgage Loan plus the principal amount of the Mezzanine Loan shall equal the outstanding principal balance of the Loan immediately prior to the creation of the Mortgage Loan and the Mezzanine Loan. In effectuating the foregoing, Lender (in its capacity as the lender under the Mezzanine Loan, the “Mezzanine Lender”) will make a loan to Borrower (in its capacity as the borrower under the Mezzanine Loan, the “Mezzanine Borrower”); Mezzanine Borrower will contribute the amount of the Mezzanine Loan to Borrower (in its capacity as Borrower under the Mortgage Loan, “Mortgage Borrower”) and Mortgage Borrower will apply the contribution to pay down the Loan to its Mortgage Loan amount. The Mortgage Loan and the Mezzanine Loan will be on the same terms and subject to the same conditions set forth in this Agreement, the Note, the Mortgage and the other Loan Documents and shall not increase Borrower’s obligations or decrease Borrower’s rights hereunder in a material manner except as follows:

          (a) Lender (in its capacity as the lender under the Mortgage Loan, the “Mortgage Lender”) shall have the right to establish different interest rates and debt service payments for the Mortgage Loan and the Mezzanine Loan and to require the payment of the Mortgage Loan and the Mezzanine Loan in such order of priority as may be designated by Lender; provided, that (i) the total loan amounts for the Mortgage Loan and the Mezzanine Loan shall equal the amount of the Loan immediately prior to the creation of the Mortgage Loan and the Mezzanine Loan and (ii) the initial weighted average spread of the Loan and any Mezzanine Loan following any such reallocation, modification or change shall equal the weighted average spread in effect immediately preceding such reallocation, modification or creation of any new Mezzanine Loan.

          (b) Mezzanine Borrower shall be a special purpose, bankruptcy remote entity pursuant to applicable Rating Agency criteria and shall own directly or indirectly one hundred percent (100%) of Mortgage Borrower. The security for the Mezzanine Loan shall be a pledge of one hundred percent (100%) of the direct and indirect ownership interests in Mortgage Borrower.

          (c) Mezzanine Borrower and Mortgage Borrower shall cooperate with all reasonable requests of Lender in order to convert the Loan into a Mortgage Loan and a

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Mezzanine Loan and shall execute and deliver such documents as shall reasonably be required by Lender and any Rating Agency in connection therewith, including, without limitation, the delivery of non-consolidation opinions and the modification of organizational documents and loan documents. In the event Mortgage Borrower and/or Mezzanine Borrower fail to execute and deliver such documents to Lender within five (5) Business Days (as may be reasonably extended by Lender upon Borrower’s request) following such request by Lender, Mortgage Borrower and/or Mezzanine Borrower, as applicable, hereby absolutely and irrevocably appoint Lender as their true and lawful attorney, coupled with an interest, in their name and stead to make and execute all documents necessary or desirable to effect such transactions, Mortgage Borrower and/or Mezzanine Borrower, as applicable, ratifying all that such attorney shall do by virtue thereof. Mezzanine Borrower and Mortgage Borrower shall pay all costs and expenses in connection with the creation of the Mortgage Loan and the Mezzanine Loan and all requirements relating thereto.

          (d) It shall be an Event of Default under this Agreement, the Note, the Mortgage and the other Loan Documents if Borrower or Mezzanine Borrower fails to comply with any of the terms, covenants or conditions of this Section 11.30 within ten (10) Business Days of notice thereof.

          (e) All reasonable third party costs and expenses incurred by Borrower (other than Borrower’s legal fees) in connection with Borrower’s complying with requests made under this Section 11.30 (including, without limitation, the fees and expenses of the Rating Agencies) shall be paid by Lender.

          Section 11.31 Approvals; Third Parties; Conditions. All approval rights retained or exercised by Lender with respect to Leases, contracts, plans, studies and other matters are solely to facilitate Lender’s credit underwriting, and shall not be deemed or construed as a determination that Lender has passed on the adequacy thereof for any other purpose and the adequacy thereof may not be relied upon by Borrower or any other Person. This Agreement is for the sole and exclusive use of Lender and Borrower and may not be enforced, nor relied upon, by any Person other than Lender and Borrower. All conditions of the obligations of Lender hereunder, including the obligation to make advances, if any, are imposed solely and exclusively for the benefit of Lender, its successors and assigns, and no other Person shall have standing to require satisfaction of such conditions or be entitled to assume that Lender will refuse to make advances in the absence of strict compliance with any or all of such conditions, and no other Person shall, under any circumstances, be deemed to be a beneficiary of such conditions, any and all of which may be freely waived in whole or in part by Lender at any time in Lender’s sole discretion.

          Section 11.32 Limitation on Liability of Lender’s Officers, Employees, etc. Any obligation or liability whatsoever of Lender which may arise at any time under this Agreement or any other Loan Document shall be satisfied, if at all, out of Lender’s interest in the Property only. No such obligation or liability shall be personally binding upon, nor shall resort for the enforcement thereof be had to, the property of any of Lender’s shareholders, directors, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort or otherwise.

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          Section 11.33 Certain Additional Rights of Lender (VCOC).

          Notwithstanding anything to the contrary contained in this Agreement, Lender shall have:

          (a) the right to routinely consult with and advise Borrower’s management regarding the significant business activities and business and financial developments of Borrower; provided, however, that such consultations shall not include discussions of environmental compliance programs or disposal of hazardous substances. Consultation meetings should occur on a regular basis (no less frequently than quarterly) with Lender having the right to call special meetings at any reasonable times and upon reasonable advance notice;

          (b) the right, in accordance with the terms of this Agreement, to examine the books and records of Borrower at any reasonable times upon reasonable notice;

          (c) the right, in accordance with the terms of this Agreement, including, without limitation, Section 4.1.6 hereof, to receive monthly, quarterly and year end financial reports, including balance sheets, statements of income, shareholder’s equity and cash flow, a management report and schedules of outstanding indebtedness; and

          (d) the right, without restricting any other rights of Lender under this Agreement (including any similar right), to approve any acquisition by Borrower of any other significant property (other than personal property required for the day to day operation of the Property).

          The rights described above in this Section 11.33 may be exercised by any entity which owns and controls, directly or indirectly, substantially all of the interests in Lender.

          Section 11.34 Certain Agreements of Lender. (a) All costs and expenses in connection with any Secondary Market Transaction, any Resizing Event or Mezzanine Option (collectively, a "Restructuring Event”) shall be borne by Lender (other than the cost in obtaining and delivering any UCC-9 title insurance policy), including without limitation any costs and expenses incurred by Borrower or any Affiliate of Borrower in cooperating with Lender in connection with any Restructuring Event or performing any of their respective undertakings and covenants (other than Borrower’s indemnification obligations) under this Agreement or any other Loan Document in connection with any Restructuring Event. No agreement or other document required from Borrower or any Affiliate of Borrower in connection with any Restructuring Event shall serve to materially increase Borrower’s and its Affiliates’ obligations under this Agreement or any other Loan Document or materially reduce Borrower’s and its Affiliates’ rights under this Agreement or any other Loan Document (with respect to the Mezzanine Loan Option, which is not intended to include any customary requirements and market standards typically provided by Borrowers with respect to any Restructuring Event); provided, however, that Borrower shall pay the costs and expenses of Borrower’s counsel (including, the cost of counsel delivering any Insolvency Opinion) in the event Borrower engages counsel in connection with any Restructuring Event or in responding to Lender’s requests for cooperation hereunder.

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          XII. CASH MANAGEMENT

          Section 12.1 Lockbox Account and Cash Management Account.

          (a) Borrower acknowledges and confirms that Borrower has established, and Borrower covenants that it shall maintain, (i) pursuant to the Lockbox Agreement, a non-interest bearing Eligible Account into which Borrower shall, and shall cause Manager to, deposit or cause to be deposited, all Rents and other revenue from the Property (such account, all funds at any time on deposit therein and any proceeds, replacements or substitutions of such account or funds therein, are referred to herein as the “Lockbox Account”), and (ii) a non-interest bearing Eligible Account into which funds in the Lockbox Account shall be transferred pursuant to the terms of Section 12.2(b) hereof (such account, the sub-accounts thereof, all funds at any time on deposit therein and any proceeds, replacements or substitutions of such account or funds therein, are referred to herein as the “Cash Management Account”).

          (b) The Lockbox Account and Cash Management Account shall each be in the name of Borrower for the benefit of Lender as secured party, provided that Borrower shall be the owner of all funds on deposit in such accounts for federal and applicable state and local tax purposes. Provided no Event of Default is continuing, sums on deposit in the Cash Management Account shall not be invested except in such Permitted Investments as determined and directed by Lender and all income earned thereon shall be the income of Borrower and be applied to and become part of the Cash Management Account, to be disbursed in accordance with this Article XII. Neither Lockbox Bank nor Lender shall have any liability for any loss resulting from the investment of funds in Permitted Investments in accordance with the terms and conditions of this Agreement.

          (c) The Lockbox Account and Cash Management Account shall be subject to the exclusive dominion and control of Lender and, except as otherwise expressly provided herein, neither Borrower, Manager nor any other party claiming on behalf of, or through, Borrower or Manager, shall have any right of withdrawal therefrom or any other right or power with respect thereto.

          (d) Borrower agrees to pay the customary fees and expenses of Deposit Bank (incurred in connection with maintaining the Lockbox Account) and Lender (incurred in connection with maintaining the Lockbox Account) and any successors thereto in connection therewith, as separately agreed by them from time to time.

          (e) Lender shall be responsible for the performance only of such duties with respect to the Cash Management Account as are specifically set forth herein, and no duty shall be implied from any provision hereof. Lender shall not be under any obligation or duty to perform any act which would involve it in expense or liability or to institute or defend any suit in respect hereof, or to advance any of its own monies. Borrower shall indemnify and hold Lender and its directors, employees, officers and agents harmless from and against any loss, cost or damage (including, without limitation, reasonable attorneys’ fees and disbursements) incurred by such parties in connection with the Cash Management Account other than such as result from the gross negligence or willful misconduct of Lender or intentional nonperformance by Lender of its obligations under this Agreement.

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          Section 12.2 Deposits and Withdrawals.

          (a) Borrower represents, warrants and covenants that:

     (i) Concurrently with the execution of this Agreement, Borrower shall notify and advise each Tenant under each Major Lease (whether such Major Lease is presently effective or executed after the date hereof) to send directly to the Lockbox all payments of Rents or any other item payable under such Major Leases pursuant to an instruction letter in form reasonably approved by Lender (a “Tenant Direction Letter”). If Borrower fails to provide any such notice (and without prejudice to Lender’s rights with respect to such default), Lender shall have the right, and Borrower hereby grants to Lender a power of attorney (which power of attorney shall be coupled with an interest and irrevocable so long as any portion of the Debt remains outstanding), to sign and deliver a Tenant Direction Letter;

     (ii) Borrower shall, and shall cause Manager to, instruct all Persons that maintain open accounts with Borrower or Manager with respect to the Property or with whom Borrower or Manager does business on an “accounts receivable” basis with respect to the Property to deliver all payments due under such accounts to the Lockbox Account. Neither Borrower nor Manager shall direct any such Person to make payments due under such accounts in any other manner. Borrower and Manager shall cause all credit card receipts to be deposited directly into the Lockbox Account. On or before the date hereof Borrower shall or shall cause Manager to instruct each of the respective credit card companies or credit card clearing banks (collectively, a “Credit Card Company”) with which Borrower or Manager has entered into merchant’s agreements pursuant to an instruction letter in a form reasonably acceptable to Lender (a “Payment Direction Letter”) that all receipts payable with respect to the Property, in accordance with such merchants’ agreements or otherwise, shall be transferred by wire transfer to Lockbox Bank for deposit in the Lockbox Account.

     (iii) All Rents or other income from the Property shall (A) be deemed additional security for payment of the Debt and shall be held in trust for the benefit, and as the property, of Lender, (B) not be commingled with any other funds or property of Borrower or Manager (except as permitted hereunder), and (C) if received by Borrower or Manager notwithstanding the delivery of a Tenant Direction Letter or Payment Direction Letter, be deposited in the Lockbox Account within one (1) Business Day of receipt;

     (iv) Without the prior written consent of Lender, so long as any portion of the Debt remains outstanding, neither Borrower nor Manager shall terminate, amend, revoke or modify any Tenant Direction Letter or Payment Direction Letter in any manner whatsoever or direct or cause any Tenant or Credit Card Company to pay any amount in any manner other than as provided in this Agreement;

     (v) If, notwithstanding the provisions of this Section 12.2, Borrower or Manager receives any Rents from the Property prior to their deposit into the Lockbox Account, then (i) such amounts shall be deemed to be Collateral and shall be held in trust

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for the benefit, and as the property, of Lender, (ii) such amounts shall not be commingled with any other funds or property of Borrower or Manager and (iii) Borrower or Manager shall deposit such amounts in the Lockbox Account within one (1) Business Day of the receipt thereof. In addition, Borrower shall cause all payments made under the Interest Rate Protection Agreement or any replacement Interest Rate Protection Agreement to be deposited into the Lockbox Account; and

     (vi) So long as any portion of the Debt remains outstanding, neither Borrower, Manager nor any other Person shall open or maintain any accounts other than the Lockbox Account into which revenues from the ownership and operation of the Property are initially deposited. The foregoing shall not prohibit Borrower from utilizing one or more separate accounts for the disbursement or retention of funds that have been transferred to Borrower pursuant to the express terms of this Agreement.

          (b) So long as no Event of Default has occurred and is continuing, on each Business Day all collected and available balances in the Lockbox Account shall be transferred by wire transfer or other method of transfer mutually agreeable to Lockbox Bank and Borrower to an account to be designated by Borrower.

          (c) During the continuance of an Event of Default, all transfers as provided in Section 12.2(b) above shall cease and all collected and available balances in the Lockbox Account shall be transferred by wire transfer or other method of transfer mutually agreeable to Lockbox Bank and Lender to the Cash Management Account to be held by Lender and applied in Lender’s sole and absolute discretion.

          (d) If an Event of Default shall have occurred and be continuing, Borrower hereby irrevocably authorizes Lender to make any and all withdrawals from the Lockbox Account and Cash Management Account and transfers between any of the Reserve Accounts as Lender shall determine in Lender’s sole and absolute discretion and Lender may use all funds contained in any such accounts for any purpose, including but not limited to repayment of the Debt in such order, proportion and priority as Lender may determine in its sole and absolute discretion. Lender’s right to withdraw and apply funds as stated herein shall be in addition to all other rights and remedies provided to Lender under this Agreement, the Note, the Mortgage and the other Loan Documents.

          Section 12.3 Security Interest.

          (a) Borrower acknowledges and agrees that the Cash Management Account and the Lockbox Accounts are subject to the sole dominion, control and discretion of Lender, its authorized agents or designees, including Lockbox Bank. Borrower shall not have the right of withdrawal with respect to either the Lockbox Account or the Cash Management Account; provided, however, that the foregoing provision shall not be deemed to limit the provision of Section 12.2(b) above. To secure the full and punctual payment of the Debt and performance of all obligations of Borrower now or hereafter existing under this Agreement and the other Loan Documents, Borrower hereby grants to Lender a first-priority continuing security interest in the Lockbox Account and Cash Management Account, and until such time as disbursed therefrom in accordance with the provisions of this Article XII, all interest, cash, checks, drafts, certificates

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and instruments, if any, from time to time deposited or held therein, any and all amounts invested in Permitted Investments, and all “proceeds” (as defined in the UCC as in effect in the state in which the Lockbox Account and Cash Management Account are located or maintained) of any or all of the foregoing. Furthermore, Borrower shall not, without obtaining the prior written consent of Lender, further pledge, assign or grant any security interest in any of the foregoing or permit any Lien to attach thereto or any levy to be made thereon or any UCC Financing Statements to be filed with respect thereto. Borrower will maintain the security interest created by this Section 12.3(a) as a first priority continuing security interest and will defend the right, title and interest of Lender in and to the Lockbox Account and Cash Management Account against the claims and demands of all Persons whomsoever.

          (b) Borrower authorizes Lender to file any financing statement or statements required by Lender to establish or maintain the validity, perfection and priority of the security interest granted herein in connection with the Lockbox Account and Cash Management Account. Borrower agrees that at any time and from time to time, at the expense of Borrower, Borrower will promptly and duly execute and deliver all further reasonable instruments and documents, and take all further action, that may be necessary or desirable, or that Lender may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby (including, without limitation, any security interest in and to any Permitted Investments) or to enable Lender to exercise and enforce its rights and remedies hereunder; provided, however, that the same do not increase in any material respect Borrower’s obligations hereunder or decrease in any material respect Borrower’s rights hereunder.

          (c) Upon the occurrence of an Event of Default, Lender may exercise any or all of its rights and remedies as a secured party, pledgee and lienholder with respect to the Lockbox Account and Cash Management Account. Without limitation of the foregoing, upon any Event of Default, Lender may use the Lockbox Account and Cash Management Account for any of the following purposes: (A) repayment of the Debt, including, but not limited to, principal prepayments and the prepayment premium applicable to such full or partial prepayment (as applicable); (B) reimbursement of Lender for all losses, fees, costs and expenses (including, without limitation, reasonable legal fees) suffered or incurred by Lender as a result of such Event of Default; (C) payment of any amount expended in exercising any or all rights and remedies available to Lender at law or in equity or under this Agreement or under any of the other Loan Documents; (D) payment of any item as required or permitted under this Agreement; or (E) any other purpose permitted by applicable law; provided, however, that any such application of funds shall not cure or be deemed to cure any Event of Default. Without limiting any other provisions hereof, each of the remedial actions described in the immediately preceding sentence shall be deemed to be a commercially reasonable exercise of Lender’s rights and remedies as a secured party with respect to the Lockbox Account and Cash Management Account and shall not in any event be deemed to constitute a setoff or a foreclosure of a statutory banker’s lien. Nothing in this Agreement shall obligate Lender to apply all or any portion of the Lockbox Account or Cash Management Account to effect a cure of any Event of Default, or to pay the Debt, or in any specific order of priority. The exercise of any or all of Lender’s rights and remedies under this Agreement or under any of the other Loan Documents shall not in any way prejudice or affect Lender’s right to initiate and complete a foreclosure under the Mortgage.

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          Section 12.4 Definitions. Notwithstanding anything to the contrary contained herein, For purposes of this Article XII only, Business Day shall mean a day on which Lender and Lockbox Bank are both open for the conduct of substantially all of their respective banking business at the office in the city in which the Note is payable, with respect to Lender and at the office in the city where the Lockbox Account is maintained, with respect to Lockbox Bank (in both instances, excluding Saturdays and Sundays).

[NO FURTHER TEXT ON THIS PAGE]

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          IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed by their duly authorized representatives, all as of the day and year first above written.

LENDER: UBS REAL ESTATE SECURITIES INC., a Delaware corporation
By:
	Name:
	Title:

BORROWER: INTERSTATE ARLINGTON, LP, a Delaware limited partnership
By:
	Name:
	Title:

SCHEDULE I

(REQUIRED REPAIRS)

Component or System	Comments	Quantity		Unit Cost		Total $
ADA Accessibility	Itemized costs are provided in Section 3.2 of the Property Improvement Report		1	$	495.00	$	495.00
Asphalt pavement. Full depth repair	Fix all pavement		12,000	$	2.50	$	30,000.00
Roof repair	Laundry room and ballroom storage		1	$	3,000.00	$	3,000.00
Masonry. Clean. Seal	Clean and seal brick on east elevation of tower		6,000	$	1.75	$	10,500.00
				Total Repair Cost:		$	43,995.00
				125%:		$	55,000.00

SCHEDULE I

SCHEDULE II

(PIP REPAIRS)

SCHEDULE II

SCHEDULE III

(ORGANIZATIONAL CHART)

SCHEDULE III

SCHEDULE IV

UBS REAL ESTATE SECURITIES INC.
(Lender)

- and -

(Tenant)

SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT

Dated:

Location:

Section:

Block:

Lot:

County:

PREPARED BY AND UPON

RECORDATION RETURN TO:

Messrs. Cadwalader, Wickersham & Taft LLP

One World Financial Center

New York, New York 10281

Attention: William P. McInerney, Esq.

File No.:

Title No.:

SCHEDULE IV — PAGE 1

SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT

          THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (this “Agreement”) is made as of the [___] day of [                    ], 20[___] by and between UBS REAL ESTATE SECURITIES INC., a Delaware corporation, having an address at 1285 Avenue of the Americas, Twenty-Ninth Floor, New York, New York 10019 (“Lender”) and [                                        ], having an address at [                                        ] (“Tenant”).

RECITALS:

          A. Lender has made a loan in the approximate amount of $[___] to Landlord (defined below), which Loan is given pursuant to the terms and conditions of that certain Loan Agreement dated [                    ], 20[___], between Lender and Landlord (the “Loan Agreement”). The Loan is evidenced by a certain Promissory Note dated [                    ], 20[___], given by Landlord to Lender (the “Note”) and secured by a certain [Mortgage][Deed of Trust] and Security Agreement dated [                    ], 20[___], given by Landlord to Lender (the “Mortgage”), which encumbers the fee estate of Landlord in certain premises described in Exhibit A attached hereto (the “Property”);

          B. Tenant occupies a portion of the Property under and pursuant to the provisions of a certain lease dated [                    ], [___] between [                    ], as landlord (“Landlord”) and Tenant, as tenant (the “Lease”); and

          C. Tenant has agreed to subordinate the Lease to the Mortgage and to the lien thereof and Lender has agreed to grant non-disturbance to Tenant under the Lease on the terms and conditions hereinafter set forth.

AGREEMENT:

          For good and valuable consideration, Tenant and Lender agree as follows:

          1. Subordination. Tenant agrees that the Lease and all of the terms, covenants and provisions thereof and all rights, remedies and options of Tenant thereunder are and shall at all times continue to be subject and subordinate in all respects to the Mortgage and to the lien thereof and all terms, covenants and conditions set forth in the Mortgage and the Loan Agreement including without limitation all renewals, increases, modifications, spreaders, consolidations, replacements and extensions thereof and to all sums secured thereby with the same force and effect as if the Mortgage and Loan Agreement had been executed, delivered and (in the case of the Mortgage) recorded prior to the execution and delivery of the Lease.

          2. Non-Disturbance. Lender agrees that if any action or proceeding is commenced by Lender for the foreclosure of the Mortgage or the sale of the Property, Tenant shall not be named as a party therein unless such joinder shall be required by law, provided, however, such joinder shall not result in the termination of the Lease or disturb the Tenant’s possession or use of the premises demised thereunder, and the sale of the Property in any such action or proceeding and the exercise by Lender of any of its other rights under the Note, the

SCHEDULE IV — PAGE 2

Mortgage and the Loan Agreement shall be made subject to all rights of Tenant under the Lease, provided that at the time of the commencement of any such action or proceeding or at the time of any such sale or exercise of any such other rights (a) the term of the Lease shall have commenced pursuant to the provisions thereof, (b) Tenant shall be in possession of the premises demised under the Lease, (c) the Lease shall be in full force and effect and (d) Tenant shall not be in default under any of the terms, covenants or conditions of the Lease or of this Agreement on Tenant’s part to be observed or performed beyond the expiration of any applicable notice or grace periods.

          3. Attornment. Lender and Tenant agree that upon the conveyance of the Property by reason of the foreclosure of the Mortgage or the acceptance of a deed or assignment in lieu of foreclosure or otherwise, the Lease shall not be terminated or affected thereby (at the option of the transferee of the Property (the “Transferee”) if the conditions set forth in Section 2 above have not been met at the time of such transfer) but shall continue in full force and effect as a direct lease between the Transferee and Tenant upon all of the terms, covenants and conditions set forth in the Lease and in that event, Tenant agrees to attorn to the Transferee and the Transferee shall accept such attornment, provided, however, that the provisions of the Mortgage and the Loan Agreement shall govern with respect to the disposition of any casualty insurance proceeds or condemnation awards and the Transferee shall not be (a) obligated to complete any construction work required to be done by Landlord pursuant to the provisions of the Lease or to reimburse Tenant for any construction work done by Tenant, (b) liable (i) for Landlord’s failure to perform any of its obligations under the Lease which have accrued prior to the date on which the Transferee shall become the owner of the Property, or (ii) for any act or omission of Landlord, whether prior to or after such foreclosure or sale, (c) required to make any repairs to the Property or to the premises demised under the Lease required as a result of fire, or other casualty or by reason of condemnation unless the Transferee shall be obligated under the Lease to make such repairs and shall have received sufficient casualty insurance proceeds or condemnation awards to finance the completion of such repairs, (d) required to make any capital improvements to the Property or to the premises demised under the Lease which Landlord may have agreed to make, but had not completed, or to perform or provide any services not related to possession or quiet enjoyment of the premises demised under the Lease, (e) subject to any offsets, defenses, abatements or counterclaims which shall have accrued to Tenant against Landlord prior to the date upon which the Transferee shall become the owner of the Property, (f) liable for the return of rental security deposits, if any, paid by Tenant to Landlord in accordance with the Lease unless such sums are actually received by the Transferee, (g) bound by any payment of rents, additional rents or other sums which Tenant may have paid more than one (1) month in advance to any prior Landlord unless (i) such sums are actually received by the Transferee or (ii) such prepayment shall have been expressly approved of by the Transferee, (h) bound to make any payment to Tenant which was required under the Lease, or otherwise, to be made prior to the time the Transferee succeeded to Landlord’s interest, (i) bound by any agreement amending, modifying or terminating the Lease made without the Lender’s prior written consent prior to the time the Transferee succeeded to Landlord’s interest or (j) bound by any assignment of the Lease or sublease of the Property, or any portion thereof, made prior to the time the Transferee succeeded to Landlord’s interest other than if pursuant to the provisions of the Lease.

SCHEDULE IV — PAGE 3

          4. Notice to Tenant. After notice is given to Tenant by Lender that the Landlord is in default under the Note and the Mortgage and that the rentals under the Lease should be paid to Lender pursuant to the terms of the assignment of leases and rents executed and delivered by Landlord to Lender in connection therewith, Tenant shall thereafter pay to Lender or as directed by the Lender, all rentals and all other monies due or to become due to Landlord under the Lease and Landlord hereby expressly authorizes Tenant to make such payments to Lender and hereby releases and discharges Tenant from any liability to Landlord on account of any such payments.

          5. Lender’s Consent. Tenant shall not, without obtaining the prior written consent of Lender, (a) enter into any agreement amending, modifying or terminating the Lease, (b) prepay any of the rents, additional rents or other sums due under the Lease for more than one (1) month in advance of the due dates thereof, (c) voluntarily surrender the premises demised under the Lease or terminate the Lease without cause or shorten the term thereof, or (d) assign the Lease or sublet the premises demised under the Lease or any part thereof other than pursuant to the provisions of the Lease; and any such amendment, modification, termination, prepayment, voluntary surrender, assignment or subletting, without Lender’s prior consent, shall not be binding upon Lender.

          6. Lender to Receive Notices. Tenant shall provide Lender with copies of all written notices sent to Landlord pursuant to the Lease simultaneously with the transmission of such notices to the Landlord. Tenant shall notify Lender of any default by Landlord under the Lease which would entitle Tenant to cancel the Lease or to an abatement of the rents, additional rents or other sums payable thereunder, and agrees that, notwithstanding any provisions of the Lease to the contrary, no notice of cancellation thereof or of such an abatement shall be effective unless Lender shall have received notice of default giving rise to such cancellation or abatement and shall have failed within sixty (60) days after receipt of such notice to cure such default, or if such default cannot be cured within sixty (60) days, shall have failed within sixty (60) days after receipt of such notice to commence and thereafter diligently pursue any action necessary to cure such default.

          7. Notices. All notices or other written communications hereunder shall be deemed to have been properly given (i) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged by the recipient thereof and confirmed by telephone by sender, (ii) one (1) Business Day (hereinafter defined) after having been deposited for overnight delivery with any reputable overnight courier service, or (iii) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows:

If to Tenant:	[                                        ]
	[                                        ]
	[                                        ]
	Attention: [                    ]
	Facsimile No.: [                    ]

SCHEDULE IV — PAGE 4

If to Lender:	UBS REAL ESTATE SECURITIES INC.
	1285 Avenue of the Americas
	New York, New York 10019
	Attention:
	Facsimile No.:
With a copy to:	Cadwalader, Wickersham & Taft LLP
	One World Financial Center
	New York, New York 10281
	Attention: William P. McInerney, Esq.
	Facsimile No.: (212) 504-6666

or addressed as such party may from time to time designate by written notice to the other parties. For purposes of this Section, the term “Business Day” shall mean a day on which commercial banks are not authorized or required by law to close in New York, New York.

Either party by notice to the other may designate additional or different addresses for subsequent notices or communications.

          8. Joint and Several Liability. If Tenant consists of more than one person, the obligations and liabilities of each such person hereunder shall be joint and several. This Agreement shall be binding upon and inure to the benefit of Lender and Tenant and their respective successors and assigns.

          9. Definitions. The term “Lender” as used herein shall include the successors and assigns of Lender and any person, party or entity which shall become the owner of the Property by reason of a foreclosure of the Mortgage or the acceptance of a deed or assignment in lieu of foreclosure or otherwise. The term “Landlord” as used herein shall mean and include the present landlord under the Lease and such landlord’s predecessors and successors in interest under the Lease, but shall not mean or include Lender. The term “Property” as used herein shall mean the Property, the improvements now or hereafter located thereon and the estates therein encumbered by the Mortgage.

          10. No Oral Modifications. This Agreement may not be modified in any manner or terminated except by an instrument in writing executed by the parties hereto.

          11. Governing Law. This Agreement shall be deemed to be a contract entered into pursuant to the laws of the State where the Property is located and shall in all respects be governed, construed, applied and enforced in accordance with the laws of the State where the Property is located.

          12. Inapplicable Provisions. If any term, covenant or condition of this Agreement is held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed without such provision.

          13. Duplicate Originals; Counterparts. This Agreement may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. This Agreement may be executed in several counterparts, each of which counterparts shall be

SCHEDULE IV — PAGE 5

deemed an original instrument and all of which together shall constitute a single Agreement. The failure of any party hereto to execute this Agreement, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder.

          14. Number and Gender. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa.

          15. Transfer of Loan. Lender may sell, transfer and deliver the Note and assign the Mortgage, this Agreement and the other documents executed in connection therewith to one or more investors in the secondary mortgage market (“Investors”). In connection with such sale, Lender may retain or assign responsibility for servicing the loan, including the Note, the Mortgage, this Agreement and the other documents executed in connection therewith, or may delegate some or all of such responsibility and/or obligations to a servicer including, but not limited to, any subservicer or master servicer, on behalf of the Investors. All references to Lender herein shall refer to and include any such servicer to the extent applicable.

          16. Further Acts. Tenant will, at the cost of Tenant, and without expense to Lender, do, execute, acknowledge and deliver all and every such further acts and assurances as Lender shall, from time to time, require, for the better assuring and confirming unto Lender the property and rights hereby intended now or hereafter so to be, or for carrying out the intention or facilitating the performance of the terms of this Agreement or for filing, registering or recording this Agreement, or for complying with all applicable laws.

          17. Limitations on Lender’s Liability. Tenant acknowledges that Lender is obligated only to Landlord to make the Loan upon the terms and subject to the conditions set forth in the Loan Agreement. In no event shall Lender or any purchaser of the Property at foreclosure sale or any grantee of the Property named in a deed-in-lieu of foreclosure, nor any heir, legal representative, successor, or assignee of Lender or any such purchaser or grantee (collectively the Lender, such purchaser, grantee, heir, legal representative, successor or assignee, the “Subsequent Landlord”) have any personal liability for the obligations of Landlord under the Lease and should the Subsequent Landlord succeed to the interests of the Landlord under the Lease, Tenant shall look only to the estate and property of any such Subsequent Landlord in the Property for the satisfaction of Tenant’s remedies for the collection of a judgment (or other judicial process) requiring the payment of money in the event of any default by any Subsequent Landlord as landlord under the Lease, and no other property or assets of any Subsequent Landlord shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant’s remedies under or with respect to the Lease; provided, however, that the Tenant may exercise any other right or remedy provided thereby or by law in the event of any failure by Subsequent Landlord to perform any such material obligation.

SCHEDULE IV — PAGE 6

          IN WITNESS WHEREOF, Lender and Tenant have duly executed this Agreement as of the date first above written.

LENDER: UBS REAL ESTATE SECURITIES INC., a Delaware corporation
By:
	Name:
	Title:

TENANT:                                         ,        a
By:
	Name:
	Title:

The undersigned accepts and agrees to the provisions of Section 4 hereof:
LANDLORD:
, a
By:
	Name:
	Title:

SCHEDULE IV — PAGE 7

ACKNOWLEDGMENTS

[INSERT STATE SPECIFIC ACKNOWLEDGMENT]

SCHEDULE IV — PAGE 8

EXHIBIT A

LEGAL DESCRIPTION

EX-10.14.1

Exhibit 10.14.1

FIRST AMENDMENT TO LOAN AGREEMENT

Dated as of December 26, 2007

By and Between

INTERSTATE ARLINGTON, LP,

as Borrower,

and

UBS REAL ESTATE SECURITIES INC.,

as Lender

AMENDMENT TO LOAN AGREEMENT

          THIS AMENDMENT TO LOAN AGREEMENT, dated as of December 26^th, 2007 this “Amendment”), by and between the INTERSTATE ARLINGTON, LP, a Delaware limited partnership (“Borrower”), having its address at c/o Interstate Hotels & Resorts, Inc., 4501 North Fairfax Drive, Arlington, Virginia 22203 and UBS REAL ESTATE SECURITIES INC., a Delaware corporation, having an address 1285 Avenue of the Americas, New York, Nsew York 10019 (“Lender”).

W I T N E S S E T H:

          WHEREAS, Borrower and Lender have executed and delivered a Loan Agreement dated as of October 17, 2006 (the “Original Loan Agreement”) which evidenced a loan made by Lender to Borrower in the original principal amount of Twenty-Four Million Seven Hundred Thousand and Noll n0 Dollars ($24,700,000.00) (the “Original Loan Amount”); and

          WHEREAS, Borrower and Lender desire to amend the Original Loan Agreement as more particularly set forth herein (the Original Loan Agreement as amended by this Amendment is hereafter referred to as the “Loan :Agreement”).

          NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00) and for other good and valuable consideration, each to the other given, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender hereby agree that the Original Loan Agreement is hereby amended to read as follows:

          1. Definitions Added and Amended. The following definitions are (a) added to Section 1.1 of the Loan Agreement or (b) appear in Section 1.1 but are hereby amended and restated in their entirety to read as follows:

          “Capital Expenditure Account” shall have the meaning set forth in Section 6.4.1

          “ERISA” shall have the meaning set forth in Section 4.2.10.

          “Event of Default” shall have the meaning set forth ill Section 10.1(a).

          “Re-Dating” shall have the meaning set forth in Section 9.1(b)(iv).

          “Required Repair Account” shall have the meaning set forth in Section 6.1.1 hereof.

          “Reserve Accounts^- shall mean the accounts and sub accounts in which the Reserve Funds are being held in accordance with this Agreement.

          “Spread Maintenance Premium” shall mean, in connection with a prepayment of all or any portion of the outstanding principal balance of the Loan pursuant to Section 2.3.3 hereof, an amount equal to the present value, discounted at LIBOR on the most recent

Determination Date, of all future installments of interest which would have been due hereunder through and including the last day of the Interest Period in which the Permitted Prepayment Date occurs on the portion of the outstanding principal balance of the Loan being prepaid as if interest accrued on such portion of the principal balance being prepaid at an interest rate per annum equal to the LIBOR Interest Rate then in effect plus the Spread. The Spread Maintenance Premium shall be calculated by Lender and shall be final absent manifest error.

          2. Sections Modified:

          For all purposes under the Loan Agreement, Section 2.2.3(g) shall be added or deleted and replaced with the following:

          “(g) Borrower agrees to indemnify Lender and to hold Lender harmless from any loss or expense (other than consequential and punitive damages) which Lender sustains or incurs as a consequence of (i) any default by Borrower in payment of the principal of or interest on a LIBOR Loan, including, without limitation, any such loss or expense arising from interest or fees payable by Lender to lenders of funds obtained by it in order to maintain a LIBOR Loan hereunder, (ii) any prepayment (whether voluntary or mandatory) of the LIBOR Loan on a day that (A) is not a Monthly Payment Date or (B) is a Monthly Payment Date if Borrower did not give the prior written notice of such prepayment required pursuant to the terms of this Agreement, including, without limitation, such loss or expense arising from interest or fees payable by Lender to lenders of funds obtained by it in order to maintain the LIBOR Loan hereunder and (iii) the conversion (for any reason whatsoever, whether voluntary or involuntary) of the Applicable Interest Rate to the Substitute Rate plus the Substitute Spread with respect to any portion of the outstanding principal amount of the Loan then bearing interest at a rate other than the Substitute Rate plus the Substitute Spread on a date other than the first day of an Interest Period, including, without limitation, such loss or expenses arising from interest or fees payable by Lender to lenders of funds obtained by it in order to maintain a LIBOR Loan hereunder (the amounts referred to in clauses (i), (ii) and (iii) are herein referred to collectively as the “Breakage Costs”). Whenever in this Section 2.2.3 the term “interest or fees payable by Lender to lenders of funds obtained by it” is used and no such funds were actually obtained from such lenders, it shall include interest or fees which would have been payable by Lender if it had obtained funds from lenders in order to maintain a LIBOR Loan hereunder. Lender will provide to Borrower a statement detailing such Breakage Costs and the calculation thereof”

     (ii) For all purposes under the Loan Agreement, Section 2.3.3 shall be added or deleted and replaced with the following:

          “2.3.3. Interest Rate and Pa^yment after Default. In the event that, and for so long as, any Event of Default shall have occurred and be continuing, the outstanding principal balance of the Loan shall accrue interest at the Default Rate, calculated from the date the Default occurred which led to such an Event of Default without regard to any grace or cure periods contained herein. If all or any part of the principal amount of the Loan is prepaid prior to the Permitted Prepayment Date following the occurrence of an Event of Default prior to the Permitted Prepayment Date, Borrower shall be required to pay Lender, in addition to all other amounts then payable hereunder (including, without limitation, (i) in the event that such prepayment is received on a Monthly Payment Date, interest accruing on such amount calculated

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through and including the end of the Interest Period in which such Monthly Payment Date occurs, or (ii) in the event that such prepayment is received on a date other than a Monthly Payment Date, interest accruing on such amount calculated through and including the end of the Interest Period in which the next Monthly Payment Date occurs), a prepayment fee equal to one percent (1 %) of the amount of principal being repaid together with a Spread Maintenance Premium calculated with respect to the amount of principal being repaid and Breakage Costs.”

     (iii) For all purposes under the Loan Agreement, Section 2.4.1 shall be added or deleted and replaced with the following:

          “2.4.1. Voluntary Prepayments. Except as otherwise provided herein, Borrower shall not have the right to prepay the Loan in whole or in part. On and after the Permitted Prepayment Date Borrower may, at its option and upon thirty (30) days prior notice to Lender, prepay the Debt in whole but not in part; provided, however, any prepayment received by Lender prior to November 10, 2008 shall be accompanied by the applicable Prepayment Fee. Any prepayment received by Lender on a date other than a Monthly Payment Date shall include interest which would have accrued thereon through and including the end of the Interest Period in which the next Monthly Payment Date occurs; provided, however, that no prepayment shall be permitted on any date during the period commencing on the first calendar day immediately following a Monthly Payment Date to, but not including, the Determination Date in such calendar month, unless consented to by Lender in its sole discretion. Any notice of prepayment shall be revocable by Borrower, except during the period commencing on the date five (5) Business Days prior to the applicable date of prepayment set forth in such notice of prepayment and ending on such date, during which time such notice is irrevocable; provided, Borrower may not revoke more than two (2) such notices of prepayment in any twelve (12) month period. If Borrower elects to revoke a notice of prepayment in accordance with the prior sentence, Borrower shall indemnify and pay to Lender immediately upon request the actual out-of-pocket expenses incurred by Lender in connection with such revocation, including but not limited to Breakage Costs as well as any and all costs of any holder of any portion of the Securities which was caused as a result of such revocation.”

     (iv) For all purposes under the Loan Agreement, the following language shall be added to the end of Section 2.4.2:

          “Any such prepayment received by Lender on a date other than a Monthly Payment Date shall include interest which would have occurred thereon through and including the end of the Interest Period in which the next Monthly Payment Date occurs.”

     (v) For all purposes under the Loan Agreement, Section 2.4.3 shall be added or deleted and replaced with the following:

          “2.4.3 Prepayments After Default. If after an Event of Default, payment of all or any part of the principal of the Loan is tendered by Borrower (which tender Lender may reject to the extent permitted under applicable Legal Requirements), a purchaser at foreclosure or any other Person, such tender shall be deemed an attempt to circumvent the prohibition against prepayment set forth in Section 2.4.1 and Borrower, such purchaser at foreclosure or other Person shall pay (including, without limitation, (i) in the event that such

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prepayment is received on a Monthly Payment Date, interest accruing on such amount calculated through and including the end of the Interest Period in which such Monthly Payment Date occurs, or (ii) in the event that such prepayment is received on a date other than a Monthly Payment Date, interest accruing on such amount calculated through and including the end of the Interest Period in which the next Monthly Payment Date occurs), a prepayment fee equal to the Spread Maintenance Premium calculated with respect to the amount of principal being repaid, if applicable, and, in addition to the outstanding principal balance, all accrued and unpaid interest, and other amounts payable under the Loan Documents,”

     (vi) For all purposes under the Loan Agreement, Section 4.1.6(d) shall be added or deleted and replaced with the following:

          “(d) Annual Reports. Within ninety (90) days after the end of each calendar year of Borrower’s operation of the Property, Borrower will furnish to Lender a complete copy of Borrower’s, annual financial statements prepared in accordance with GAAP covering the Property for such fiscal year and containing statements of profit and loss for Borrower and the Property and a balance sheet for Borrower. Such statements shall set forth the financial condition and the results of operations for the Property for such Fiscal Year, shall include (hut not be limited to) amounts representing annual Net Cash Flow, Gross Income from Operations, Operating Expenses and Capital Expenditures and shall be accompanied by a reasonably detailed schedule of all Capital Expenditures for such fiscal year. Borrower’s annual financial statements shall be accompanied by (i) a comparison of (A) the budgeted income and expenses and Capital Expenditures and (B) the actual income and expenses and Capital Expenditures for the prior fiscal year, (ii) an Officer’s Certificate stating that, to such officer’s knowledge after reasonable inquiry, each such annual financial statement presents fairly the financial condition and the results of operations of Borrower and the Property being reported upon and has been prepared in accordance with GAAP and (iiii) occupancy statistics for the Property. Together with Borrower’s annual financial statements, Borrower shall furnish to Lender an Officer’s Certificate certifying as of the date thereof whether, to such officer’s knowledge after reasonable inquiry, there exists an event or circumstance which constitutes a Default or Event of Default under the Loan Documents executed and delivered by, or applicable to, Borrower, and if such Default or Event of Default exists, the nature thereof, the period of time it has existed and the action then being taken to remedy the same.”

     (vii) For all purposes under the Loan Agreement, Section 6.1.1 shall be added or deleted and replaced with the following:

          “Deposit of Required Repair Funds. Borrower shall perform the repairs at the Property as set forth on Schedule II hereto (such repairs hereinafter referred to as “Required Repairs”) and, subject to Force Majeure (provided no such Force Majeure causes an event of default under the Franchise Agreement), shall complete each of the Required Repairs on or before the respective deadline for each repair as set forth on Schedule II hereof. On the Closing Date, Borrower has deposited with Lender the sum of $54,993.75, which amount is one hundred and twenty-five percent (125%) of the cost to perform such Required Repairs as set forth on Schedule II hereto in order to perform the Required Repairs. Amounts deposited pursuant to this Section 6. I .1 are referred to herein as the “Required Repair Funds”, and the account in which

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such amounts are held shall hereinafter be referred to as Borrower’s “Required Repair Account”.”

     (viii) For all purposes under the Loan Agreement, Section 6.4.3 shall be added or deleted and replaced with the following:

          “6.4.3 Balance in the Capital Expenditure Account. The insufficiency of any balance in the Capital Expenditure Account shall not relieve Borrower from its obligation to fulfill all preservation and maintenance covenants in the Loan Documents. Upon completion of the PIP Repairs, provided no Event of Default has occurred and is continuing, the balance, if any, in the Capital Expenditure Account will be disbursed to Borrower.”

     (ix) For all purposes under the Loan Agreement, Section 9.2(c) shall be added or deleted and replaced with the following:

          “(c) In connection with Exchange Act Filings, Borrower shall (i) indemnify Lender, the Lender Group and the Underwriter Group for Liabilities to which Lender, the Lender Group or the Underwriter Group may become subject insofar as the Liabilities arise out of or are based upon the omission or alleged omission to state in the Disclosure Document a material fact required to be stated in the Disclosure Document in order to make the statements in the Disclosure Document, in light of the circumstances under which they were made, not misleading, all as they relate to Borrower, Borrower Affiliates, the Property, Manager and all other aspects of the Loan, and (ii) reimburse Lender, the Lender Group or the Underwriter Group for any legal or other expenses reasonably incurred by Lender, the Lender Group or the Underwriter Group in connection with defending or investigating the Liabilities, all as they relate to Borrower, Borrower Affiliates, the Property, Manager and all other aspects of the Loan; provided, however, that Borrower will be liable in any such case under this subsection only to the extent that any such loss claim, damage or liability arises out of or is based upon any such untrue statement or omission made therein in reliance upon and in conformity with information furnished to Lender by or on behalf of Borrower in connection with the preparation of the Disclosure Document or in connection with the underwriting or closing of the Loan, including, without limitation, financial statements of Borrower, operating statements and rent rolls with respect to the Property.”

     (x) For all purposes under the Loan Agreement, Section 10.1(a)(i) shall be added or deleted and replaced with the following:

          “(i) if (A) any monthly installment of principal and/or interest due under the Note or the payment due on the Maturity Date is not paid when due or (B) any other portion of the Debt is not paid when due and such non-payment in Section 10.1(a)(i)(B) continues for ten (I 0) Business Days following notice to Borrower that the same is due and payable;”

     (xi) For all purposes under the Loan Agreement, the first paragaph of Section 11.30 shall be added or deleted and replaced with the following:

          “Section 11.30 Mezzanine Loan Option. Lender shall have the right, at no material cost to Borrower, at any time to divide the Loan into two parts (the “Mezzanine Option”): a mortgage loan (the “Mortgage Loan”) and a mezzanine loan (the “Mezzanine Loan”). The principal amount of the Mortgage Loan plus the principal amount of the Mezzanine

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Loan shall equal the outstanding principal balance of the Loan immediately prior to the creation of the Mortgage Loan and the Mezzanine Loan. In effectuating the foregoing, Lender (in its capacity as the lender under the Mezzanine Loan, the “Mezzanine Lender”) will make a loan to the direct or indirect owner of Borrower (in its capacity as the borrower under the Mezzanine Loan, the “Mezzanine Borrower”); Mezzanine Borrower will contribute the amount of the Mezzanine Loan to Borrower (in its capacity as Borrower under the Mortgage Loan, “Mortgage Borrower”) and Mortgage Borrower will apply the contribution to pay down the Loan to its Mortgage Loan amount. The Mortgage Loan and the Mezzanine Loan will be on the same terms and subject to the same conditions set forth in this Agreement, the Note, the Mortgage and the other Loan Documents and shall not increase Borrower’s obligations or decrease Borrower’s rights hereunder in a material manner except as follows:”

     (xii) For all purposes under the Loan Agreement, Section 1 2.1 (a) shall be added or deleted and replaced with the following:

          “(a) Borrower acknowledges and confirms that Borrower has established, and Borrower covenants that it shall maintain, (i) pursuant to the Lockbox Agreement, a non-interest bearing Eligible Account into which Borrower shall, and shall cause Manager to, deposit or cause to be deposited, all Rents and other revenue from the Property (such account, all funds at any time on deposit therein and any proceeds, replacements or substitutions of such account or funds therein, are referred to herein as the -Lockbox Account”), and (ii) a non-interest bearing Eligible Account into which funds in the Lockbox Account shall be transferred pursuant to the terms of Section 12.2(c) hereof (such account, the sub-accounts thereof, all funds at any time on deposit therein and any proceeds, replacements or substitutions of such account or funds therein, are referred to herein as the “Cash Management Account”).”

          3. Borrower Representations and Warranties. Borrower represents and warrants as of the date hereof that: (i) The representations, warranties, certifications and agreements of Borrower contained in the Loan Documents made by Borrower in favor of Lender are true, complete and accurate in all material respects as of the date hereof; (ii) both Borrower and, to the best of Borrower’s knowledge, Lender have performed all of their respective obligations under the Loan Documents and Borrower has no knowledge of any event which with the giving of notice, the passage of time or both would constitute a default by Borrower or Lender under the Loan Documents; (iii) Borrower has no claim against Lender and no offset or defense to the payment of the Debt or any counterclaim or right to rescission to enforcement of any of the terms of the Loan Documents; (iv) no voluntary actions or involuntary actions are pending against Borrower, any member of Borrower, the Borrower’s managing member, or any guarantor or indemnitor of the Loan under the bankruptcy or insolvency laws of the United States or any state thereof; and (v) the Loan Documents, as any of the same have been modified, amended and restated, are the valid, legal and binding obligation of Borrower.

          4. No Other Amendments. Except as specifically modified and amended herein, all other terms, conditions and covenants contained in the Original Loan Agreement shall remain in full force and effect.

          5. References to Loan Agreement. Wherever reference is made in the Original Loan Agreement to “the Loan Agreement”, “this Agreement”, “hereof’, “hereunder”,

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“herein” or words of similar import, the same shall be deemed to refer to the Loan Agreement (as defined in this Amendment) and wherever reference is made in any of the Loan Documents to “the Loan Agreement,” the same shall be deemed to refer to the Loan Agreement (as defined in this Amendment). Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Loan Agreement.

          6. Counterparts. This Amendment may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All such counterparts shall be construed together and shall constitute one instrument, but in making proof hereof it shall only be necessary to produce one such counterpart.

          7. Binding Effect. This Amendment shall be binding upon and inure to the benefit of the parties and their respective successors and assigns.

          8. Govern in Law. This Amendment shall be governed by New York law, without regard to conflicts of law principles.

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]

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          IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their duly authorized representatives, all as of the day and year first above written.

BORROWER:
	INTERSTATE ARLINGTON, LP, a Delaware
	limited partnership
	By:	INTERSTATE ARLINGTON GP, LLC, a Delaware limited liability company, general partner
		By: INTERSTATE ARLINGTON MC, LLC, a Delaware limited liability company, manager and sole member.
		By:	/s/ Bruce Riggins
		Name:	Bruce Riggins
		Title:	President

[SIGNATURES CONTINUE ON NEXT PAGE]

LENDER:
UBS REAL ESTATE SECURITIES INC., a
Delaware corporation
By:	/s/ Maryann Fisher
	Name: Maryann Fisher
	Title: Associate Director
By:	/s/ Henry Chung
	Name: Henry Chung
	Title: Director

EX-10.15

Exhibit 10.15

LOAN AGREEMENT

Dated as of February 8, 2007

Between

INTERSTATE WESTCHASE, LP,

as Borrower

and

UBS REAL ESTATE SECURITIES INC.,

as Lender

TABLE OF CONTENTS

	Page
I. DEFINITIONS; PRINCIPLES OF CONSTRUCTION
Section 1.1 Definitions		1
Section 1.2 Principles of Construction		24
II. THE LOAN
Section 2.1 The Loan		24
2.1.1 Agreement to Lend and Borrow		24
2.1.2 Single Disbursement to Borrower		24
2.1.3 The Note		24
2.1.4 Use of Proceeds		24
Section 2.2 Interest Rate		25
2.2.1 Applicable Interest Rate		25
2.2.2 Interest Calculation		25
2.2.3 Determination of Interest Rate		25
2.2.4 Usury Savings		28
Section 2.3 Loan Payments		28
2.3.1 Payment Before Maturity Date		28
2.3.2 Payment on Maturity Date		28
2.3.3 Interest Rate and Payment after Default		29
2.3.4 Late Payment Charge		29
2.3.5 Method and Place of Payment		29
Section 2.4 Prepayments		30
2.4.1 Voluntary Prepayments		30
2.4.2 Mandatory Prepayments		30
2.4.3 Prepayments After Default		30
Section 2.5 Interest Rate Cap		31
III. REPRESENTATIONS AND WARRANTIES
Section 3.1 Borrower Representations		31
3.1.1 Organization		31
3.1.2 Proceedings		32
3.1.3 No Conflicts		32
3.1.4 Litigation		32
3.1.5 Agreements		32
3.1.6 Consents		32
3.1.7 Title		32
3.1.8 Intentionally Omitted		33
3.1.9 Intentionally Omitted		33

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	Page
3.1.10 Financial Information		33
3.1.11 Condemnation		33
3.1.12 Utilities and Public Access		33
3.1.13 Separate Lots		33
3.1.14 Assessments		33
3.1.15 Enforceability		33
3.1.16 Assignment of Leases		33
3.1.17 Insurance		34
3.1.18 Licenses		34
3.1.19 Flood Zone		34
3.1.20 Physical Condition		34
3.1.21 Boundaries		34
3.1.22 Leases		34
3.1.23 Filing and Recording Taxes		35
3.1.24 Single Purpose		35
3.1.25 Tax Filings		39
3.1.26 Solvency		39
3.1.27 Federal Reserve Regulations		40
3.1.28 Organizational Chart		40
3.1.29 Bank Holding Company		40
3.1.30 No Other Debt		40
3.1.31 Investment Company Act		40
3.1.32 Access/Utilities		40
3.1.33 No Bankruptcy Filing		40
3.1.34 Full and Accurate Disclosure		40
3.1.35 Foreign Person		41
3.1.36 No Change in Facts or Circumstances; Disclosure		41
3.1.37 Management Agreement		41
3.1.38 Intentionally Omitted		41
3.1.39 Intentionally Omitted		41
3.1.40 Intentionally Omitted		41
3.1.41 Patriot Act		41
3.1.42 Certificate of Occupancy; Licenses		41
3.1.43 Franchise Agreement		42
3.1.44 Inventory		42
Section 3.2 Survival of Representations		42
IV. BORROWER COVENANTS
Section 4.1 Borrower Affirmative Covenants		42
4.1.1 Existence; Compliance with Legal Requirements		42
4.1.2 Taxes, Liens and Other Charges		42
4.1.3 Litigation		43
4.1.4 Access to Property		43
4.1.5 Further Assurances; Supplemental Mortgage Affidavits		43
4.1.6 Financial Reporting		43

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	Page
4.1.7 Title to the Property		46
4.1.8 Estoppel Statement		46
4.1.9 Leases		46
4.1.10 Alterations		47
4.1.11 Material Agreements		48
4.1.12 Performance by Borrower		48
4.1.13 Costs of Enforcement/Remedying Defaults		48
4.1.14 Business and Operations		48
4.1.15 Loan Fees		48
4.1.16 O&M Agreement. Borrower agrees to comply in all material respects with the O&M Agreement		48
4.1.17 Handicapped Access		49
4.1.18 Certain Hotel/Franchise Covenants		49
4.1.19 Notice of Certain Events		50
4.1.20 Further Assurances		50
4.1.21 Taxes on Security		51
4.1.22 Principal Place of Business, State of Organization		51
4.1.23 No Plan Assets		52
4.1.24 Compliance		52
Section 4.2 Borrower Negative Covenants		52
4.2.1 Liens		52
4.2.2 Dissolution		52
4.2.3 Change in Business		52
4.2.4 Debt Cancellation		53
4.2.5 Affiliate Transactions		53
4.2.6 Zoning		53
4.2.7 Assets		53
4.2.8 No Joint Assessment		53
4.2.9 Intentionally Omitted		53
4.2.10 ERISA		53
4.2.11 Material Agreements		54
V. INSURANCE, CASUALTY AND CONDEMNATION
Section 5.1 Insurance		54
5.1.1 Insurance Policies		54
5.1.2 Insurance Company		57
Section 5.2 Casualty and Condemnation		58
5.2.1 Casualty		58
5.2.2 Condemnation		58
5.2.3 Casualty Proceeds		59
Section 5.3 Delivery of Net Proceeds		59
5.3.1 Minor Casualty or Condemnation		59
5.3.2 Major Casualty or Condemnation		59

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	Page
VI. RESERVE FUNDS
Section 6.1 Required Repair Funds		62
6.1.1 Deposit of Required Repair Funds		62
6.1.2 Release of Required Repair Funds		63
6.1.3 Balance in the Required Repair Account		63
Section 6.2 Tax Funds		63
6.2.1 Deposits of Tax Funds		63
6.2.2 Release of Tax Funds		64
Section 6.3 Insurance Funds		64
6.3.1 Deposits of Insurance Funds		64
6.3.2 Release of Insurance Funds		64
Section 6.4 Capital Expenditure Funds		65
6.4.1 Deposits of Capital Expenditure Funds		65
6.4.2 Release of Capital Expenditure Funds		65
6.4.3 Balance in the Capital Expenditure Account		67
Section 6.5 Replacements and Replacement Reserve		67
6.5.1 Replacement Reserve Fund		67
6.5.2 Disbursements from Replacement Reserve Account		67
6.5.3 Performance of Replacements		68
6.5.4 Balance in the Replacement Reserve Account		70
Section 6.6 Intentionally Omitted		70
Section 6.7 Security Interest in Reserve Funds		70
6.7.1 Grant of Security Interest		70
6.7.2 Income Taxes		71
6.7.3 Prohibition Against Further Encumbrance		71
VII. PROPERTY MANAGEMENT
Section 7.1 The Management Agreement		71
Section 7.2 The Franchise Agreement		71
Section 7.3 Prohibition Against Termination or Modification		72
Section 7.4 Replacement of Manager		72
Section 7.5 Matters Concerning Franchisor		72
VIII. PERMITTED TRANSFERS
Section 8.1 Transfer or Encumbrance of Property		73
IX. SALE AND SECURITIZATION OF MORTGAGE
Section 9.1 Sale of Mortgage and Securitization		76
Section 9.2 Securitization Indemnification		79

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	Page
X. DEFAULTS
Section 10.1 Event of Default		81
Section 10.2 Remedies		84
Section 10.3 Right to Cure Defaults		85
Section 10.4 Remedies Cumulative		85
XI. MISCELLANEOUS
Section 11.1 Successors and Assigns		86
Section 11.2 Lender’s Discretion		86
Section 11.3 Governing Law		86
Section 11.4 Modification, Waiver in Writing		87
Section 11.5 Delay Not a Waiver		88
Section 11.6 Notices		88
Section 11.7 Trial by Jury		89
Section 11.8 Headings		89
Section 11.9 Severability		89
Section 11.10 Preferences		89
Section 11.11 Waiver of Notice		89
Section 11.12 Remedies of Borrower		90
Section 11.13 Expenses; Indemnity		90
Section 11.14 Schedules Incorporated		91
Section 11.15 Offsets, Counterclaims and Defenses		91
Section 11.16 No Joint Venture or Partnership; No Third Party Beneficiaries		91
Section 11.17 Publicity		92
Section 11.18 Waiver of Marshalling of Assets		92
Section 11.19 Waiver of Offsets/Defenses/Counterclaims		92
Section 11.20 Conflict; Construction of Documents; Reliance		92
Section 11.21 Brokers and Financial Advisors		93
Section 11.22 Exculpation		93
Section 11.23 Prior Agreements		95
Section 11.24 Servicer		95
Section 11.25 Joint and Several Liability		96
Section 11.26 Creation of Security Interest		96
Section 11.27 Assignments and Participations		96
Section 11.28 Intentionally Omitted		96
Section 11.29 Component Notes		96
Section 11.30 Mezzanine Loan Option		97
Section 11.31 Approvals; Third Parties; Conditions		98
Section 11.32 Limitation on Liability of Lender’s Officers, Employees, etc.		98
Section 11.33 Certain Additional Rights of Lender (VCOC)		99
Section 11.34 Certain Agreements of Lender		99

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	Page
XII. CASH MANAGEMENT
Section 12.1 Lockbox Account and Cash Management Account		100
Section 12.2 Deposits and Withdrawals		101
Section 12.3 Security Interest		102
Section 12.4 Definitions		104
SCHEDULES
Schedule I Required Repairs
Schedule II PIP Repairs
Schedule III Organizational Chart
Schedule IV Form of Subordination, Non-Disturbance and Attornment Agreement

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LOAN AGREEMENT

THIS LOAN AGREEMENT, dated as of February 8, 2007 (as amended, restated, replaced, supplemented or otherwise modified from time to time, this “Agreement”), between UBS REAL ESTATE SECURITIES INC., a Delaware corporation, having an address at 1285 Avenue of the Americas, New York, New York 10019 (“Lender”) and INTERSTATE WESTCHASE, LP, a Delaware limited partnership having an address c/o Interstate Hotels & Resorts, Inc., 4501 North Fairfax Drive, Arlington, Virginia 22203 (“Borrower”).

          All capitalized terms used herein shall have the respective meanings set forth in Article I hereof.

W I T N E S S E T H:

          WHEREAS, Borrower desires to obtain the Loan from Lender; and

          WHEREAS, Lender is willing to make the Loan to Borrower, subject to and in accordance with the conditions and terms of this Agreement and the other Loan Documents.

          NOW, THEREFORE, in consideration of the covenants set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree, represent and warrant as follows:

          I. DEFINITIONS; PRINCIPLES OF CONSTRUCTION

          Section 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided:

          “Acquired Property Statements” shall have the meaning set forth in Section 9 .1 (c)(i).

          “Additional Insolvency Opinion” shall have the meaning set forth in Section 3.1.24(w) hereof.

          “Affiliate” shall mean, as to any Person, any other Person that, directly or indirectly, owns ten percent (10%) or more of, is in control of, is controlled by or is under common ownership or control with such Person or is a director or officer of such Person or of an Affiliate of such Person. As used in this definition, the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management, policies or activities of a Person, whether through ownership of voting securities, by contract or otherwise.

          “ALTA” shall mean American Land Title Association, or any successor thereto.

          “Alteration Threshold” shall mean $984,750.00.

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          “Annual Budget” shall mean the operating and capital budget for the Property setting forth Borrower’s good faith estimate of Gross Income From Operations, Operating Expenses, and Capital Expenditures for the applicable Fiscal Year.

          “Applicable Interest Rate” shall mean 6.67 % per annum for the initial Interest Period and thereafter either (1) LIBOR Interest Rate plus the Spread with respect to any period when the Loan is a LIBOR Loan or (ii) the Substitute Rate plus the Substitute Spread with respect to any period when the Loan is a Substitute Rate Loan.

          “Appraisal” shall mean an appraisal of the Property in its then “as is” condition, prepared not more than ninety (90) days prior to the Closing Date (or other relevant date with respect to an updated Appraisal or an Appraisal with respect to the Property) by a member of the American Institute of Real Estate Appraisers selected by Lender, which appraisal (i) shall meet the minimum appraisal standards for national banks promulgated by the Comptroller of the Currency pursuant to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as amended (FIRREA), and (ii) otherwise shall be in both form and substance satisfactory to Lender in its sole and absolute discretion.

          “Approved Bank” shall mean a bank or other financial institution which has a minimum long term unsecured debt rating of at least “AA” by S&P and Fitch and “Aa2” by Moody’s.

          “Assignment of Franchise Agreement” shall mean that certain Assignment of Franchise Agreement and Subordination of Franchise Agreement, dated as of the date hereof among Lender, Borrower and Franchisor, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

          “Assignment of Leases” shall mean that certain first priority Assignment of Leases and Rents, dated as of the date hereof, from Borrower, as assignor, to Lender, as assignee, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

          “Assignment of Management Agreement” shall mean that certain Assignment of Management Agreement and Subordination of Management Fees dated the date hereof among Borrower, Manager and Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

          “Assignment of Protection Agreement” shall mean that certain Assignment of Interest Rate Protection Agreement of even date herewith between Borrower and Lender and acknowledged by UBS AG, London Branch and any other Assignment of Interest Rate Protection Agreement hereafter delivered.

          “Award” shall mean any compensation paid by any Governmental Authority in connection with a Condemnation in respect of all or any part of the Property.

          “Bankruptcy Code” shall mean Title 11 of the United States Code entitled “Bankruptcy”, as amended from time to time, and any successor statute or statutes and all rules and regulations from time to time promulgated thereunder, and any comparable foreign laws

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relating to bankruptcy, insolvency or creditors’ rights, or other Federal or state bankruptcy or insolvency law.

          “Basic Carrying Costs” shall mean the sum of the following costs associated with the Property for the relevant Fiscal Year or payment period: (i) Taxes, (ii) Insurance Premiums and (iii) Other Charges.

          “Borrower” shall mean INTERSTATE WESTCHASE, LP, together with its permitted successors and permitted assigns.

“Breakage Costs” shall have the meaning set forth in Section 2.2.3(g).

          “Business Day” shall mean any day other than a Saturday, a Sunday or a legal holiday on which national banks are not open for general business in (i) the State of New York, (ii) the state where the corporate trust office of the Trustee is located, or (iii) the state where the servicing offices of the Servicer are located.

“Capital Expenditure Account” shall have the meaning set forth in Section 6.4.1.

“Capital Expenditure Funds” shall have the meaning set forth in Section 6.4.1.

          “Capital Expenditures” for any period shall mean amounts expended for replacements, alterations and capital repairs to the Property and required to be capitalized according to GAAP and the Uniform System of Accounts.

          “Capital Expenditures Work” shall mean any labor performed or materials installed in connection with any PIP Repairs.

“Capped LIBOR Rate” shall mean 7.25%.

          “Cash Management Account” shall have the meaning set forth in Section 12.1(a).

          “Casualty” shall mean the occurrence of any casualty, damage or injury, by fire or otherwise, to the Property or any part thereof

“Casualty Consultant” shall have the meaning set forth in Section 5.3.2(c). “Casualty Retainage” shall have the meaning set forth in Section 5.3.2(d). “Closing Date” shall mean the date of funding the Loan.

          “Code” shall mean the Internal Revenue Code of 1986, as amended, and as it may be further amended from time to time, any successor _rstatutes thereto, and applicable U.S. Department of Treasury regulations issued pursuant thereto in temporary or final form.

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          “Concession Agreement” shall mean that certain Amended and Restated Concession Management Services Agreement dated as of the date hereof by and between Manager and Westchase Beverage Corporation, a Texas corporation.

          “Condemnation” shall mean a temporary or permanent taking by any Governmental Authority as the result or in lieu or in anticipation of the exercise of the right of condemnation or eminent domain, of all or any part of the Property, or any interest therein or right accruing thereto, including any right of access thereto or any change of grade affecting the Property or any part thereof.

          “Counterparty” shall mean a counterparty to the Interest Rate Protection Agreement that (a) has and shall maintain, until the expiration of the applicable Interest Rate Protection Agreement, a long-term unsecured debt rating of not less than “AAA” by S&P and “Aaa” from Moody’s, which rating shall not include a. “t” or otherwise reflect a termination risk, or (b) is otherwise acceptable to all Rating Agencies rating any Securitization, as evidenced by written confirmation from all such Rating Agencies that such counterparty shall not cause a downgrade, withdrawal or qualification of the ratings assigned, or to be assigned, to the Securities or any class thereof in any Securitization.

          “Debt” shall mean the outstanding principal amount of the Loan together with all interest accrued and unpaid thereon and all other sums (including, without limitation, late payment fees, protective advances, the Spread Maintenance Premium and any Breakage Costs) due to Lender in respect of the Loan under the Note, this Agreement, the Mortgage, the Environment& Indemnity or any other Loan Document.

          “Debt Service” shall mean, with respect to any particular period of time, scheduled principal and interest payments under the Note.

          “Debt Service Coverage Ratio” shall mean a ratio for the applicable period for the immediately preceding twelve (12) full calendar month period in which:

(i)	the numerator is the Net Cash Flow for such period as set forth in the financial statements required in accordance with this Agreement; and
(ii)	the denominator is the aggregate amount of principal and interest due and payable on the Loan and any Mezzanine Loan, if any, for such period based upon an assumed constant interest rate for such period equal to eight and 60/100 percent (8.60%).

          “Default” shall mean the occurrence of any event hereunder or under any other Loan Document which, but for the giving of notice or passage of time, or both, would be an Event of Default.

          “Default Rate” shall mean, with respect to the Loan, a rate per annum equal to the lesser of (i) the maximum rate permitted by applicable law, or (ii) five percent (5%) above the Applicable Interest Rate.

          “Deposit Bank” shall mean Wells Fargo Bank, National Association.

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          “Determination Date” shall mean, with respect to any Interest Period, the date that is two (2) London Business Days prior to the fifteenth (15^th) day of the month in which such Interest Period commences; provided, however, that prior to a Securitization of the Loan, Lender shall have the right to change the Determination Date to any other day upon notice to Borrower (in which event such change shall then be deemed effective) and, if requested by Lender, Borrower shall promptly execute an amendment to this Agreement to evidence such change.

          “Disclosure Document” shall have the meaning set forth in Section 9.1(c).

          “Disclosure Document Date” shall have the meaning set forth in Section 9.1(c)(iv).

          “Eligible Account” shall mean a separate and identifiable account from all other funds held by the holding institution that is either (i) an account or accounts maintained with a federal or state-chartered depository institution or trust company which complies with the definition of Eligible Institution or (ii) a segregated trust account or accounts maintained with a federal or state chartered depository institution or trust company acting in its fiduciary capacity which, in the case of a state chartered depository institution or trust company is subject to regulations substantially similar to 12 C.F.R. §9.10(b), having in either case a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by federal and state authority. An Eligible Account will not be evidenced by a certificate of deposit, passbook or other instrument.

          “Eligible Institution” shall mean a depository institution or trust company insured by the Federal Deposit Insurance Corporation the short term unsecured debt obligations or commercial paper of which are rated at least A-1 by S&P and having at least the equivalent rating from one of the two other Rating Agencies in the case of accounts in which funds are held for thirty (30) days or less or, in the case of Letters of Credit or accounts in which funds are held for more than thirty (30) days, the long term unsecured debt obligations of which are rated at least “AA” by Fitch and S&P and “Aa2” by Moody’s.

          “Environmental Indemnity” shall mean that certain Environmental Indemnity Agreement dated as of the date hereof executed by Borrower in connection with the Loan for the benefit of Lender.

          “Equipment” shall have the meaning set forth in the granting clause of the Mortgage.

          “ERISA” shall have the meaning set forth in Section 4.2.10.

          “Event of Default” shall have the meaning set forth in Section 10.1(a).

          “Exchange Act” shall have the meaning set forth in Section 9.2(a).

          “Exchange Act Filing” shall have the meaning set forth in Section 9.1(c).

          “Executive Order” shall have the meaning set forth in the definition of “Prohibited Person”.

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          “Fiscal Year” shall mean each twelve month period commencing on January 1 and ending on December 31 during each year of the term of the Loan.

          “Fitch” shall mean Fitch, Inc.

          “Force Mal cure” shall mean a delay due to acts of God, war, acts of terrorism, civil commotion, governmental restrictions or preemptions, stays, judgments, orders, decrees, enemy actions, civil commotion, fire, casualty, strikes, work stoppages, shortages of labor or materials or other causes beyond the reasonable control of Borrower, but lack of funds in and of itself shall not be deemed a cause beyond the control of Borrower.

          “Foreign Taxes” shall have the meaning set forth in Section 2.2.3(d).

          “Franchise Agreement” shall mean that certain Franchise License Agreement, dated as of the date hereof, between Borrower and Franchisor, as the same may be amended or modified from time to time in accordance with the terms and provisions of this Agreement, or, if the context requires, the Replacement Franchise Agreement executed in accordance with the terms and provisions of this Agreement.

          “Franchisor” shall mean Hilton Inns, Inc., a Delaware corporation, or, if the context requires, a Qualified Franchisor.

          “GAAP” shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the accounting profession), or in such other statements by such entity as may be in general use by significant segments of the U.S. accounting profession.

          “Governmental Authority” shall mean any court, board, agency, commission, office or authority of any nature whatsoever or any governmental unit (federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence.

          “Gross Income from Operations” shall mean all sustainable income and proceeds (whether in cash or on credit, and computed on an accrual basis) received by Borrower or Manager for the use, occupancy or enjoyment of the Property, or any part thereof, or received by Borrower or Manager for the sale of any goods, services or other items sold on or provided from the Property in the ordinary course of the Property operation, including without limitation: (a) all income and proceeds received from rental of rooms, Leases and commercial space, meeting, conference and/or banquet space within the Property including net parking revenue and all income received pursuant to the Concession Agreement; (b) all income and proceeds received from food and beverage operations and from catering services conducted from the Property even though rendered outside of the Property, including all income received pursuant to the Concession Agreement; (c) all income and proceeds from business interruption, rental interruption and use and occupancy insurance with respect to the operation of the Property (after deducting therefrom all necessary costs and expenses incurred in the adjustment or collection thereof); (d) all Awards for temporary use (after deducting therefrom all costs incurred in the adjustment or collection thereof and in Restoration of the Property); (e) all income and proceeds

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from judgments, settlements and other resolutions of disputes with respect to matters which would be includable in this definition of “Gross Income from Operations” if received in the ordinary course of the Property operation (after deducting therefrom all necessary costs and expenses incurred in the adjustment or collection thereof); and (f) interest on credit accounts, rent concessions or credits, and other required pass-throughs and interest on Reserve Funds; but excluding, (1) gross receipts received by lessees, licensees or concessionaires of the Property; (2) consideration received at the Property for hotel accommodations, goods and services to be provided at other hotels, although arranged by, for or on behalf of Borrower or Manager; (3) income and proceeds from the sale or other disposition of goods, capital assets and other items not in the ordinary course of the Property operation; (4) federal, state and municipal excise, sales and use taxes collected directly from patrons or guests of the Property as a part of or based on the sales price of any goods, services or other items, such as gross receipts, room, admission, cabaret or equivalent taxes; (5) Awards (except to the extent provided in clause (d) above); (6) refunds of amounts not included in Operating Expenses at any time and =collectible accounts; (7) gratuities collected by the Property employees; (8) the proceeds of any financing; (9) other income or proceeds resulting other than from the use or occupancy of the Property, or any part thereof, or other than from the sale of goods, services or other items sold on or provided from the Property in the ordinary course of business; (10) any credits or refunds made to customers, guests or patrons in the form of allowances or adjustments to previously recorded revenues; and (11) payments made to Borrower pursuant to the Interest Rate Protection Agreement.

          “Improvements” shall have the meaning set forth in the granting clause of the Mortgage.

          “Indebtedness” shall mean, for any Person, without duplication: (i) all indebtedness of such Person for borrowed money, for amounts drawn under a letter of credit, or for the deferred purchase price of property for which such Person or its assets is liable, (ii) all unfunded amounts under a loan agreement, letter of credit, or other credit facility for which such Person would be liable if such amounts were advanced thereunder, (iii) all amounts required to be paid by such Person as a guaranteed payment to partners or a preferred or special dividend, including any mandatory redemption of shares or interests, (iv) all indebtedness guaranteed by such Person, directly or indirectly, (v) all obligations under leases that constitute capital leases for which such Person is liable, and (vi) all obligations of such Person under interest rate swaps, caps, floors, collars and other interest hedge agreements, in each case whether such Person is liable contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations such Person otherwise assures a creditor against loss.

          “Indemnified Liabilities” shall have the meaning set forth in Section 11.13(b).

          “Independent Director” shall have the meaning set forth in Section 3.1.24(p).

          “Insolvency Opinion” shall mean that certain bankruptcy nonconsolidation opinion letter dated the date hereof rendered by Levenfeld Pearlstein, LLC in connection with the Loan.

          “Insurance Account” shall have the meaning set forth in Section 6.3.1.

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          “Insurance Funds” shall have the meaning set forth in Section 6.3.1.

          “Insurance Premiums” shall have the meaning set forth in Section 5.1.1(b).

          “Interest Period” shall mean, with respect to any Monthly Payment Date, the period commencing on the fifteenth (15^th) day of the preceding calendar month and terminating on the fourteenth (14^th) day of the calendar month in which such Monthly Payment Date occurs; and the initial Interest Period shall begin on the Closing Date and shall end on the immediately following fourteenth (14^th) day of the calendar month.

          “Interest Rate Protection Agreement” shall mean one or more interest rate caps (together with the schedules relating thereto) in form and substance satisfactory to Lender, with a confirmation from the Counterparty in the form and substance satisfactory to Lender between Borrower and, subject to Section 4.1.11, a Counterparty reasonably acceptable to Lender with a Minimum Counterparty Rating, and all amendments, restatements, replacements, supplements and modifications thereto.

          “Lease” shall mean any lease, sublease or subsublease, letting, license, concession or other agreement (whether written or oral and whether now or hereafter in effect) pursuant to which any Person is granted a possessory interest in, or right to use or occupy all or any portion of any space in the Property, excluding hotel rooms let to hotel guest in the ordinary course of business, and every modification, amendment or other agreement relating to such lease, sublease, subsublease, or other agreement entered into in connection with such lease, sublease, subsublease, or other agreement and every guarantee of the performance and observance of the covenants, conditions and agreements to be performed and observed by the other party thereto.

          “Legal Requirements” shall mean all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities affecting Borrower or the Property or any part thereof or the construction, use, alteration or operation thereof, or any part thereof, whether now or hereafter enacted and in force, including, without limitation, the Americans with Disabilities Act of 1990, and all permits, licenses and authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Borrower, at any time affecting the Property or any part thereof, including, without limitation, any which may require repairs, modifications or alterations in or to the Property or any part thereof, or in any way limit the use and enjoyment thereof.

          “Lender” shall mean UBS REAL ESTATE SECURITIES INC., a Delaware corporation, together with its successors and assigns.

          “Lender Group” shall have the meaning set forth in Section 9.2(b).

          “Lender Indemnitees” shall have the meaning set forth in Section 11.13(b).

          “Lender’s Notice” shall have the meaning set forth in Section 2.2.3(b).

          “Letter of Credit” shall mean an irrevocable, unconditional, transferable, clean sight draft letter of credit, as the same may be replaced, split, substituted, modified, amended,

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supplemented, assigned or otherwise restated from time to time, (either an evergreen letter of credit or a letter of credit which does not expire until at least two (2) Business Days after the Maturity Date or such earlier date as such Letter of Credit is no longer required pursuant to the terms of this Agreement) in favor of Lender and entitling Lender to draw thereon based solely on a statement purportedly executed by an officer of Lender stating that it has the right to draw thereon, and issued by a domestic Approved Bank or the U.S. agency or branch of a foreign Approved Bank, or if there are no domestic Approved Banks or U.S. agencies or branches of a foreign Approved Bank then issuing letters of credit, then such letter of credit may be issued by a domestic bank, the long term unsecured debt rating of which is the highest such rating then given by the Rating Agency or Rating Agencies, as applicable, to a domestic commercial bank.

          “Liabilities” shall have the meaning set forth in Section 9.2(b).

          “LIBOR” shall mean, with respect to each Interest Period, the rate (calculated by Lender, expressed as a percentage per annum and rounded upward, if necessary, to the next nearest 1/8 of 1%) for deposits in United States dollars for a one-month period, which appears on Telerate Access Service Page 3750 as of 11:00 a.m., London time, on the applicable Determination Date. If such rate does not appear on Telerate Access Service Page 3750 as of 11:00 a.m., London time, on the applicable Determination Date, LIBOR for the next Interest Period and such Determination Date, the Lender will request the principal London office of any four (4) major reference banks in the London interbank market selected by the Lender to provide such reference bank’s offered quotation to prime banks in the London interbank market for deposits in United States dollars for a one (1) month period as of 11:00 a.m., London time, on such LIBOR Determination Date in a principal amount of not less than One Million and No/100 Dollars ($1,000,000.00) that is representative for a single transaction in the relevant market at such time. If at least two such offered quotations are so provided, LIBOR will be the arithmetic mean of such quotations. If fewer than two (2) such quotations are so provided, the Lender will request any three (3) major banks in New York City selected by the Lender to provide such bank’s rate for loans in United States dollars to leading European banks for a one (1) month period as of approximately 11:00 a.m., New York City time, on the applicable LIBOR Determination Date for amounts in a principal amount of not less than One Million and No/100 Dollars ($1,000,000.00) that is representative for a single transaction in the relevant market at such time. If at least two (2) such rates are so provided, LIBOR will be the arithmetic mean of such rates. LIBOR shall be determined conclusively by Lender or its agent.

          “LIBOR Interest Rate” shall mean with respect to each Interest Period the quotient of (i) LIBOR applicable to the Interest Period divided by (ii) a percentage equal to 100% minus the Reserve Requirement applicable to the Interest Period.

          “LIBOR Loan” shall mean the Loan at any time in which the Applicable Interest Rate is calculated at LIBOR Interest Rate plus the Spread in accordance with the provisions of Article II hereof.

          “Licenses” shall have the meaning set forth in Section 3.1.42 hereof.

          “Lien” shall mean any mortgage, deed of trust, lien, pledge, hypothecation, assignment, security interest, or any other encumbrance, charge or transfer of, on or affecting the

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Property or any portion thereof or Borrower, or any interest therein, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, the filing of any financing statement, and mechanic’s, materialmen’s and other similar liens and encumbrances.

          “Loan” shall mean the loan in the original principal amount of THIRTY-TWO MILLION EIGHT HUNDRED TWENTY-FIVE THOUSAND AND NO/l00 DOLLARS ($32,825,000.00) made by Lender to Borrower pursuant to this Agreement evidenced by the Note and secured by the Mortgage, together with all sums due or to become due thereunder.

          “Loan Documents” shall mean, collectively, this Agreement, the Note, the Mortgage, the Assignment of Leases, the Environmental Indemnity, the Assignment of Protection Agreement, the Assignment of Management Agreement, the Assignment of Franchise Agreement, the O&M Agreement any Letter of Credit and any other document pertaining to the Property as well as all other documents now or hereafter executed and/or delivered in connection with the Loan, as amended, restated, replaced, supplemented or otherwise modified from time to time.

          “Loan to Value Ratio” shall mean the ratio, as of a particular date, in which the numerator is equal to the outstanding principal balance of the Debt and the denominator is equal to the appraised value of the Property based on an Appraisal, as determined by Lender in its sole and absolute discretion.

          “Lockbox Account” shall have the meaning set forth in Section 12.1(a).

          “London Business Day” shall mean any day other than a Saturday, Sunday or any other day on which commercial banks in London, England or New York, New York are not open for business.

          “Major Lease” shall mean any Lease (i) covering more than 5,000 square feet at the Property, (ii) made with a Tenant that is a Tenant under another Lease at the Property or that is an Affiliate of any other Tenant under a Lease at the Property, if the Leases together cover more than 5,000 square feet, or (iii) made with a Tenant that is paying base rent in an amount equal to or exceeding five percent (5%) of the Gross Income from Operations.

          “Management Agreement” shall mean that certain management agreement entered into by and between Borrower and the Manager, pursuant to which the Manager is to provide management and other services with respect to the Property.

          “Manager” shall mean Interstate Management Company, LLC or any other manager approved in accordance with the terms and conditions of the Loan Documents.

          “Material Adverse Effect” shall mean any material adverse effect upon (i) the business operations, economic performance, assets, financial condition, equity, contingent liabilities, Material Agreements or results of operations of Borrower or the Property, (ii) the ability of Borrower to perform, in all material respects, its obligations under each of the Loan Documents, (iii) the enforceability or validity of any Loan Document, the perfection or priority

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of any Lien created under any Loan Document or the remedies of the Lender under any Loan Document or (iv) the value of, or cash flow from the Property or the operations thereof.

          “Material Agreements” shall mean each contract and agreement entered into by Borrower or Principal or Manager on behalf of Borrower relating to the ownership, management, development, use, operation, leasing, maintenance, repair or improvement of the Property (other than the Management Agreement, the Franchise Agreement and the Leases) or other contract and/or agreement that is material to the use and operation of the Property or to Borrower (i) , under which there is an obligation of Borrower to pay more than $125,000.00 in payments or liability in any annual period, (ii) which is made in the ordinary course of its business on an arm’s-length basis with an unrelated third party and on terms which are commercially reasonable, (iii) which is not an Ordinary Contract and (iv) is not cancelable without penalty or premium on no more than thirty (30) days notice.

          “Maturity Date” shall mean February 9, 2010 or such other date on which the final payment of principal of the Note becomes due and payable as therein or herein provided, whether at such stated maturity date, by declaration of acceleration, or otherwise.

          “Maximum Legal Rate” shall mean the maximum nonusurious interest rate, if any; that at any time or from time to time may be contracted for, taken, reserved, charged or received on the indebtedness evidenced by the Note and as provided for herein or the other Loan Documents, under the laws of such state or states whose laws are held by any court of competent jurisdiction to govern the interest rate provisions of the Loan.

          “Mezzanine Borrower” shall have the meaning set forth in Section 11.30 hereof.

          “Mezzanine Lender” shall have the meaning set forth in Section 11.30 hereof.

          “Mezzanine Loan” shall have the meaning set forth in Section 11.30 hereof.

          “Mezzanine Option” shall have the meaning set forth in Section 11.30 hereof.

          “Minimum Counterparty Rating” shall mean a credit rating from S&P and Fitch of at least “AN’ and from Moody’s of at least “Aa2”; provided, however, that if Lender is the Counterparty, the Minimum Counterparty Rating shall mean a credit rating from S&P and Fitch of at least “AA-” and from Moody’s of at least “Aa3”; notwithstanding the foregoing, if S&P or Fitch withdraws or downgrades the credit rating of Lender below “A”, or Moody’s withdraws or downgrades the credit rating of Lender below “A”, Borrower shall replace the Interest Rate Protection Agreement not later than fifteen (15) Business Days following receipt of notice from Lender of such downgrade or withdrawal with an Interest Rate Protection Agreement in form and substance satisfactory to Lender (and meeting the requirements set forth in Section 2.5 hereof) from a Counterparty acceptable to Lender having a Minimum Counterparty Rating.

          “Minimum Disbursement Amount” shall mean Fifteen Thousand and No/100 Dollars ($15,000.00).

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          “Monthly Payment Date” shall mean the ninth (9^th) day of every calendar month occurring during the term of the Loan, provided, however, that Lender shall have the right to change the Monthly Payment Date to any other day (or such other day of a calendar month selected by Lender, in its sole and absolute discretion, to collect debt service payments under loans which it makes and securitizes) upon notice to Borrower (in which event such change shall then be deemed effective) and, if requested by Lender, Borrower shall promptly execute an amendment to this Agreement to evidence such change.

          “Moody’s” shall mean Moody’s Investors Service, Inc.

          “Mortgage” shall mean that certain first priority Deed of Trust, Assignment of Leases and Rents and Security Agreement, dated the date hereof, executed and delivered by Borrower as security for the Loan and encumbering the Property, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

          “Mortgage Borrower” shall have the meaning set forth in Section 11.30.

          “Mortgage Lender” shall have the meaning set forth in Section 11.30(a).

          “Mortgage Loan” shall have the meaning set forth in Section 11.30.

          “Net Cash Flow” shall mean, for any period, the amount obtained by subtracting Operating Expenses for such period from Gross Income from Operations for such period.

          “Net Proceeds” shall mean: (i) the net amount of all insurance proceeds payable as a result of a Casualty to the Property, after deduction of reasonable costs and expenses (including, but not limited to, reasonable attorneys’ fees), if any, in collecting such insurance proceeds, or (ii) the net amount of the Award, after deduction of reasonable costs and expenses (including, but not limited to, reasonable attorneys’ fees), if any, in collecting such Award.

          “Net Proceeds Deficiency” shall have the meaning set forth in Section 5.3.2(0.

          “Note” shall have the meaning set forth in Section 2.1.3.

          “Notice” shall have the meaning set forth in Section 11.6.

          “O&M Agreement” shall mean, that certain Asbestos Operations & Maintenance Plan for the Hilton Houston Westchase, prepared by EMB, dated May 3, 2006 as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

          “Officer’s Certificate” shall mean a certificate delivered to Lender by Borrower which is signed by an authorized representative of Borrower or Borrower’s General Partner.

          “Operating Agreements” shall mean any covenants, agreements, restrictions and encumbrances of record relating to the construction, operation or use of the Property.

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          “Operating Expenses” shall mean the sum of all costs and expenses incurred and required to be expensed as an operating expense under GAAP of operating, maintaining, directing, managing and supervising the Property (excluding, (i) depreciation and amortization, (ii) any Debt Service in connection with the Loan, (iii) any Capital Expenditures in connection with the Property, or (iv) the costs of any other things specified to be done or provided at Manager’s sole expense, incurred by Borrower or by Manager on behalf of, for the account of or at the expense of Borrower pursuant to the Management Agreement, or as otherwise specifically provided therein, which are properly attributable to the period under consideration under Borrower’s system of accounting, including without limitation: (a) the cost of all food and beverages sold or consumed and of all necessary chinaware, glassware, linens, flatware, uniforms, utensils and other items of a similar nature, including such items bearing the name or identifying characteristics of the hotel as Borrower and/or Manager shall reasonably consider appropriate (“Operating Equipment”) and paper supplies, cleaning materials and similar consumable items (“Operating Supplies”) placed in use (other than reserve stocks thereof in storerooms); (b) salaries and wages of personnel of the Property, including costs of payroll taxes and employee benefits; (c) the cost of all other goods and services obtained by Borrower or Manager in connection with its operation of the Property including, without limitation, heat and utilities, office supplies and all services performed by third parties, including leasing expenses in connection with telephone and data processing equipment, and all existing and any future installations necessary for the operation of the Improvements for hotel purposes (including, without limitation, heating, lighting, sanitary equipment, air conditioning, laundry, refrigerating, built-in kitchen equipment, telephone equipment, communications systems, computer equipment and elevators), Operating Equipment and existing and any future furniture, furnishings, wall coverings, fixtures and hotel equipment necessary for the operation of the building for hotel purposes which shall include all equipment required for the operation of kitchens, bars, laundries, (if any) and dry cleaning facilities (if any), office equipment, cleaning and engineering equipment and vehicles; (d) the cost of repairs to and maintenance of the Property other than of a capital nature; (e) insurance premiums for general liability insurance, workers’ compensation insurance or insurance required by similar employee benefits acts and such business interruption or other insurance as may be provided for protection against claims, liabilities and losses arising from the operation of the Property (as distinguished from any property damage insurance on the Property building or its contents) and losses incurred on any self-insured risks of the foregoing types, provided that Borrower and Manager have specifically approved in advance such self-insurance or insurance is unavailable to cover such risks. Premiums on policies for more than one year will be pro rated over the period of insurance and premiums under blanket policies will be allocated among properties covered; (f) all Taxes and Other Charges (other than federal, state or local income taxes and franchise taxes or the equivalent) payable by or assessed against Borrower or Manager with respect to the operation of the Property; (g) legal fees and fees of any firm of independent certified public accounts designated from time to time by Borrower (the “Independent CPA”) for services directly related to the operation of the Property; (h) the costs and expenses of technical consultants and specialized operational experts for specialized services in connection with non-recurring work on operational, legal, functional, decorating, design or construction problems and activities; provided, however, that if such costs and expenses have not been included in an approved budget, then if such costs exceed $25,000.00 in any one instance the same shall be subject to approval by Lender; (i) all expenses for advertising the Property and all expenses of sales promotion and public relations activities; (j) all out-of-pocket expenses and

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disbursements determined by the Independent CPA to have been reasonably, properly and specifically incurred by Borrower, Manager or any of their Affiliates pursuant to, in the course of and directly related to, the management and operation of the Property under the Management Agreement (without limiting the generality of the foregoing, such charges may include all reasonable travel, telephone, telegram, radiogram, cablegram, air express and other incidental expenses, but, excluding costs relating to the offices maintained by Borrower, Manager or any of their Affiliates other than the offices maintained at the Property for the management of the Property and excluding transportation costs of Borrower or Manager related to meetings between Borrower and Manager with respect to administration of the Management Agreement, as applicable or of the Property involving travel away from such party’s principal executive offices); (k) the cost of any reservations system, any accounting services or other group benefits, programs or services from time to time made available to properties in the Borrower’s system; (1) the cost associated with any retail Leases; (m) any management fees, basic and incentive fees or other fees and reimbursables paid or payable to Manager under the Management Agreement; (n) any franchise fees or other fees and reimbursables paid or payable to Franchisor under the Franchise Agreement; and (o) all costs and expenses of owning, maintaining, conducting and supervising the operation of the Property to the extent such costs and expenses are not included above.

          “Ordinary Contract” shall mean any trade or operational contracts incurred in the ordinary course of business on an arm’s-length basis with an unrelated third party and on terms which are commercially reasonable terms and in amounts that are customary and reasonable under the circumstances.

          “Other Charges” shall mean all ground rents, maintenance charges, impositions other than Taxes, and any other governmental or other charges, including, without limitation, fees and charges of the Westchase District (including, without limitation, those administered by the Westchase Community Association (the “WCA”)), vault charges and license fees for the use of vaults, chutes and similar areas adjoining the Property, now or hereafter levied or assessed or imposed against the Property or any part thereof.

          “Patriot Act” shall mean collectively all laws relating to terrorism or money laundering, including Executive Order No. 13224 on Terrorist Financing (effective September 24, 2001) and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56).

          “Permitted Encumbrances” shall mean, collectively, (i) the Liens and security interests created by the Loan Documents, (ii) all Liens, encumbrances and other matters expressly set forth on Schedule A or Schedule B of the Title Insurance Policy, (iii) Liens, if any, for Taxes and Other Charges imposed by any Governmental Authority not yet due or delinquent or being contested in good faith by Borrower pursuant to Section 4.1.2 of this Agreement, (iv) liens related to equipment leases, provided same are subordinate to any Liens hereunder and the cost of which shall not cause Borrower to violate Section 3.1.24(d) hereof and (iv) such other title and survey exceptions as Lender has approved or may approve in writing in Lender’s sole discretion.

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          “Permitted Investments” shall mean any one or more of the following obligations or securities with maturities of not more than three hundred sixty-five (365) days acquired at a purchase price of not greater than par, including those issued by any servicer, the trustee under any securitization or any of their respective Affiliates, payable on demand or having a maturity date not later than the Business Day immediately prior to the first Monthly Payment Date following the date of acquiring such investment and meeting one of the appropriate standards set forth below:

     (i) obligations of, or obligations fully guaranteed as to payment of principal and interest by, the United States or any agency or instrumentality thereof provided such obligations are backed by the full faith and credit of the United States of America including, without limitation, obligations of: the U.S. Treasury (all direct or fully guaranteed obligations), the Farmers Home Administration (certificate of beneficial ownership), the General Services Administration (participation certificates), the U.S. Maritime Administration (guaranteed Title XI financing), the Small Business Administration (guaranteed participation certificates and guaranteed pool certificates), the U.S. Department of Housing and Urban Development (local authority bonds) and the Washington Metropolitan Area Transit Authority (guaranteed transit bonds); provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index and (C) such investments must not be subject to liquidation prior to their maturity;

     (ii) Federal Housing Administration debentures;

     (iii) obligations of the following United States government sponsored agencies: Federal Home Loan Mortgage Corp. (debt obligations), the Farm Credit System (consolidated systemwide bonds and notes), the Federal Home Loan Banks (consolidated debt obligations), the Federal National Mortgage Association (debt obligations), the Student Loan Marketing Association (debt obligations), the Financing Corp. (debt obligations), and the Resolution Funding Corp. (debt obligations); provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index and (C) such investments must not be subject to liquidation prior to their maturity;

     (iv) federal funds, unsecured certificates of deposit, time deposits, bankers’ acceptances and repurchase agreements with maturities of not more than three hundred sixty-five (365) days of any bank, the short term obligations of which at all times are rated in the highest short term rating category by two (2) of the Rating Agencies (or, if not rated by all Rating Agencies, rated by at least one (1) Rating Agency in the highest short term rating category and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to the Securities or any class thereof); provided, however, that the investments described in this

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clause must (A) have a predetamined fixed dollar of principal due at maturity that cannot vary or change, (B) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index and (C) such investments must not be subject to liquidation prior to their maturity;

     (v) fully Federal Deposit Insurance Corporation-insured demand and time deposits in, or certificates of deposit of, or bankers’ acceptances issued by, any bank or trust company, savings and loan association or savings bank, the short term obligations of which at all times are rated in the highest short term rating category by each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one (1) Rating Agency in the highest short term rating category and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to the Securities or any class thereof); provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index and (C) such investments must not be subject to liquidation prior to their maturity;

     (vi) debt obligations with maturities of not more than three hundred sixty-five (365) days and at all times rated by each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one (1) Rating Agency and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investments would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to the Securities or any class thereof) in its highest long-term unsecured debt rating category; provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index and (C) such investments must not be subject to liquidation prior to their maturity;

     (vii) commercial paper (including both non-interest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not more than one (1) year after the date of issuance thereof) with maturities of not more than three hundred sixty-five (365) days and that at all times is rated by each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one (1) Rating Agency and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to the Securities or any class thereof) in its highest short-term unsecured debt rating; provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and

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must move proportionately with that index and (C) such investments must not be subject to liquidation prior to their maturity;

     (viii) units of taxable money market funds, which funds are regulated investment companies, seek to maintain a constant net asset value per share and invest solely in obligations backed by the full faith and credit of the United States, which funds have the highest rating available from each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one (1) Rating Agency and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the then current ratings assigned to the Securities or any class thereof) for money market funds; and

     (ix) any other security, obligation or investment which has been approved as a Permitted Investment in writing by (a) Lender and (b) each Rating Agency, as evidenced by a written confirmation that the designation of such security, obligation or investment as a Permitted Investment will not, in and of itself, result in a downgrade, qualification or withdrawal of the initial, or, if higher, then current ratings assigned to the Securities or any class thereof by such Rating Agency;

          provided, however, that such instrument continues to qualify as a “cash flow investment” pursuant to Code Section 860G(a)(6) earning a passive return in the nature of interest and no obligation or security shall be a Permitted Investment if (A) such obligation or security evidences a right to receive only interest payments or (B) the right to receive principal and interest payments on such obligation or security are derived from an underlying investment that provides a yield to maturity in excess of one hundred twenty percent (120%) of the yield to maturity at par of such underlying investment.

          “Permitted Prepayment Date” shall mean February 10, 2008.

          “Permitted Transferee” shall mean any of the following entities (for purposes of this definition, “control” means the ability to make or veto all material decisions with respect to the operation, management, financing and disposition of the Property, rather than a beneficial ownership requirement, and regardless of the fact that responsibility for such day-to-day operating and management functions are ordinarily handled by a property manager or for leasing activities has been delegated by such controlling Person pursuant to a written agreement):

          (i) a pension fund, pension trust or pension account that immediately prior to such transfer owns, directly or indirectly, total real estate assets of at least $1,000,000,000;

          (ii) a pension fund advisor who (a) immediately prior to such transfer, controls, directly or indirectly, at least $1,000,000,000 of real estate assets and (b) is acting on behalf of one or more pension funds that, in the aggregate, satisfy the requirements of clause (i) of this definition;

          (iii) an insurance company which is subject to supervision by the insurance commissioner, or a similar official or agency, of a state or territory of the United States (including the District of Columbia) (a) with a net worth, determined under GAAP as of a date no more than six (6) months prior to the date of the transfer of at least $500,000,000 and (b) who,

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immediately prior to such transfer, controls, directly or indirectly, real estate assets of at least $1,000,000,000;

          (iv) a corporation organized under the banking laws of the United States or any state or territory of the United States (including the District of Columbia) (a) with a combined capital and surplus of at least $500,000,000 and (b) who, immediately prior to such transfer, controls, directly or indirectly, real estate assets of at least $1,000,000,000;

          (v) any Person (a) who has at least five (5) years’ experience in owning and/or operating at least 1,000,000 square feet (exclusive of the Property) of hospitality properties which comprise in the aggregate at least 4,000 hotel rooms of similar size, scope, class, use and value of the Property, (b) who has a net worth, determined as of a date no more than six (6) months prior to the date of such transfer, of at least $400,000,000 and (c) who, immediately prior to such transfer, controls, directly or indirectly, real estate assets of at least $1,000,000,000;

          (vi) a real estate investment trust, bank, saving and loan association, investment bank, insurance company, trust company, commercial credit corporation, pension plan, pension fund or pension advisory firm, mutual fund, government entity or plan, provided that any such Person referred to in this clause (vi) (a) has total assets (in name or under management) in excess of $600,000,000 and (except with respect to a pension advisory firm or similar fiduciary) capital/statutory surplus or shareholder’s equity of $250,000,000 and (b) is regularly engaged in the business of making or owning commercial real estate loans or loans similar in type as the Loan or operating commercial mortgage properties; or

          (vii) any Person in which fifty percent (50%) of the ownership interests are owned directly or indirectly by any of the entities listed in subsections (i) through (vi) of this definition of “Permitted Transferee”, or any combination of more than one such entity, and which is controlled directly or indirectly by such entity or entities.

          “Person” shall mean any individual, corporation, partnership, limited liability company, joint venture, estate, trust, unincorporated association, any other entity, any federal, state, county or municipal government or any bureau, department or agency thereof and any fiduciary acting in such capacity on behalf of any of the foregoing.

          “PIP Repairs” shall have the meaning specified in Section 6.4.1. “Policy” shall have the meaning specified in Section 5.1.1(b).

          “Prepayment Date” shall mean the date on which the Loan is prepaid in accordance with the terms hereof.

          “Prepayment Fee” shall mean, with respect to any prepayment received by Lender (a) prior to February 10, 2009, an amount initially equal to one percent (1.0%) of the Loan; provided however, such fee shall decrease by .08333% on the day immediately after each Monthly Payment Date, with the first such reduction occurring on March 10, 2008 and (b) anytime on or after February 10, 2009, an amount equal to zero (0).

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          “Principal” shall mean INTERSTATE WESTCHASE GP, LLC, a Delaware Limited Liability Company.

          “Product Improvement Plan” shall have the meaning set forth in the Franchise Agreement.

          “Prohibited Person” shall mean any Person:

     (i) listed in the Annex to, or is otherwise subject to the provisions of, the Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, and relating to Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (the “Executive Order”);

     (ii) that is owned or controlled by, or acting for or on behalf of, any person or entity that is listed in the Annex to, or is otherwise subject to the provisions of the Executive Order;

     (iii) with whom Lender is prohibited from dealing or otherwise engaging in any transaction by any terrorism or money laundering Law, including the Executive Order;

     (iv) who commits, threatens or conspires to commit or supports “terrorism” as defined in the Executive Order;

     (v) that is named as a “specially designated national and blocked person” on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control at its official website or at any replacement website or other replacement official publication of such list; or

     (vi) who is an Affiliate of a Person listed above.

          “Property” shall mean the parcel of real property, the Improvements thereon and all personal property owned by Borrower and encumbered by the Mortgage, together with all rights pertaining to such property and Improvements, all as more particularly described in the granting clauses of the Mortgage.

          “Qualified Franchisor” shall mean either (a) Franchisor; or (b) in the reasonable judgment of Lender, a reputable and experienced franchisor (which may be an Affiliate of Borrower) possessing experience in flagging hotel properties similar in size, scope, use and value as the Property, provided, that Borrower shall have obtained (i) prior written confirmation from the applicable Rating Agencies that licensing of the Property by such Person will not cause a downgrade, withdrawal or qualification of the then current ratings of the Securities or any class thereof and (ii) if such Person is an Affiliate of Borrower, an Additional Insolvency Opinion.

          “Rating Agencies” shall mean, prior to the final Securitization of the Loan, each of S&P, Moody’s and Fitch, or any other nationally-recognized statistical rating agency which has been designated by Lender and, after the final Securitization of the Loan, shall mean any of the foregoing that have rated any of the Securities or any class thereof.

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          “Rating Agency Confirmation” shall mean a written affirmation from each of the Rating Agencies that the credit rating of the Securities or any class thereof by such Rating Agency immediately prior to the occurrence of the event with respect to which such Rating Agency Confirmation is sought will not be qualified, downgraded or withdrawn as a result of the occurrence of such event, which affirmation may be granted or withheld in such Rating Agency’s sole and absolute discretion.

          “Re-Dating” shall have the meaning set forth in Section 9.1(b)(iv).

          “Registration Statement” shall have the meaning set forth in Section 9.2(b).

          “Regulation AB” shall have the meaning set forth in Section 9.1(c).

          “Regulation D” shall mean Regulation D of the Board of Governors of the Federal Reserve System from time to time in effect, including any successor or other Regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System.

          “Related Property” shall have the meaning set forth in Section 9.1(c).

          “Related Loan” shall have the meaning set forth in Section 9.1(c).

          “Rents” shall mean, all rents, rent equivalents, moneys payable as damages or in lieu of rent or rent equivalents, royalties (including, without limitation, all oil and gas or other mineral royalties and bonuses), income, receivables, receipts, revenues, deposits (including, without limitation, security, utility and other deposits), accounts, cash, issues, profits, charges for services rendered, and other consideration of whatever form or nature received by or paid to Borrower or its agents or employees for the account of or benefit of Borrower from any and all sources arising from or attributable to the Property, and proceeds, if any, from business interruption or other loss of income or insurance, including, without limitation, all hotel receipts, revenues and credit card receipts collected from guest rooms, restaurants, bars, meeting rooms, banquet rooms and recreational facilities, all receivables, customer obligations, installment payment obligations and other obligations now existing or hereafter arising or created out of the sale, lease, sublease, license, concession or other grant of the right of the use and occupancy of property or rendering of services by Borrower or any operator or manager of the hotel or the commercial space located in the Improvements or acquired from others (including, without limitation, from the rental of any office space, retail space, guest rooms or other space, halls, stores, and offices, and deposits securing reservations of such space), license, lease, sublease and concession fees and rentals, health club membership fees, food and beverage wholesale and retail sales, service charges, vending machine sales and proceeds, if any, from business interruption or other loss of income insurance,

          “Replacement Franchise Agreement” shall mean either (a) a franchise, trademark and license agreement with a Qualified Franchisor substantially in the same form and substance as the Franchise Agreement, or (b) a franchise, trademark and license agreement with a Qualified Franchisor, which franchise, trademark and license agreement shall be reasonably acceptable to Lender in form and substance, provided, with respect to this subclause (b), Lender, at its option, may require that Borrower shall have obtained prior written confirmation from the

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applicable Rating Agencies that such franchise, trademark and license agreement will not cause a downgrade, withdrawal or qualification of the then current rating of the Securities or any class thereof.

          “Replacement Reserve Account” shall have the meaning set forth in Section 6.5.1 hereof.

          “Replacement Reserve Fund” shall have the meaning set forth in Section 6.5.1 hereof.

          “Replacement Reserve Monthly Deposit” shall have the meaning set forth in Section 6.5.1 hereof.

          “Replacements” shall have the meaning set forth in Section 6.5.1 hereof.

          “Required Repair Account” shall have the meaning set forth in Section 6.1.1 hereof

          “Required Repair Funds” shall have the meaning set forth in Section 6.1.1 hereof

          “Required Repairs” shall have the meaning set forth in Section 6.1.1 hereof.

          “Reserve Accounts” shall mean the accounts and sub-accounts in which the Reserve Funds are being held in accordance with this Agreement.

          “Reserve Funds” shall mean, collectively, Capital Expenditure Funds, the Insurance Funds, the Tax Funds, the Required Repair Funds and the Replacement Reserve Funds.

          “Reserve Requirements” means with respect to any Interest Period, the maximum rate of all reserve requirements (including, without limitation, all basic, marginal, emergency, supplemental, special or other reserves and taking into account any transitional adjustments or other schedule changes in reserve requirements during the Interest Period) which are imposed under Regulation D on eurocurrency liabilities (or against any other category of liabilities which includes deposits by reference to which LIBOR is determined or against any category of extensions of credit or other assets which includes loans by a non-United States office of a depository institution to United States residents or loans which charge interest at a rate determined by reference to such deposits) during the Interest Period and which are applicable to member banks of the Federal Reserve System with deposits exceeding one billion dollars, but without benefit or credit of proration, exemptions or offsets that might otherwise be available from time to time under Regulation D. The determination of the Reserve Requirements shall be based on the assumption that Lender funded 100% of the Loan in the interbank eurodollar market. In the event of any change in the rate of such Reserve Requirements under Regulation D during the Interest Period, or any variation in such requirements based upon amounts or kinds of assets or liabilities, or other factors, including, without limitation, the imposition of Reserve Requirements, or differing Reserve Requirements, on one or more but not all of the holders of the Loan or any participation therein, Lender may use any reasonable averaging and/or

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attribution methods which it deems appropriate and practical for determining the rate of such Reserve Requirements which shall be used in the computation of the Reserve Requirements. Lender’s computation of same shall be final absent manifest error.

          “Resizing Event” shall have the meaning set forth in Section 11.29(a). “Restoration” shall have the meaning set forth in Section 5.2.1.

          “Restricted Party” shall mean collectively, (a) Borrower, Principal and any Affiliated Manager and (b) any shareholder, partner, member, non-member manager, any direct or indirect legal or beneficial owner of, Borrower, Principal, any Affiliated Manager or any non member manager.

          “Restoration Threshold” shall mean $984,750.00.

          “S&P” shall mean Standard & Poor’s Ratings Services, a division of the McGraw-Hill Companies, Inc.

          “Secondary Market Transaction” shall have the meaning set forth in Section 9.1(a).

“Securities” shall have the meaning set forth in Section 9.1(a). “Securities Act” shall have the meaning set forth in Section 9.2(a). “Securitization” shall have the meaning set forth in Section 9.1(a). “Servicer” shall have the meaning set forth in Section 11.24(a).

“Servicing Agreement” shall have the meaning set forth in Section 11.24(a). “Severed Loan Documents” shall have the meaning set forth in Section 10.2(c). “Significant Obligator” shall have the meaning set forth in Section 9.1(c). “SPC Party” shall have the meaning set forth in Section 3.1.24(o). “Spread” shall mean 135 basis points.

          “Spread Maintenance Premium” shall mean, in connection with a prepayment of all or any portion of the outstanding principal balance of the Loan pursuant to Section 2.3.3 hereof, an amount equal to the present value, discounted at LIBOR on the most recent Determination Date, of all future installments of interest which would have been due hereunder through and including the last day of the Interest Period in which the Permitted Prepayment Date occurs on the portion of the outstanding principal balance of the Loan being prepaid as if interest accrued on such portion of the principal balance being prepaid at an interest rate per annum equal to the LIBOR Interest Rate then in effect plus the Spread. The Spread Maintenance Premium shall be calculated by Lender and shall be final absent manifest error.

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          “State” shall mean the State or Commonwealth in which the Property or any part thereof is located.

          “Substitute Rate” shall have the meaning set forth in Section 2.2.3(b).

          “Substitute Rate Loan” shall mean the Loan at any time in which the Applicable Interest Rate is calculated at the Substitute Rate plus the Substitute Spread in accordance with the provisions of Article II hereof.

          “Substitute Spread” shall have the meaning set forth in Section 2.2.3(b).

          “Survey” shall mean a current land survey for the Property, certified .to the title company and Lender and its successors and assigns, in form and content satisfactory to Lender and prepared by a professional and properly licensed land surveyor satisfactory to Lender in accordance with the 2005 Minimum Standard DetRil Requirements for-ALTA/ACSM Land Title Surveys (i) including the following additional items from the list of “Optional Survey Responsibilities and Specifications” (Table A): 2, 3, 4, 6, 7(a), 7(b)(1), 8, 9, 10, 11(a) and 13, (ii) reflecting a metes and bounds description of the real property comprising part of the Property in conformity with the Title Insurance Policy, and (iii) together with the surveyor’s seal affixed to the Survey and a certification from the surveyor in form and substance acceptable to Lender.

          “Tax Funds” shall have the meaning set forth in Section 6.2.1.

          “Taxes” shall mean all real estate and personal property taxes, assessments, water rates or sewer rents, now or hereafter levied or assessed or imposed against the Property or part thereof, together with all interest and penalties thereon.

          “Telerate Page 3750” means the display designated as “Page 3750” on the Dow Jones Telerate Service (or such other page as may replace Page 3750 on that service or such other service as may be nominated by the British Bankers’ Association as the information vendor for the purpose by displaying British Bankers’ Association Interest Settlement Rates for U.S. Dollar deposits).

          “Tenant” shall mean any Person obligated by contract or otherwise to pay monies (including a percentage of gross income, revenue or profits) under any Lease now or hereafter affecting all or any part of the Property.

          “Tenant Direction Letter” shall have the meaning set forth in Section 12.2(a)(i).

          “Title Insurance Policy” shall mean an ALTA mortgagee title insurance policy in the form acceptable to Lender issued with respect to the Property and insuring the lien of the Mortgage together with such endorsements and affirmative coverages as Lender may require.

          “Transferee” shall have the meaning set forth in Section 8.1.1(f)(ii).

          “Trustee” shall mean any trustee holding the Loan in a Securitization.

          “UBS” shall mean UBS Real Estate Securities Inc., a Delaware corporation.

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          “UCC” or “Uniform Commercial Code” shall mean the Uniform Commercial Code as in effect in the State.

          “Uniform System of Accounts” shall mean the most recent edition of the Uniform System of Accounts for Hotels as adopted by the American Hotel and Motel Association.

          “Underwriter Group” shall have the meaning set forth in Section 9.2(b). “Updated Information” shall have the meaning set forth in Section 9.1(b)(i).

          “U.S. Obligations” shall mean direct full faith and credit obligations of the United States of America that are not subject to prepayment, call or early redemption.

          “WCA” shall have the meaning set forth in the definition of “Other Charges.”

          Section L2 Principles of Construction. All references to sections and schedules are to sections and schedules in or to this Agreement unless otherwise specified. Unless otherwise specified, the words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all meanings attributed to defined terms herein shall be equally applicable to both the singular and plural forms of the terms so defined.

II. THE LOAN

          Section 2.1 The Loan.

          2.1.1 Agreement to Lend and Borrow. Subject to and upon the terms and conditions set forth herein, Lender shall make the Loan to Borrower and Borrower shall accept the Loan from Lender on the Closing Date.

          2.1.2 Single Disbursement to Borrower. Borrower shall receive only one (1) borrowing hereunder in respect of the Loan and any amount borrowed and repaid hereunder in respect of the Loan may not be reborrowed.

          2.1.3 The Note. The Loan shall be evidenced by that certain Promissory Note of even date herewith, in the stated principal amount of THIRTY-TWO MILLION EIGHT HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($32,825,000.00) executed by Borrower and payable to the order of Lender in evidence of the Loan (as the same may hereafter be amended, supplemented, restated, increased, extended or consolidated from time to time, the “Note”) and shall be repaid in accordance with the terms of this Agreement and the Note.

          2.1.4 Use of Proceeds. Borrower shall use proceeds of the Loan to (a) acquire the Property, (b) pay all past-due Basic Carrying Costs, if any, in respect of the Property, (c) deposit the Reserve Funds, (d) pay costs and expenses incurred in connection with the closing

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of the Loan, as approved by Lender, (e) fund any working capital requirements of the Property, as approved by Lender and (f) distribute the balance of the proceeds, if any to Borrower.

          Section 2.2 Interest Rate.

          2.2.1 Applicable Interest Rate. Except as herein provided with respect to interest accruing at the Default Rate, interest on the principal balance of the Loan outstanding from time to time shall accrue from (and including) the Closing Date up to and including the end of the last Interest Period at the Applicable Interest Rate.

          2.2.2 Interest Calculation. Interest on the outstanding principal balance of the Loan shall be calculated by multiplying (a) the actual number of days elapsed in the period for which the calculation is being made by (b) a daily rate based on a three hundred sixty (360) day year (that is, the Applicable Interest Rate or the Default Rate, as then applicable, expressed as an annual rate divided by 360) by (c) the outstanding principal balance.

          2.2.3 Determination of Interest Rate. (a) Any change in the rate of interest hereunder due to a change in the Applicable Interest Rate shall become effective as of the first day of the new Interest Period. Each determination by Lender of the Applicable Interest Rate shall be conclusive and binding for all purposes, absent manifest error.

          (b) In the event that Lender shall have determined (which determination shall be conclusive and binding upon Borrower absent manifest error) that by reason of circumstances affecting the interbank eurodollar market, adequate and reasonable means do not exist for ascertaining LIBOR, then Lender shall, by notice to Borrower (“Lender’s Notice”), which notice shall set forth in reasonable detail such circumstances, establish the Applicable Interest Rate at Lender’s then customary spread (the “Substitute Spread”), taking into account the size of the Loan and the creditworthiness of Borrower, above a published index used for variable rate loans as reasonably determined by Lender (the “Substitute Rate”).

          (c) If, pursuant to the terms of this Agreement, the Loan has been converted to a Substitute Rate Loan and Lender shall determine (which determination shall be conclusive and binding upon Borrower absent manifest error) that the event(s) or circumstance(s) which resulted in such conversion shall no longer be applicable or reasonable and adequate means for establishing LIBOR otherwise exist as determined by Lender, Lender shall give notice thereof to Borrower, and the Substitute Rate Loan shall automatically convert to a LIBOR Loan on the first day of the Interest Period next following the effective date set forth in such notice. Notwithstanding any provision of this Agreement to the contrary, in no event shall Borrower have the right to elect to convert a LIBOR Loan to a Substitute Rate Loan.

          (d) With respect to a LIBOR Loan, all payments made by Borrower hereunder shall be made free and clear of, and without reduction for or on account of, income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions, reserves or withholdings imposed, levied, collected, withheld or assessed by any Governmental Authority, which are imposed, enacted or become effective after the date hereof (such non-excluded taxes being referred to collectively as “Foreign Taxes”), excluding income and franchise taxes of the United States of America or any political subdivision or taxing authority thereof or therein (including Puerto

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Rico). If any Foreign Taxes are required to be withheld from any amounts payable to Lender hereunder, the amounts so payable to Lender shall be increased to the extent necessary to yield to Lender (after payment of all Foreign Taxes) interest or any such other amounts payable hereunder at the rate or in the amounts specified hereunder. Whenever any Foreign Tax is payable pursuant to applicable law by Borrower, as promptly as possible thereafter, Borrower shall send to Lender an original official receipt, if available, or certified copy thereof showing payment of such Foreign Tax. Borrower hereby indemnifies Lender for any incremental taxes, interest or penalties that may become payable by Lender which may result from any failure by Borrower to pay any such Foreign Tax when due to the appropriate taxing authority or any failure by Borrower to remit to Lender the required receipts or other required documentary evidence.

          (e) If any requirement of law or any change therein or in the interpretation or application thereof, shall hereafter make it unlawful for Lender to make or maintain a LIBOR Loan as contemplated hereunder, (i) the obligation of Lender hereunder to make a LIBOR Loan shall be cancelled forthwith and (ii) Lender may give Borrower a Lender’s Notice, establishing the Applicable Interest Rate at the Substitute Rate plus the Substitute Spread, in which case the Applicable Interest Rate shall be a rate equal to the Substitute Rate in effect from time to time plus the Substitute Spread. In the event the condition necessitating the cancellation of Lender’s obligation to make a LIBOR Loan hereunder shall cease, Lender shall promptly notify Borrower of such cessation and the Loan shall resume its characteristics as a LIBOR Loan in accordance with the terms herein from and after the first day of the calendar month next following such cessation. Borrower hereby agrees promptly to pay Lender, upon demand, any additional amounts necessary to compensate Lender for any actual (as reasonably determined by Lender) out-of-pocket costs incurred by Lender in making any conversion in accordance with this Agreement, including, without limitation, any interest or fees payable by Lender to lenders of funds obtained by it in order to make or maintain the LIBOR Loan hereunder. Lender’s notice of such costs, as certified to Borrower, shall be set forth in reasonable detail and Lender’s calculation shall be conclusive absent manifest error.

          (f) In the event that any change in any requirement of law or in the interpretation or application thereof, or compliance by Lender with any request or directive (whether or not having the force of law) hereafter issued from any central bank or other Governmental Authority:

     (i) shall hereafter have the effect of reducing the rate of return on Lender’s capital as a consequence of its obligations hereunder to a level below that which Lender could have achieved but for such adoption, change or compliance (taking into consideration Lender’s policies with respect to capital adequacy) by any amount deemed by Lender to be material;

     (ii) shall hereafter impose, modify, increase or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of Lender which is not otherwise included in the determination of the rate hereunder; or

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     (iii) shall hereafter impose on Lender any other condition and the result of any of the foregoing is to increase the cost to Lender of making, renewing or maintaining loans or extensions of credit or to reduce any amount receivable hereunder;

then, in any such case, Borrower shall promptly pay Lender, upon demand, any additional amounts necessary to compensate Lender for such additional cost or reduced amount receivable which Lender deems to be material as determined by Lender. If Lender becomes entitled to claim any additional amounts pursuant to this Section 2.2.3(f), Borrower shall not be required to pay same unless the requirement for such additional amounts is the result of requirements imposed generally on lenders similar to Lender and not the result of some specific reserve or similar requirement imposed on Lender as a result of Lender’s special circumstances. If Lender becomes entitled to claim any additional amounts pursuant to this Section 2.2.3(0, Lender shall provide Borrower with not less than thirty (30) days written notice specifying in reasonable detail the event by reason of which it has become so entitled and the additional amounts required to fully compensate Lender for such additional costs or reduced amounts. A certificate as to any additional costs or amounts payable pursuant to the foregoing sentence, executed by an authorized signatory of Lender and submitted by Lender to Borrower shall be conclusive in the absence of manifest error. This provision shall survive payment of the Note and the satisfaction of all other obligations of Borrower under this Agreement and the Loan Documents.

          (g) Borrower agrees to indemnify Lender and to hold Lender harmless from any loss or expense (other than consequential and punitive damages) which Lender sustains or incurs as a consequence of (i) any default by Borrower in payment of the principal of or interest on a LIBOR Loan, including, without limitation, any such loss or expense arising from interest or fees payable by Lender to lenders of funds obtained by it in order to maintain a LIBOR Loan hereunder, (ii) any prepayment (whether voluntary or mandatory) of the LIBOR Loan on a day that (A) is not a Monthly Payment Date or (B) is a Monthly Payment Date if Borrower did not give the prior written notice of such prepayment required pursuant to the terms of this Agreement, including, without limitation, such loss or expense arising from interest or fees payable by Lender to lenders of funds obtained by it in order to maintain the LIBOR Loan hereunder and (iii) the conversion (for any reason whatsoever, whether voluntary or involuntary) of the Applicable Interest Rate to the Substitute Rate plus the Substitute Spread with respect to any portion of the outstanding principal amount of the Loan then bearing interest at a rate other than the Substitute Rate plus the Substitute Spread on a date other than the first day of an Interest Period, including, without limitation, such loss or expenses arising from interest or fees payable by Lender to lenders of funds obtained by it in order to maintain a LIBOR Loan hereunder (the amounts referred to in clauses (i), (ii) and (iii) are herein referred to collectively as the “Breakage Costs”). Whenever in this Section 2.2.3 the term “interest or fees payable by Lender to lenders of funds obtained by it” is used and no such funds were actually obtained from such lenders, it shall include interest or fees which would have been payable by Lender if it had obtained funds from lenders in order to maintain a LIBOR Loan hereunder. Lender will provide to Borrower a statement detailing such Breakage Costs and the calculation thereof.

          (h) The provisions of this Section 2.2.3 shall survive payment of the Note in full and the satisfaction of all other obligations of Borrower under this Agreement and the other Loan Documents.

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          2.2.4 Usury Savings. This Agreement and the other Loan Documents are subject to the express condition that at no time shall Borrower be required to pay interest on the principal balance of the Loan at a rate which could subject Lender to either civil or criminal liability as a result of being in excess of the Maximum Legal Rate. If by the terms of this Agreement or the other Loan Documents, Borrower is at any time required or obligated to pay interest on the principal balance due hereunder at a rate in excess of the Maximum Legal Rate, the Applicable Interest Rate or the Default Rate, as the case may be, shall be deemed to be immediately reduced to the Maximum Legal Rate and all previous payments in excess of the Maximum Legal Rate shall be deemed to have been payments in reduction of principal and not on account of the interest due hereunder. All sums paid or agreed to be paid to Lender for the use, forbearance, or detention of the sums due under the Loan, shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term of the Loan until payment in full so that the rate or amount of interest on account of the Loan does not exceed the Maximum Legal Rate from time to time in effect and applicable to the Loan for so long as the Loan is outstanding.

          Section 2.3 Loan Payments.

          2.3.1 Payment Before Maturity Date. Borrower shall make a payment to Lender of interest only on the Closing Date for the initial Interest Period. Borrower shall make a payment to Lender of interest calculated in the manner set forth herein on the Monthly Payment Date occurring in March, 2007 and on each Monthly Payment Date thereafter to and including the Maturity Date.

          2.3.2 Payment on Maturity Date. (a) Borrower shall pay to Lender on the Maturity Date the outstanding principal balance of the Loan, all accrued and unpaid interest and all other amounts due hereunder and under the Note, the Mortgage and the other Loan Documents.

          (b) Borrower will have two (2) options to extend the Maturity Date of the Loan for consecutive one (1) year periods. In order to exercise the first such extension right, Borrower shall deliver to Lender written notice of such extension on or before December 25, 2009 and, upon giving of such notice of extension, and subject to the satisfaction of the conditions set forth below in this Section 2.3.2(b) on or before December 25, 2009, the Maturity Date as theretofore in effect will be extended to February 9, 2011. In order to exercise the second such extension right, Borrower shall deliver to Lender written notice of such extension on or before December 25, 2010 and, upon the giving of such notice of extension, and subject to the satisfaction of the conditions set forth below in this Section 2.3.2(b) on or before December 25, 2010, the Maturity Date as theretofore in effect will be extended to February 9, 2012. The Maturity Date shall be extended pursuant to Borrower’s notices as aforesaid, provided that the following conditions are satisfied: (i) no Event of Default shall be in existence either at the time of Borrower’s notice or at the then-current Maturity Date and (ii) Borrower shall enter into an Interest Rate Protection Agreement through the term of the applicable extension under the same terms and conditions of the initial Interest Rate Protection Agreement (including its LIBOR strike price) entered into in connection with the Loan and shall provide an Assignment of Protection Agreement with respect thereto in the form of Assignment of Protection Agreement, together with an opinion of counsel with respect thereto reasonably acceptable to Lender.

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          2.3.3 Interest Rate and Payment after Default. In the event that, and for so long as, any Event of Default shall have occurred and be continuing, the outstanding principal balance of the Loan shall accrue interest at the Default Rate, calculated from the date the Default occurred which led to such an Event of Default without regard to any grace or cure periods contained herein. If all or any part of the principal amount of the Loan is prepaid prior to the Permitted Prepayment Date following the occurrence of an Event of Default prior to the Permitted Prepayment Date, Borrower shall be required to pay Lender, in addition to all other amounts then payable hereunder (including, without limitation, (i) in the event that such prepayment is received on a Monthly Payment Date, interest accruing on such amount calculated through and including the end of the Interest Period in which such Monthly Payment Date occurs, or (ii) in the event that such prepayment is received on a date other than a Monthly Payment Date, interest accruing on such amount calculated through and including the end of the Interest Period in which the next Monthly Payment Date occurs), a prepayment fee equal to one percent (1%) of the amount of principal being repaid together with a Spread Maintenance Premium calculated with respect to the amount of principal being repaid and Breakage Costs.

          2.3.4 Late Payment Charge. If any principal, interest or any other sum due under the Loan Documents, other than the payment of principal due on the Maturity Date, is not paid by Borrower on the date on which it is due, Borrower shall pay to Lender upon demand an amount equal to the lesser of five percent (5%) of such unpaid sum or the maximum amount permitted by applicable law in order to defray the expense incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment. Any such amount shall be secured by the Mortgage and the other Loan Documents.

          2.3.5 Method and Place of Payment. (a) Except as otherwise specifically provided herein, all payments and prepayments under this Agreement and the Note shall be made to Lender not later than 1:00 P.M., New York City time, on the date when due and shall be made in lawful money of the United States of America by wire transfer in federal or other in immediately available funds to Lender’s account as such bank(s) as Lender may from time to time designate, and any funds received by Lender after such time shall, for all purposes hereof, be deemed to have been paid on the next succeeding Business Day.

          (b) Whenever any payment to be made hereunder or under any other Loan Document shall be stated to be due on a day which is not a Business Day, the due date thereof shall be the first Business Day that is immediately preceding such due date (notwithstanding such adjustment of due dates, Borrower shall not be entitled to any deduction of interest due under the Note, this Agreement or any of the other Loan Documents) and, with respect to payments of principal due on the Maturity Date, interest shall be payable at the Applicable Interest Rate or the Default Rate, as the case may be, during such extension.

          (c) All payments required to be made by Borrower hereunder or under the Note or the other Loan Documents shall be made irrespective of, and without deduction for, any setoff, claim or counterclaim and shall be made irrespective of any defense thereto.

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          Section 2.4 Prepayments.

          2.4.1 Voluntary Prepayments. Except as otherwise provided herein, Borrower shall not have the right to prepay the Loan in whole or in part. On and after the Permitted Prepayment Date Borrower may, at its option and upon thirty (30) days prior notice to Lender, prepay the Debt in whole but not in part; provided, however, any prepayment received by Lender prior to February 10, 2009 shall be accompanied by the applicable Prepayment Fee. Any prepayment received by Lender on a date other than a Monthly Payment Date shall include interest which would have accrued thereon through and including the end of the Interest Period in which the next Monthly Payment Date occurs; provided, however, that no prepayment shall be permitted on any date during the period commencing on the first calendar day immediately following a Monthly Payment Date to, but not including, the Determination Date in such calendar month, unless consented to by Lender in its sole discretion. Any notice of prepayment shall be revocable by Borrower, except during the period commencing on the date five (5) Business Days prior to the applicable date of prepayment set forth in such notice of prepayment and ending on such date, during which time such notice is irrevocable; provided, Borrower may not revoke more than two (2) such notices of prepayment in any twelve (12) month period. If Borrower elects to revoke a notice of prepayment in accordance with the prior sentence, Borrower shall indemnify and pay to Lender immediately upon request the actual out-of-pocket expenses incurred by Lender in connection with such revocation, including but not limited to Breakage Costs as well as any and all costs of any holder of any portion of the Securities which was caused as a result of such revocation.

          2.4.2 Mandatory Prepayments. On each date on which Lender actually receives a distribution of Net Proceeds, and if Lender does not make such Net Proceeds available to Borrower for a Restoration in accordance with the provisions of this Agreement or otherwise remit such Net Proceeds to Borrower pursuant to Section 5.3 hereof, Borrower shall, at Lender’s option, prepay or authorize Lender to apply such Net Proceeds as a prepayment of all or a portion of the outstanding principal balance of the Note in an amount equal to one hundred percent (100%) of such Net Proceeds together with interest that would have accrued on such amounts through the next Monthly Payment Date. Any such prepayment received by Lender on a date other than a Monthly Payment Date shall include interest which would have occurred thereon through and including the end of the Interest Period in which the next Monthly Payment Date occurs.

          2.4.3 Prepayments After Default. If after an Event of Default, payment of all or any part of the principal of the Loan is tendered by Borrower (which tender Lender may reject to the extent permitted under applicable Legal Requirements), a purchaser at foreclosure or any other Person, such tender shall be deemed an attempt to circumvent the prohibition against prepayment set forth in Section 2.4.1 and Borrower, such purchaser at foreclosure or other Person shall pay (including, without limitation, (i) in the event that such prepayment is received on a Monthly Payment Date, interest accruing on such amount calculated through and including the end of the Interest Period in which such Monthly Payment Date occurs, or (ii) in the event that such prepayment is received on a date other than a Monthly Payment Date, interest accruing on such amount calculated through and including the end of the Interest Period in which the next Monthly Payment Date occurs), a prepayment fee equal to the Spread Maintenance Premium calculated with respect to the amount of principal being repaid, if applicable, and, in addition to

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the outstanding principal balance, all accrued and unpaid interest, and other amounts payable under the Loan Documents.

          Section 2.5 Interest Rate Cap. At all times during the term of the Loan Borrower shall maintain in effect an Interest Rate Protection Agreement having a term equal to the term of the Loan, with an initial notional amount equal to the amount of the Loan and with a Counterparty acceptable to Lender having a Minimum Counterparty Rating. If Borrower obtains one (1) interest rate cap, the LIBOR strike rate under the Interest Rate Protection Agreement shall be equal to or less than the Capped LIBOR Rate, or if Borrower obtains more than one (1) interest rate cap, the blended LIBOR strike rate under the Interest Rate Protection Agreement, as determined by Lender, shall be equal to or less than the Capped LIBOR Rate. The Interest Rate Protection Agreement shall be in form and substance substantially similar to the Interest Rate Protection Agreement in effect as of the date hereof. In the event of any downgrade or withdrawal of the rating of such Counterparty by any Rating Agency below the Minimum Counterparty Rating, Borrower shall replace the Interest Rate Protection Agreement not later than thirty (30) Business Days following receipt of notice from Lender of such downgrade or withdrawal with an Interest Rate Protection Agreement in faun and substance satisfactory to Lender (and meeting the requirements set forth in this Section 2.5) from a Counterparty acceptable to Lender having a Minimum Counterparty Rating; provided, however, that if Lender is the Counterparty and any Rating Agency withdraws or downgrades the credit rating of Lender below the Minimum Counterparty Rating, Borrower shall not be required to replace the Counterparty under the Interest Rate Protection Agreement provided that within thirty (30) Business Days following Lender’s notice to Borrower of such downgrade or withdrawal Lender posts additional collateral acceptable to the Rating Agencies securing its obligations under the Interest Rate Protection Agreement.

          III. REPRESENTATIONS AND WARRANTIES

          Section 3.1 Borrower Representations. Borrower represents and warrants as of the date hereof and as of the Closing Date that:

          3.1.1 Organization. (a) Each of Borrower and each SPC Party is duly organized, validly existing and in good standing with full power and authority to own its assets and conduct its business, and is duly qualified in all jurisdictions in which the ownership or lease of its property or the conduct of its business requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect on its ability to perform its obligations hereunder, and Borrower has taken all necessary action to authorize the execution, delivery and performance of this Agreement and the other Loan Documents by it, and has the power and authority to execute, deliver and perform under this Agreement, the other Loan Documents and all the transactions contemplated hereby.

          (b) Borrower’s exact legal name is correctly set forth in the first paragraph of this Agreement. Borrower is an organization of the type specified in the first paragraph of this Agreement. Borrower is incorporated or organized under the laws of the state specified in the first paragraph of this Agreement. Borrower’s principal place of business and chief executive office, and the place where Borrower keeps its books and records, including recorded data of any kind or nature, regardless of the medium of recording, including software, writings, plans,

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specifications and schematics, has been for the preceding four (4) months (or, if less than four (4) months, the entire period of the existence of Borrower) and will continue to be the address of Borrower set forth in the first paragraph of this Agreement (unless Borrower notifies Lender in writing at least thirty (30) days prior to the date of such change). Borrower’s organizational identification number, if any, assigned by the state of its incorporation or organization is 4275700. Borrower’s federal tax identification number is 20-8158254.

          3.1.2 Proceedings. This Agreement and the other Loan Documents have been duly authorized, executed and delivered by Borrower and constitute a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally, and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

          3.1.3 No Conflicts. The execution and delivery of this Agreement and the other Loan Documents by Borrower and the performance of its obligations hereunder and thereunder will not conflict with any provision of any law or regulation to which Borrower is subject, or conflict with, result in a breach of, or constitute a default under, any of the terms, conditions or provisions of any of Borrower’s organizational documents or any agreement or instrument to which Borrower is a party or by which it is bound, or any order or decree applicable to Borrower, or result in the creation or imposition of any lien on any of Borrower’s assets or property (other than pursuant to the Loan Documents).

          3.1.4 Litigation. There is no action, suit, proceeding or investigation pending or, to Borrower’s knowledge, threatened against Borrower in any court or by or before any other Governmental Authority that would have a Material. Adverse Effect.

          3.1.5 ‘Agreements. Borrower is not in default with respect to any order or decree of any court or any order, regulation or demand of any Governmental Authority, which default might have a Material Adverse Effect.

          3.1.6 Consents. No consent, approval, authorization or order of any court or Governmental Authority is required for the execution, delivery and performance by Borrower of, or compliance by Borrower with, this Agreement or the consummation of the transactions contemplated hereby, other than those which have been obtained by Borrower.

          3.1.7 Title. Borrower has good, marketable and insurable fee simple title to the real property comprising part of the Property and good title to the balance of the Property owned by it, free and clear of all Liens whatsoever except the Permitted Encumbrances. The Mortgage, when properly recorded in the appropriate records, will create (a) a valid, first priority, perfected lien on the Property, subject only to Permitted Encumbrances and (b) perfected security interests in and to, and perfected collateral assignments of, all personalty (including the Leases), all in accordance with the terms thereof, in each case subject only to any Permitted Encumbrances. There are no mechanics’, materialman’s or other similar liens or claims which have been filed for work, labor or materials affecting the Property which are or may be liens prior to, or equal or coordinate with, the lien of the Mortgage. None of the Permitted Encumbrances, individually or

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in the aggregate, materially interfere with the benefits of the security intended to be provided by the Mortgage and this Loan Agreement, materially and adversely affect the value of the Property, impair the use or operations of the Property or impair Borrower’s ability to pay its obligations in a timely manner. Borrower represents that there is no assessment currently due and payable to the Westchase District (including, without limitation, those administered by the WCA).

3.1.8 Intentionally Omitted.

3.1.9 Intentionally Omitted.

          3.1.10 Financial Information. AU financial data, including, without limitation, income and operating expense statements, that have been delivered to Lender in respect of the Property (i) are true, complete and correct in all material respects, (ii) accurately represent the financial condition of the Property as of the date of such reports, and (iii) have been prepared in accordance with the Uniform System of Accounts and reconciled in accordance with GAAP throughout the periods covered, except as disclosed therein. Borrower does not have any contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments that are known to Borrower and reasonably likely to have a Material Adverse Effect. Since the date of the financial statements, there has been no material adverse change in the financial condition, operations or business of Borrower or the Property from that set forth in said financial statements.

          3.1.11 Condemnation. No Condemnation or other proceeding has been commenced or, to Borrower’s best knowledge, is contemplated with respect to all or any portion of the Property or for the relocation of roadways providing access to the Property.

          3.1.12 Utilities and Public Access. The Property has rights of access to public ways and is served by water, sewer, sanitary sewer and storm drain facilities adequate to service the Property for its intended uses.

          3.1.13 Separate Lots. The Property is comprised of one (1) or more parcels which constitute separate tax lots and do not constitute a portion of any other tax lot not a part of the Property.

          3.1.14 Assessments. There are no pending or proposed special or other assessments which are currently due and payable for public improvements or otherwise affecting the Property, nor are there any contemplated improvements to the Property that may result in such special or other assessments.

          3.1.15 Enforceability. The Loan Documents are not subject to any right of rescission, set-off, counterclaim or defense by Borrower, including the defense of usury, nor would the operation of any of the terms of the Loan Documents, or the exercise of any right thereunder, render the Loan Documents unenforceable, subject to bankruptcy, insolvency and other limitations on creditors’ rights generally and to equitable principles, and Borrower has not asserted any right of rescission, set-off, counterclaim or defense with respect thereto.

          3.1.16 Assignment of Leases. The Assignment of Leases creates a valid assignment of, or a valid security interest in, certain rights under the Leases, subject only to a

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license granted to Borrower to exercise certain rights and to perform certain obligations of the lessor under the Leases, as more particularly set forth therein. No Person other than Lender has any interest in or assignment of the Leases or any portion of the Rents due and payable or to become due and payable thereunder.

          3.1.17 Insurance. Borrower has obtained and has delivered to Lender a certificate of insurance for all Policies, and will deliver to Lender certified copies or originals of all Policies within ten (10) days after request thereof reflecting the insurance coverages, amounts and other requirements set forth in this Agreement. In addition, Borrower shall make all Policies available to Lender at Borrower’s offices where the Policies are maintained within five (5) Business Days of Lender’s request therefor. No claims have been made under any of the Policies, and no Person, including Borrower, has done, by act or omission, anything which would impair the coverage of any of the Policies.

          3.1.18 Licenses. All peiinits and approvals, including without limitation, certificates of occupancy required by any Governmental Authority for the use, occupancy and operation of the Property in the manner in which the Property is currently being used, occupied and operated have been obtained and are in full force and effect.

          3.1.19 Flood Zone. Except as shown on the Survey, none of the Improvements on the Property is located in an area identified by the Federal Emergency Management Agency as a special flood hazard area.

          3.1.20 Physical Condition. Except as may be shown on the physical condition reports delivered to Lender, and to the knowledge of Borrower after due inquiry, (i) the Property, including, without limitation, all buildings, improvements, parking facilities, sidewalks, storm drainage systems, roofs, plumbing systems, HVAC systems, fire protection systems, electrical systems, equipment, elevators, exterior sidings and doors, landscaping, irrigation systems and all structural components, are in good condition, order and repair in all material respects; there exists no structural or other material defects or damages in the Property, whether latent or otherwise, and Borrower has not received notice from any insurance company or bonding company of any defects or inadequacies in the Property, or any part thereof, which would adversely affect the insurability of the same or cause the imposition of extraordinary premiums or charges thereon or of any termination or threatened termination of any policy of insurance or bond.

          3.1.21 Boundaries. Except as may be shown on the Survey, and except to the extent the same is not reasonably likely to result in a Material Adverse Effect, all of the improvements which were included in determining the appraised value of the Property lie wholly within the boundaries and building restriction lines of the Property, and no improvements on adjoining properties encroach upon the Property, and no easements or other encumbrances affecting the Property encroach upon any of the improvements, so as to affect the value or marketability of the Property except those which are insured against by title insurance each of which, whether or not insured, are shown on the Survey.

          3.1.22 Leases, Borrower represents and warrants to Lender with respect to the Leases that: (a) the Property is not subject to any Leases other than (1) that certain Lease

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Agreement dated as of December 1, 1997 by and between Capstar Westchase Partners LP, d/b/a The Westchase Hilton and Towers and Buja Johnston (as amended, renewed, modified or restated), and (2) that certain Lease Agreement, dated as of February 15, 1990 by and between Westchase Holding Ltd. and Daniel and wife Phyllis English (as amended, renewed, modified or restated), (b) such Leases are in full force and effect and there are no defaults thereunder by either party, (c) the copies of the Leases delivered to Lender are true and complete, and there are no oral agreements with respect thereto, (d) no Rent (including security deposits) has been paid more than one (1) month in advance of its due date, (e) all work to be performed by Borrower under each Lease has been performed as required and has been accepted by the applicable Tenant, (f) any payments, free rent, partial rent, rebate of rent or other payments, credits, allowances or abatements required to be given by Borrower to any Tenant has already been received by such Tenant, (g) all security deposits, if any, are being held in accordance with Legal Requirements, (h) Borrower has no knowledge of any notice of termination or default with respect to any Lease, (i) Borrower has not assigned or pledged any of the Leases, the rents or any interests therein except to Lender, (j) no Tenant or other party has an option or right of first refusal or offer, to purchase all or any portion of the Property, (k) no Tenant under a Major Lease has the right to terminate its Lease prior to expiration of the stated term of such Lease, and (1) all existing Leases other than the Leases which are included as a Permitted Encumbrance are subordinate to the Mortgage either pursuant to their terms or a recorded subordination agreement.

          3.1.23 Filing and Recording Taxes. All transfer taxes, deed stamps, intangible taxes or other amounts in the nature of transfer taxes required to be paid under applicable Legal Requirements in connection with the transfer of the Property to Borrower have been paid or are being paid simultaneously herewith. All mortgage, mortgage recording, stamp, intangible or other similar tax required to be paid under applicable Legal Requirements in connection with the execution, delivery, recordation, filing, registration, perfection or enforcement of any of the Loan Documents, including, without limitation, the Mortgage, have been paid or are being paid simultaneously herewith. All Taxes due and owing in respect of the Property have been paid, or an escrow of funds in an amount sufficient to cover such payments has been established hereunder.

          3.1.24 Single Purpose. Borrower hereby represents and warrants to, and as applicable in the context covenants with, Lender that as of the date hereof and until such time as the Debt shall be paid in full:

          (a) Borrower does not own and will not own any asset or property other than (i) the Property, and (ii) incidental personal property necessary for the ownership or operation of the Property.

          (b) Borrower will not engage in any business other than the ownership, management and operation (including without limitation, alterations and renovations to the Property) of the Property and Borrower will conduct and operate its business as presently conducted and operated.

          (c) Except for capital contributions and distributions, Borrower will not enter into any contract or agreement with any Affiliate of Borrower, any constituent party of Borrower

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or any Affiliate of any constituent party, except upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arms-length basis with third parties other than any such party.

          (d) Borrower has not incurred and will not incur any Indebtedness other than (i) the Debt, (ii) unsecured trade payables and operational debt not evidenced by a note and in an aggregate amount not exceeding $656,500.00 of outstanding principal balance of the Loan at any one time, and (iii) unsecured Indebtedness incurred in the financing of equipment and other personal property used on the Property with annual payments not exceeding together with the amount set forth in clause (ii) above in the aggregate $656,500.00; provided that any Indebtedness incurred pursuant to subclauses (ii) and (iii) (other than any such amounts in the aggregate not to exceed $25,000.00 at any one time which are diligently being disputed in good faith and which are not likely to result in a Material Adverse Effect) shall be (x) paid within sixty (60) days of the date incurred and (y) incurred in the ordinary course of business. No Indebtedness other than the Debt may be secured (subordinate or pan passu) by the Property.

          (e) Borrower has not made and will not make any loans or advances to any third party (including any Affiliate or constituent party), and shall not acquire obligations or securities of its Affiliates.

          (f) Borrower is and will remain solvent and Borrower will pay its debts and liabilities (including, as applicable, shared personnel and overhead expenses) as the same shall become due from its own assets.

          (g) Borrower has done or caused to be done and will do all things necessary to observe organizational formalities and preserve its existence, and Borrower will not, nor will Borrower permit any constituent party (i.e., its general partner or limited partner) to amend, modify or otherwise change the partnership certificate, partnership agreement, articles of incorporation and bylaws, operating agreement, trust or other organizational documents of Borrower or such constituent party without the prior written consent of Lender and Borrower has received Rating Agency Confirmation in any manner that (i) violates the single purpose covenants set forth in this Section 3.1.24, or (ii) amends, modifies or otherwise changes any provision thereof that by its terms cannot be modified at any time when the Loan is outstanding or by its terms cannot be modified without Lender’s consent.

          (h) Borrower will maintain all of its books, records, financial statements and bank accounts separate from those of its Affiliates and any constituent party. Borrower’s assets will not be listed as assets on the financial statement of any other Person, provided, however, that Borrower’s assets may be included in a consolidated financial statement of its Affiliates provided that (i) appropriate notation shall be made on such consolidated financial statements to indicate the separateness of Borrower and such Affiliates and to indicate that Borrower’s assets and credit are not available to satisfy the debts and other obligations of such Affiliates or any other Person and (ii) such assets shall be listed on Borrower’s own separate balance sheet. Borrower will file its own tax returns (to the extent Borrower is required to file any such tax returns) and will not file a consolidated federal income tax return with any other Person, or, if Borrower is part of a consolidated group, will be shown on the tax returns of such consolidated group as a

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consolidated member of such group. Borrower shall maintain its books, records, resolutions and agreements as official records.

          (i) Borrower will be, and at all times will hold itself out to the public as, a legal entity separate and distinct from any other entity (including any Affiliate of. Borrower or any constituent party of Borrower), shall correct any known misunderstanding regarding its status as a separate entity, shall conduct business in its own name, shall not identify itself as a division or part of another or any of its Affiliates as a division or part of itself and shall maintain and utilize separate stationery, invoices and checks bearing its own name.

          (0) Borrower will maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations.

          (k) Neither Borrower nor any constituent party will seek or effect the liquidation, dissolution, winding up, consolidation or merger, in whole or in part, of Borrower.

               Borrower will not commingle the funds and other assets of Borrower with those of any Affiliate or constituent party or any other Person, and will hold all of its assets in its own name (except as may be provided for in the Management Agreement or any replacement thereof acceptable to Lender) or pursuant to the Manager’s ordinary cash management practices.

          (m) Borrower has and will maintain its assets in such a manner that it will not be costly or difficult to segregate, ascertain or identify its individual assets from those of any Affiliate or constituent party or any other Person.

          (n) Borrower will not guarantee or become obligated for the debts of any other Person and does not and will not hold itself out to be responsible for or have its credit available to satisfy the debts or obligations of any other Person.

          (o) If Borrower is a limited partnership or a limited liability company, (other than a single member limited liability company), each general partner or managing member (each, an “SPC Party”) shall be a corporation or limited liability company whose sole asset is its interest in Borrower and each such SPC Party will at all times comply, and will cause Borrower to comply, with each of the representations, warranties, and covenants contained in this Section 3.1.24 as if such representation, warranty or covenant was made directly by such SPC Party. Upon the withdrawal or the disassociation of an SPC Party from Borrower, Borrower shall immediately appoint a new SPC Party whose articles of incorporation are substantially similar to those of such SPC Party and deliver a new non-consolidation opinion to the Rating Agency or Rating Agencies, as applicable, with respect to the new SPC Party and its equity owners.

          (p) Principal shall at all times cause there to be at least one duly appointed independent manager or member of the board of directors who is provided by a nationally recognized company that provides professional independent directors (each, an “Independent Director”) of each SPC Party and Principal reasonably satisfactory to Lender who shall not have been at the time of such individual’s appointment or at any time while serving as a manager or director of such SPC Party and Principal, and may not have been at any time during the preceding five years (i) a stockholder, director (other than as an Independent Director), officer,

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employee, partner, attorney or counsel of such SPC Party, Principal or any Affiliate of either of them, (ii) a customer, supplier or other Person who derives any of its purchases or revenues from its activities with such SPC Party, Principal or any Affiliate of either of them, (iii) a Person or other entity controlling or under common control with any such stockholder, partner, customer, supplier or other Person, or (iv) a member of the immediate family of any such stockholder, director, officer, employee, partner, customer, supplier or other Person. (For purposes of this subclause (p), the term “Affiliate” means any person controlling, under common control with, or controlled by the person in question; and the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of management, policies or activities of a person or entity, whether through ownership of voting securities, by contract or otherwise). A natural person who satisfies the foregoing definition other than subparagraph (ii) shall not be disqualified from serving as an Independent Director of Principal or the SPC Party if (a) such individual is an independent manager or director provided by a nationally-recognized company that provides professional independent directors in the ordinary course of its business or (b) a natural person who otherwise satisfies the foregoing definition except for being the independent director of a “special purpose entity” affiliated with Borrower that does not own a direct or indirect equity interest in Borrower or any co-Borrower shall not be disqualified from serving as an Independent Director of the SPC Party if such individual is at the time of initial appointment, or at any time while serving as a Independent Director of the SPC Party, an Independent Director of a “special purpose entity” affiliated with the Borrower or the SPC Party (other than any entity that owns a direct or indirect equity interest in borrower or any co-borrower) if such individual is an independent director provided by a nationally-recognized company that provides professional independent directors. A natural person who otherwise satisfies the foregoing definition other than subparagraph (i) by reason of being the independent director of a “special purpose entity” affiliated with the Company or the Member shall not be disqualified from serving as an Independent Manager if such individual is either (i) a Professional Independent Manager or (ii) the fees that such individual earns from serving as independent director of affiliates of the Company in any given year constitute in the aggregate less than five percent (5%) of such individual’s annual income for that year. For purposes of this paragraph, a “special purpose entity” is an entity whose organizational documents contain restrictions on its activities substantially similar to those set forth in the SPC Party’s organizational documents.

          (q) Borrower shall not cause or permit the manager or board of directors of any SPC Party and Borrower to take any action which, under the terms of any certificate of incorporation, by-laws or any voting trust agreement with respect to any common stock or under any organizational document of Borrower or SPC Party, requires a vote of the board of directors of each SPC Party and Principal unless at the time of such action there shall be at least one member who is an Independent Director.

          (r) Borrower shall conduct its business so that the assumptions made with respect to Borrower in the Insolvency Opinion shall be true and correct in all respects. In connection with the foregoing, Borrower hereby covenants and agrees that it will comply with or cause the compliance with, (i) all of the facts and assumptions (whether regarding the Borrower or any other Person) set forth in the Insolvency Opinion, (ii) all the representations, warranties and covenants in this Section 3.1.24, and (iii) all the organizational documents of the Borrower and any SPC Party.

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          (s) Borrower will not permit any Affiliate or constituent party independent access to its bank accounts.

          (t) Borrower shall pay the salaries of its own employees (if any) from its own funds and maintain a sufficient number of employees (if any) in light of its contemplated business operations.

          (u) Borrower shall compensate each of its consultants and agents from its funds for services provided to it and pay from its own assets all obligations of any kind incurred.

          (v) INTENTIONALLY DELETED

          (w) All of the facts stated and all of the assumptions made in the Insolvency Opinion, including, but not limited to, in any exhibits attached thereto, are true and correct in all respects and all facts stated and all assumptions made in any subsequent non-consolidation opinion required to be delivered in connection with the Loan Documents (an “Additional Insolvency Opinion”), including, but not limited to, any exhibits attached thereto, will have been and shall be true and correct in all respects. Borrower has complied and will comply with, and Principal has complied and Borrower will cause Principal to comply with, all of the assumptions made with respect to Borrower and Principal in the Insolvency Opinion. Borrower will have complied and will comply with all of the assumptions made with respect to Borrower and Principal in any Additional Insolvency Opinion. Each entity other than Borrower and Principal with respect to which an assumption shall be made in any Additional Insolvency Opinion will have complied and will comply with all of the assumptions made with respect to it in any Additional Insolvency Opinion.

          3.1.25 Tax Filings. To the extent required, Borrower has filed (or has obtained effective extensions for filing) all federal, state and local tax returns required to be filed and has paid or made adequate provision for the payment of all federal, state and local taxes, charges and assessments payable by Borrower. Borrower believes that its tax returns (if any) properly reflect the income and taxes of Borrower for the periods covered thereby, subject only to reasonable adjustments required by the Internal Revenue Service or other applicable tax authority upon audit.

          3.1.26 Solvency. Borrower (a) has not entered into the transaction or any Loan Document with the actual intent to hinder, delay, or defraud any creditor and (b) received reasonably equivalent value in exchange for its obligations under the Loan Documents. Giving effect to the Loan, the fair saleable value of Borrower’s assets exceeds and will, immediately following the making of the Loan, exceed Borrower’s total liabilities, including, without limitation, subordinated, unliquidated, disputed and contingent liabilities. The fair saleable value of Borrower’s assets is and will, immediately following the making of the Loan, be greater than Borrower’s probable liabilities, including the maximum amount of its contingent liabilities on its debts as such debts become absolute and matured. Borrower’s assets do not and, immediately following the making of the Loan will not, constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Borrower does not intend to, and does not believe that it will, incur Indebtedness and liabilities (including contingent liabilities and other commitments) beyond its ability to pay such Indebtedness and liabilities as they mature

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(taking into account the timing and amounts of cash to be received by Borrower and the amounts to be payable on or in respect of obligations of Borrower).

          3.1.27 Federal Reserve Regulations. No part of the proceeds of the Loan will be used for the purpose of purchasing or acquiring any “margin stock” within the meaning of Regulation U of the Board of Governors of the Federal Reserve System or for any other purpose which would be inconsistent with such Regulation U or any other Regulations of such Board of Governors, or for any purposes prohibited by Legal Requirements or by the terms and conditions of this Agreement or the other Loan Documents.

          3.1.28 Organizational Chart.. The organizational chart attached as Schedule III hereto, relating to Borrower and certain Affiliates and other parties, is true, complete and correct on and as of the date hereof.

          3.1.29 Bank Holding Company. Borrower is not a “bank holding company” or a direct or indirect subsidiary of a “bank holding company” as defined in the Bank Holding Company Act of 1956, as amended, and Regulation Y thereunder of the Board of Governors of the Federal Reserve System.

          3.1.30 No Other Debt. Borrower has not borrowed or received debt financing (other than permitted pursuant to this Agreement) that has not been heretofore repaid in full.

          3.1.31 Investment Company Act. Borrower is not (a) an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended; (b) a “holding company” or a “subsidiary company” of a “holding company” or an “affiliate” of either a “holding company” or a “subsidiary company” within the meaning of the Public Utility Holding Company Act of 1935, as amended; or (c) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money.

          3.1.32 Access/Utilities. All public utilities necessary to the continued use and enjoyment of the Property as presently used and enjoyed are located in valid easements or in the public right-of-way abutting the Property. All roads necessary for the full utilization of the Property for its current purpose have been completed and dedicated to public use and accepted by all governmental authorities or are the subject of access easements for the benefit of the Property.

          3,1.33 No Bankruptcy Filing. Borrower is not contemplating either the filing of a petition by it under any state or federal bankruptcy or insolvency laws or the liquidation of its assets or property, and Borrower does not have any knowledge of any Person contemplating the filing of any such petition against it.

          3.1.34 Full and Accurate Disclosure. To the best of Borrower’s knowledge, no information contained in this Agreement, the other Loan Documents, or any written statement furnished by or on behalf of Borrower pursuant to the terms of this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which

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they were made. There is no fact or circumstance presently known to Borrower which has not been disclosed to Lender and which will have a Material Adverse Effect.

          3.1.35 Foreign Person. Borrower is not a “foreign person” within the meaning of Section 1445(f)(3) of the Code.

          3.1.36 No Change in Facts or Circumstances; Disclosure. To the best of Borrower’s knowledge, there has been no material adverse change in any condition, fact, circumstance or event that would make the financial statements, rent rolls, reports, certificates or other documents submitted in connection with the Loan inaccurate, incomplete or otherwise misleading in any material respect or that otherwise materially and adversely affects the business operations or the financial condition of Borrower or the Property.

          3.1.37 Management Agreement. All of the representations and warranties with respect to the Management Agreement set forth in Article VII of this Agreement are true and correct in all respects.

          3.1.38 Intentionally Omitted.

          3.1.39 Intentionally Omitted.

          3.1.40 Intentionally Omitted.

          3.1.41 Patriot Act. (a) None of Borrower, any of their respective constituents or Affiliates, and to the best of Borrower’s knowledge, any of their respective brokers or other agents acting or benefiting in any capacity in connection with the Loan is a Prohibited Person.

          (b) None of Borrower, any of their respective constituents or Affiliates, any of their respective brokers or other agents acting in any capacity in connection with the Loan, (i) has conducted or will conduct any business or has engaged or will engage in any transaction or dealing with any Prohibited Person, including making or receiving any contribution of funds, goods or services to or for the benefit of any Prohibited Person, (ii) has dealt or will deal in, or otherwise has engaged or will engage in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order; or (iii) has engaged or will engage in or has conspired or will conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in the Executive Order or the Patriot Act.

          (c) Borrower covenants and agrees to deliver to Lender any certification or other evidence reasonably requested from time to time by Lender in its reasonable discretion, confirming Borrower’s compliance with this Section 3.1.41.

          3.1.42 Certificate of Occupancy; Licenses. All material certifications, permits, licenses and approvals, including without limitation, certificates of completion and occupancy permits and any applicable liquor license required for the legal use, occupancy and operation of the Property as a hotel (collectively, the “Licenses”), have been obtained and are in full force and effect. Borrower shall keep and maintain all, or cause to be kept and maintained, Licenses

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necessary for the operation of the Property as a hotel with related retail uses. The use being made of the Property is in conformity with the certificate of occupancy issued for the Property.

          3.1.43 Franchise Agreement. The Franchise Agreement is in full force and effect and there is no default thereunder by any party thereto and no event has occurred that, with the passage of time and/or giving of notice, would constitute a default thereunder.

          3.1.44 Inventory. Borrower is the owner of all of the Equipment, Fixtures and Personal Property (as such terms are defined in the Mortgage) located on or at the Property, other than such items leased under equipment leases or provided under contracts disclosed to Lender, and shall not lease any Equipment, Fixtures or Personal Property other than as permitted hereunder. All of the Equipment, Fixtures and Personal Property are sufficient to operate the Property in the manner required hereunder and in the manner in which it is currently operated.

          Section 3.2 Survival of Representations. The representations and warranties set forth in Section 3.1 shall survive for so long as any amount remains payable to Lender under this Agreement or any of the other Loan Documents.

          IV. BORROWER COVENANTS

          Section 4.1 Borrower Affirmative Covenants. Borrower hereby covenants and agrees with Lender that:

          4.1.1 Existence; Compliance with Legal Requirements. Borrower shall do or cause to be done all things necessary to preserve, renew and keep in full force and effect its existence, rights, licenses, permits and franchises and comply with all Legal Requirements applicable to it and the Property, other than non-compliance not likely to result in a Material Adverse Effect.

          4.1.2 Taxes, Liens and Other Charges. Borrower shall pay all Taxes and Other Charges now or hereafter levied or assessed or imposed against the Property or any part thereof as the same become due and payable; provided, however, that notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents, Borrower’s obligation to directly pay Taxes and Other Charges shall be suspended for so long as no Event of Default has occurred and is continuing and Borrower complies with the terms and provisions of Section 6.2 hereof. Borrower shall furnish to Lender receipts for the payment of the Taxes and the Other Charges prior to the date the same shall become delinquent; provided, however, that so long as no Event of Default has occurred and is continuing, Borrower is not required to furnish such receipts for payment of Taxes and Other Charges in the event that such Taxes and Other Charges have been paid or were to have been paid by Lender pursuant to Section 6.2 hereof Subject to Borrower’s right to contest such Taxes and Other Charges as hereinafter provided, Borrower shall not permit or suffer and shall promptly discharge any lien for Taxes or Other Charges against the Property (other than liens for Taxes or Other Charges not yet due or payable). After prior notice to Lender, Borrower, at its own expense, and notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents, may contest by appropriate legal proceeding, conducted in good faith and with due diligence, the amount or validity of any Taxes, Liens or Other Charges, provided that (a) no Default or Event of Default

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has occurred and remains uncured; (b) such proceeding shall be permitted under and be conducted in accordance with all applicable statutes, laws and ordinances; (c) neither the Property nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, canceled or lost; (d) Borrower shall promptly upon final determination thereof pay the amount of any such Taxes, Liens or Other Charges, together with all costs, interest and penalties which may be payable in connection therewith; (e) such proceeding shall suspend the collection of Taxes, Liens or Other Charges from the Property; (f) Borrower shall deposit with Lender cash, or other security as may be approved by Lender, in an amount equal to one hundred twenty percent (120%) of the contested amount (provided, that Borrower shall not be required to deposit any such cash or post security with respect to claims which in the aggregate do not exceed $125,000.00 ), to insure the payment of any such Taxes, Liens or Other Charges, together with all interest and penalties thereon, and (g) such contest by Borrower is not in violation of Leases or Operating Agreements. Lender may pay over any such cash or other security held by Lender to the claimant entitled thereto at any time when, in the judgment of Lender, the entitlement of such claimant is established.

          4.1.3 Litigation. Borrower shall give prompt notice to Lender of any litigation or governmental proceedings pending or threatened against Borrower which if adversely determined would have a Material Adverse Effect.

          4.1.4 Access to Property. Borrower shall permit agents, representatives and employees of Lender to inspect the Property or any part thereof at reasonable hours upon reasonable advance notice not to unreasonably interfere with guests at the Hotel or business operations at the Hotel.

          4.1.5 Further Assurances; Supplemental Mortgage Affidavits. Borrower shall, at Borrower’s sole cost and expense:

          (a) execute and deliver to Lender such documents, instruments, certificates, assignments and other writings, and do such other acts necessary or desirable, to evidence, preserve and/or protect the collateral at any time securing or intended to secure the obligations of Borrower under the Loan Documents, as Lender may reasonably require, provided the same do not increase in a material manner Borrower’s obligations or decrease in a material manner Borrower’s rights under this Agreement and the other Loan Documents; and

          (b) execute and deliver to Lender such documents, instruments, certificates, assignments and other writings, and do such other acts necessary or desirable, to evidence, preserve and/or protect the collateral at any time securing or intended to secure the obligations of Borrower under the Loan Documents, as Lender may reasonably require including, without limitation, and to extent permitted by law the execution and delivery of all such writings necessary to transfer any liquor licenses with respect to the Property into the name of Lender or its designee after the occurrence of an Event of Default, provided the same do not increase in a material manner Borrower’s obligations or decrease in a material manner Borrower’s rights under this Agreement and the other Loan Documents.

          4.1.6 Financial Reporting.

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          (a) GAAP. Borrower shall keep and maintain or shall cause to be kept and maintained, in accordance with the Uniform System of Accounts and reconciled in accordance with G.AAP, proper and accurate books, records and accounts reflecting all of the financial affairs of Borrower and all items of income and expense in connection with the operation on an individual basis of the Property. All financial statements delivered to Lender in accordance with this Section 4.1.6 shall be prepared in accordance with the Uniform System of Accounts and reconciled in accordance with GAAP in the United States of America as in effect on the date so indicated and consistently applied (or such other accounting basis reasonably acceptable for Lender).

          (b) Monthly Reports. Prior to a Securitization, within thirty (30) days after the end of each calendar month, Borrower shall furnish to Lender a current (as of the calendar month just ended), a detailed operating statement (showing monthly activity and year-to-date) stating Gross Income from Operations, Operating Expenses and Net Cash Flow for the calendar month just ended, a report of occupancy for the subject month including an average daily rate, and, as requested by Lender, a written statement setting forth any variance from the Annual Budget and other documentation supporting the information disclosed in the most recent financial statements. In addition, such statement shall also be accompanied by (i) a calculation reflecting the Debt Service Coverage Ratio as of the last day of such month and (ii) a certificate of the chief financial officer (or such other officer acceptable to Lender) of Borrower or the general partner of Borrower stating that the representations and warranties of Borrower set forth in Section 3.1.24 are true and correct as of the date of such certificate and that, other than amounts in dispute to the extent permitted under Section 3.1.24(d), there are no trade payables outstanding for more than sixty (60) days.

          (c) Quarterly Reports. Within forty-five (45) days after the end of each calendar quarter, Borrower shall furnish to Lender a detailed operating statement (showing quarterly activity and year-to-date) stating Gross Income from Operations, Operating Expenses, Net Cash Flow, and capital expenditures for the calendar quarter just ended. Borrower’s quarterly statements shall be accompanied by (i) a comparison of the budgeted income and expenses and the actual income and expenses for the corresponding calendar quarter on in the immediately prior calendar year, (ii) a calculation reflecting the Debt Service Coverage Ratio as of the last day of such quarter; (iii) if there are then Major Leases, a current rent roll for the Property; and (iv) a certificate executed by the chief financial officer (or such other officer acceptable to Lender of Borrower or the general partner of Borrower stating that each such quarterly statement presents fairly the financial condition and the results of operations of the Borrower and the Property and has been prepared in accordance with GAAP.

          (d) Annual Reports. Within ninety (90) days after the end of each calendar year of Borrower’s operation of the Property, Borrower will furnish to Lender a complete copy of Borrower’s annual financial statements audited or if not audited accompanied by an AgreedUpon-Procedures report prepared by a “big four” accounting firm or other independent certified public accountant reasonably acceptable to Lender in accordance with the Uniform System of Accounts and reconciled in accordance with GAAP for such calendar year which financial statements shall contain, if audited, a balance sheet, a detailed operating statement stating Gross Income from Operations, Operating Expenses and Net Cash Flow for each of Borrower and the Property. Borrower’s annual financial statements shall be accompanied by (i) a comparison of

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the budgeted income and expenses and the actual income and expenses for the prior calendar year, (ii) a certificate executed by the chief financial officer of Borrower or the general partner of Borrower stating that each such annual financial statement presents fairly the financial condition and the results of operations of Borrower and the Property and has been prepared in accordance with GAAP, and (iii) with respect to any audited annual financial statement an unqualified opinion of a “big four” accounting firm or other independent certified public accountant reasonably acceptable to Lender.

          (e) Certification; Supporting Documentation. Each such financial statement shall be in scope and detail reasonably satisfactory to Lender and certified by the chief financial representative of Borrower.

          a) Additional Reports. Borrower shall deliver to Lender as soon as reasonably available but in no event later than thirty (30) days after such items become available to Borrower in final form:

(i) copies of any final engineering or environmental reports prepared for Borrower with respect to the Property;

(ii) a copy of any written notice received by Borrower from any environmental authority having jurisdiction over the Property with respect to a condition existing or alleged to exist or emanate from or at the Property;

(iii) the most current Smith Travel Research Reports then available to Borrower reflecting market penetration and relevant hotel properties competing with the Property;

(iv) if requested by Lender, a summary report listing only Tenants under Major Leases and the square footage occupied by such Tenants; and

(v) any and all franchise inspection reports.

          (g) Access. Lender shall have the right from time to time at all times during normal business hours and upon reasonable prior notice upon reasonable notice (provided no Event of Default has occurred and is continuing) to examine such books, records and accounts at the office of Borrower or other Person maintaining such books, records and accounts and to make such copies or extracts thereof as Lender shall desire; provided however, so long as no Event of Default has occurred or is continuing, Lender’s right shall not unreasonably interfere with guests at the Hotel or business operations at the Hotel. Borrower shall pay any costs and expenses incurred by Lender to examine Borrower’s accounting records with respect to the Property, as Lender shall determine to be necessary or appropriate in the protection of Lender’s interest.

          (h) Format of Delivery. Any reports, statements or other information required to be delivered under this Agreement shall be delivered (i) in paper form (or other electronic format acceptable to Lender), (ii) on a diskette, and (iii) if requested by Lender and within the capabilities of Borrower’s data systems without change or modification thereto, in electronic format reasonably acceptable to Lender.

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          (i) Annual Budget. Borrower shall submit (i) a preliminary version of the Annual Budget to Lender not later than fifteen (15) days prior to the commencement of each Fiscal Year and (ii) the Annual Budget to Lender no later than thirty-one (31) days after the commencement of the Fiscal Year.

          (j) Other Required Information. Borrower shall furnish to Lender, within five (5) Business Days after request (or as soon thereafter as may be reasonably possible), such further detailed information with respect to the operation of the Property and the financial affairs of Borrower as may be reasonably requested by Lender, including, without limitation, a comparison of the budgeted income and expenses and the actual income and expenses for a quarter and year to date for the Property, together with a detailed explanation of any variances of more than five percent (5%) between budgeted and actual amounts for such period and year to date.

          4.1.7 Title to the Property. Borrower will warrant and defend the validity and priority of the Liens of the Mortgage and the Assignment of Leases on the Property against the claims of all Persons whomsoever, subject only to Permitted Encumbrances.

          4.1.8 Estoppel Statement. (a) After request by Lender, Borrower shall within five (5) Business Days furnish Lender with a statement, duly acknowledged and certified, stating (i) the unpaid principal amount of the Note, (ii) the Applicable Interest Rate of the Note, (iii) the date installments of interest and/or principal were last paid, (iv) any offsets or defenses to the payment of the Debt, if any, and (v) that this Agreement and the other Loan Documents have not been modified or if modified, giving particulars of such modification.

          (b) Borrower shall deliver to Lender, within thirty (30) days after request, an estoppel certificate from each Tenant under any Major Lease (provided that Borrower shall only be required to use commercially reasonable efforts to obtain an estoppel certificate from any Tenant not required to provide an estoppel certificate under its Lease); provided that such certificate may be in the form required under such Lease; provided further that Borrower shall not be required to deliver such certificates more frequently than two (2) times in any calendar year.

          4.1.9 Leases. (a) All Major Leases shall in all respects be approved by Lender and shall be on a standard Lease form previously approved by Lender with no modifications (except as approved by Lender). Such Lease form shall provide that (i) the Major Lease is subordinate to the Mortgage, (ii) the tenant shall attorn to Lender, and (iii) that any cancellation, surrender, or amendment of such Major Lease without the prior written consent of Lender shall be voidable by Lender. Borrower shall hold, in trust, all tenant security deposits in a segregated account, and, to the extent required by applicable law, shall not commingle any such funds with any other funds of Borrower. Within ten (10) days after Lender’s request, Borrower shall furnish to Lender a statement of all tenant security deposits, and copies of all Major Leases not previously delivered to Lender, certified by Borrower as being true and correct. Notwithstanding anything contained in the Loan Documents, Lender’s approval shall not be required for future Leases or Lease extensions if the following conditions are satisfied: (A) there exists no Default or Event of Default; (B) the Lease does not conflict with any restrictive covenant affecting the Property or any other Lease for space in the Property; and (C) if the Lease is not a Major Lease.

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Lender shall execute and deliver a Subordination Non-Disturbance and Attornment Agreement in the form annexed hereto as Schedule IV to Tenants under future Major Leases approved by Lender promptly upon request with such commercially reasonable changes as may be requested by Tenants, from time to time, and which are reasonably acceptable to Lender.

          (b) Borrower (i) shall perform in all material respects the obligations which Borrower is required to perform under the Leases; (ii) shall enforce in all material respects the obligations to be performed by the tenants; (iii) shall promptly furnish to Lender any notice of default or termination received by Borrower from any tenant, and any notice of default or termination given by Borrower to any tenant; (iv) shall not collect any rents for more than thirty (30) days in advance of the time when the same shall become due, except for bona fide security deposits not in excess of an amount equal to two months rent; (v) shall not enter into any ground Lease or master Lease of any part of the Property; (vi) shall not further assign or encumber any Lease; (vii) shall not, except with Lender’s prior written consent, cancel or accept surrender or termination of any Major Lease; and (viii) shall not, except with Lender’s prior written consent, modify or amend any Major Lease (except for minor modifications and amendments entered into in the ordinary course of business, consistent with prudent property management practices, not affecting the economic terms of the Lease). Any action in violation of clauses (v), (vi), (vii), and (viii) of this Section 4.1.9(b) shall be void at the election of Lender.

          4.1.10 Alterations. Lender’s prior approval shall be required in connection with any alterations to any Improvements (except the (i) PIP Repairs (other than as provided in Section 6.4) and (ii) tenant improvements under any Lease approved by Lender or under any Lease for which approval was not required by Lender under this Agreement, with respect to each of which Lender’s approval shall not be required) adversely affecting structural components of the Property, utilities, HVAC or the exterior of the building (a) that would have a Material Adverse Effect on Borrower’s financial condition, the value of the Property or the ongoing revenues and expenses of the Property or (b) the cost of which (including any related alteration, improvement or replacement) is reasonably anticipated to exceed the Alteration Threshold, which approval may be granted or withheld in Lender’s sole discretion. Lender shall not unreasonably withhold consent to any Alteration required pursuant to any future Product Improvement Plan imposed pursuant to the Franchise Agreement then in effect. If the total unpaid amounts incurred and to be incurred with respect to any alteration to the Improvements for which Lender’s consent is required, shall at any time exceed the Alteration Threshold, Borrower shall promptly deliver to Lender as security for the payment of such amounts and as additional security for Borrower’s obligations under the Loan Documents any of the following: (i) cash, (ii) Letters of Credit (iii) U.S. Obligations, (iv) other securities acceptable to Lender, provided that Lender shall have received a Rating Agency Confirmation as to the form and issuer of same, or (v) a completion bond, provided that Lender shall have received a Rating Agency Confirmation as to the form and issuer of same. Such security shall be in an amount equal to the excess of the total unpaid amounts incurred and to be incurred with respect to such alterations to the Improvements (other than such amounts to be paid or reimbursed by Tenants under the Leases) over the Alteration Threshold. Any security delivered to Lender in connection with alterations which are required to be performed pursuant to a Property Improvement Plan, shall be disbursed by Lender to Borrower in accordance with the teems and provisions of Section 6.4 hereof.

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          4.1.11 Material Agreements. Borrower shall (a) promptly perform and/or observe all of the material covenants and agreements required to be performed and observed by it under each Material Agreement and Operating Agreement to which it is a party, and do all things necessary to preserve and to keep unimpaired its rights thereunder, to the extent that failure to do so would likely result in a Material Adverse Effect, (b) promptly notify Lender in writing of the giving of any notice of any material default by any party under any Material Agreement and Operating Agreement of which it is aware and (c) promptly enforce the performance and observance of all of the material covenants and agreements required to be performed and/or observed by the other party under each Material Agreement and Operating Agreement to which it is a party in a commercially reasonable manner.

          4.1.12 Performance by Borrower. Borrower shall in a timely manner observe, perform and fulfill each and every covenant, term and provision of each Loan Document executed and delivered by Borrower, and shall not enter into or otherwise suffer or permit any amendment, waiver, supplement, termination or other modification of any Loan Document executed and delivered by Borrower without the prior consent of Lender.

          4.1.13 Costs of Enforcement/Remedying Defaults. In the event (a) that the Mortgage is foreclosed in whole or in part or the Note or any other Loan Document is put into the hands of an attorney for collection, suit, action or foreclosure, (b) of the foreclosure of any Lien or Mortgage prior to or subsequent to the Mortgage in which proceeding Lender is made a party, (c) of the bankruptcy, insolvency, rehabilitation or other similar proceeding in respect of Borrower or Guarantor or an assignment by Borrower or Guarantor for the benefit of its creditors, or (d) Lender shall remedy or attempt to remedy any Event of Default hereunder, Borrower shall be chargeable with and agrees to pay all costs incurred by Lender as a result thereof, including costs of collection and defense (including reasonable attorneys’, experts’, consultants’ and witnesses’ fees and disbursements) in connection therewith and in connection with any appellate proceeding or post-judgment action involved therein, which shall be due and payable on demand, together with interest thereon from the date incurred by Lender at the Default Rate, and together with all required service or use taxes.

          4.1.14 Business and Operations. Borrower will engage in the business as and to the extent the same are necessary for the ownership, maintenance, operation and leasing (including, without limitation, alterations and renovations) and leasing of the Property. Borrower will qualify to do business and will remain in good standing under the laws of each jurisdiction as and to the extent the same are required for the ownership and leasing of the related Property. Borrower shall at all times cause the Property to be maintained as a first-class hotel.

          4.1.15 Loan Fees. Borrower shall pay all fees and costs (including, without limitation, all origination and commitment fees) required of Borrower pursuant to the terms of that certain application letter between Interstate Hotels & Resorts and Lender dated January 29, 2007.

          4.1.16 O&M Agreement. Borrower agrees to comply in all material respects with the O&M Agreement.

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          4.1.17 Handicapped Access. (a) Borrower covenants and agrees that the Property shall at all times strictly comply to the extent applicable with the requirements of the Americans with Disabilities Act of 1990, the Fair Housing Amendments Act of 1988, all state and local laws and ordinances related to handicapped access and all rules, regulations, and orders issued pursuant thereto including, without limitation, the Americans with Disabilities Act Accessibility Guidelines for Buildings and Facilities (collectively, “Access Laws”).

          (b) Notwithstanding any provisions set forth herein or in any other document regarding Lender’s approval of alterations of the Property, Borrower shall not alter the Property in any manner which would increase Borrower’s responsibilities for compliance with the applicable Access Laws without the prior written approval of Lender. The foregoing shall apply to tenant improvements constructed by Borrower or by any of its tenants, but shall not apply to the PIP Repairs. Lender may condition any such approval upon receipt of a certificate of Access Law compliance from an architect, engineer, or other person acceptable to Lender.

          (c) Borrower covenants and agrees to give prompt notice to Lender of the receipt by Borrower of any written complaints related to violation of any Access Laws and of the commencement of any proceedings or investigations which relate to compliance with applicable Access Laws.

          4.1.18 Certain Hotel/Franchise Covenants. Borrower further covenants and agrees with Lender as follows:

          (a) Borrower shall cause the hotel located on the Property to be operated pursuant to the Franchise Agreement and the Management Agreement.

          (b) Borrower shall:

     (i) promptly perform and/or observe all of the covenants and agreements required to be performed and observed by it under the Franchise Agreement and the Management Agreement and do all things necessary to preserve and to keep unimpaired its rights thereunder;

     (ii) promptly notify Lender of any default under the Franchise Agreement or the Management Agreement of which it is aware;

     (iii) promptly deliver to Lender a copy of each financial statement, business plan, capital expenditures plan, notice, report and estimate received by Borrower under the Franchise Agreement or the Management Agreement; and

     (iv) promptly enforce the performance and observance of all of the covenants and agreements required to be performed and/or observed by the franchisor under the Franchise Agreement and the manager under the Management Agreement.

     (c) Borrower shall not, without Lender’s prior consent:

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     (i) surrender, terminate or cancel the Franchise Agreement or the Management Agreement which consent shall not be unreasonably withheld, provided that Borrower enters into a Replacement Franchise Agreement with a Qualified Franchisor;

     (ii) reduce or consent to the reduction of the term of the Franchise Agreement or the Management Agreement;

     (iii) increase or consent to the increase of the amount of any charges under the Franchise Agreement or the Management Agreement except pursuant to the provisions thereof; or

     (iv) otherwise modify, change, supplement, alter or amend, or waive or release any of its rights and remedies under, the Franchise Agreement or the Management Agreement in any material respect.

          (d) Borrower shall not, without Lender’s prior consent, enter into transactions with any Affiliate, including without limitation any arrangement providing for the managing of the hotel on the Property, the rendering or receipt of services or the purchase or sale of inventory, except any such transaction in the ordinary course of business of Borrower if the monetary or business consideration arising therefrom would be substantially as advantageous to Borrower as the monetary or business consideration that would obtain in a comparable transaction with a person not an affiliate of Borrower.

          (e) Borrower shall maintain the Management Agreement for the operation of the Property in full force and effect and timely perform all of Borrower’s obligations thereunder and enforce performance of all obligations of the Manager. Borrower is simultaneously herewith entering into and causing the Manager to enter into an assignment and subordination of such Management Agreement in form satisfactory to Lender, assigning and subordinating the manager’s interest in the Property and all fees and other rights of the Manager pursuant to such Management Agreement to the rights of Lender.

          (f) Following the occurrence and during the continuance of an Event of Default, Borrower shall not exercise any rights, make any decisions, grant any approvals or otherwise take any action under the Management Agreement or the Franchise Agreement without the prior written consent of Lender, which consent may be granted, conditioned or withheld in Lender’s sole discretion.

          4.1.19 Notice of Certain Events. Borrower shall promptly notify Lender of (a) any Default or Event of Default, together with a detailed statement of the steps being taken to cure such Default or Event of Default; (b) any notice of default received by Borrower under other obligations relating to the Property or otherwise material to Borrower’s business (which is likely to result in a Material Adverse Effect); and (c) any legal, judicial or regulatory proceedings pending or to the extent the same is likely to result in a Material Adverse Effect, threatened in writing, including any dispute between Borrower and any Governmental Authority, affecting Borrower or the Property.

          4.1.20 Further Assurances. Borrower shall promptly (a) cure any defects in the execution and delivery of the Loan Documents, and (b) execute and deliver, or cause to be

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executed and delivered, all such other documents, agreements and instruments as Lender may reasonably request to further evidence and more fully describe the collateral for the Loan, to correct any omissions in the Loan Documents, to perfect, protect or preserve any Liens created under any of the Loan Documents, or to make any recordings, file any notices, or obtain any consents, as may be necessary or appropriate in connection therewith, so long as Borrower’s obligations under this Agreement and the other Loan Documents are not increased in a material manner thereby and Borrower’s rights under this Agreement and the other Loan Documents are not decreased in a material manner thereby. From and after the occurrence of and during the continuance of an Event of Default, Borrower grants Lender an irrevocable power of attorney coupled with an interest for the purpose of exercising and perfecting any and all rights and remedies available to Lender under the Loan Documents, at law and in equity, including without limitation such rights and remedies available to Lender pursuant to Sections 10.2, 10.3, and 10.4.

          4.1.21 Taxes on Security. Borrower shall pay all taxes, charges, filing, registration and recording fees, excises and levies_, payable with respect to the Note or the Liens created or secured by the Loan Documents, other than income, franchise and doing business taxes imposed on Lender. If there shall be enacted any law (a) deducting the Loan from the value of the Property for the purpose of taxation, (b) affecting any Lien on the Property, or (c) changing existing laws of taxation of mortgages, deeds of trust, security deeds, or debts secured by real property, or changing the manner of collecting any such taxes, Borrower shall promptly pay to Lender, on demand, all taxes, costs and charges for which Lender is or may be liable as a result thereof; however, if such payment would be prohibited by law or would render the Loan usurious, then instead of collecting such payment, Lender may declare all amounts owing under the Loan Documents to be immediately due and payable.

          4.1.22 Principal Place of Business, State of Organization. Borrower will not cause or permit any change to be made in its name, identity (including its trade name or names), place of organization or formation (as set forth in Section 3.1.1 hereof) of Borrower’s corporate, partnership or other structure unless Borrower shall have first notified Lender in writing of such change at least thirty (30) days prior to the effective date of such change, and shall have first taken all action required by Lender for the purpose of perfecting or protecting the lien and security interests of Lender pursuant to this Agreement, and the other Loan Documents and, in the case of a change in Borrower’s structure, but subject to the provisions of Article VIII hereof, without first obtaining the prior consent of Lender. Upon Lender’s request, Borrower shall execute and deliver additional financing statements, security agreements and other instruments which may be necessary to effectively evidence or perfect Lender’s security interest in the Property as a result of such change of principal place of business or place of organization. Borrower’s principal place of business and chief executive office, and the place where Borrower keeps its books and records, including recorded data of any kind or nature, regardless of the medium or recording, including software, writings, plans, specifications and schematics, has been for the preceding four months (or, if less, the entire period of the existence of Borrower) and will continue to be the address of Borrower set forth at the introductory paragraph of this Agreement (unless Borrower notifies Lender in writing at least thirty (30) days prior to the date of such change). Borrower’s organizational identification number, if any, assigned by the state of incorporation or organization is correctly set forth in the introductory paragraph of this Agreement. Borrower shall promptly notify Lender of any change in its organizational identification number. If Borrower does not now have an organizational identification number

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and later obtains one, Borrower promptly shall notify Lender of such organizational identification number. At the request of Lender, Borrower shall execute a certificate in form satisfactory to Lender listing the trade names under which Borrower intends to operate the Property, and representing and warranting that Borrower does business under no other trade name with respect to the Property.

          4.1.23 No Plan Assets. As of the date hereof and throughout the term of the Loan (a) Borrower is not and will not be an “employee benefit plan,” as defined in Section 3(3) of ERISA, subject to Title I of ERISA, (b) none of the assets of Borrower constitutes or will constitute “plan assets” of one or more such plans within the meaning of 29 C.F.R. Section 2510.3-101, (c) Borrower is not and will not be a “governmental plan” within the meaning of Section 3(32) of MUSA, and (d) transactions by or with Borrower are not and will not be subject to any state statute regulating investments of, or fiduciary obligations with respect to, governmental plans.

          4.1.24 Compliance. Borrower and the Property and the use thereof comply in all material respects with all applicable Legal Requirements, including, without limitation, building and zoning ordinances and codes. Borrower is not in default or violation of any order, writ, injunction, decree or demand of any Governmental Authority, the violation of which would have a Material Adverse Effect. There has not been and shall never be committed by Borrower or any other person in occupancy of or involved with the operation or use of the Property any act or omission affording the federal government or any state or local government the right of forfeiture as against the Property or any part thereof or any monies paid in performance of Borrower’s obligations under any of the Loan Documents. Borrower hereby covenants and agrees not to commit, permit or suffer to exist any act or omission affording such right of forfeiture.

          Section 4.2 Borrower Negative Covenants. Borrower covenants and agrees with Lender that:

          4.2.1 Liens. Subject to Section 4.1.2 above, Borrower shall not create, incur, assume or suffer to exist any Lien on any portion of the Property except for Permitted Encumbrances.

          4.2.2 Dissolution. Borrower shall not (a) engage in any dissolution, liquidation or consolidation or merger with or into any other business entity, (b) engage in any business activity not related to the ownership, maintenance, operation and leasing (including without limitation alterations and renovations) of the Property, (c) transfer, lease or sell, in one transaction or any combination of transactions, all or substantially all of the property or assets of Borrower except to the extent expressly permitted by the Loan Documents, or (d) cause, permit or suffer any SPC Party to (i) dissolve, wind up or liquidate or take any action, or omit to take an action, as a result of which such SPC Party would be dissolved, wound up or liquidated in whole or in part, or (ii) amend, modify, waive or terminate the certificate of incorporation or bylaws of such SPC Party, in each case without obtaining the prior consent of Lender.

          4.2.3 Change in Business. Borrower shall not enter into any line of business other than the ownership, maintenance, operation and leasing (including without limitation alterations and renovations) of the Property.

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          4.2.4 Debt Cancellation. Borrower shall not cancel or otherwise forgive or release any claim or debt (other than termination of Leases in accordance herewith) owed to Borrower by any Person, except for adequate consideration and in the ordinary course of Borrower’s business.

          4.2.5 Affiliate Transactions. Borrower shall not enter into, or be a party to, any transaction with an Affiliate of Borrower or any of the partners of Borrower except in the ordinary course of business and on terms which are fully disclosed to Lender in advance and are no less favorable to Borrower or such Affiliate than would be obtained in a comparable arm’s-length transaction with an unrelated third party.

          4.2.6 Zoning. Borrower shall not initiate or consent to any zoning reclassification of any portion of the Property or seek any variance under any existing zoning ordinance or use or permit the use of any portion of the Property in any manner that could result in such use becoming a non-conforming use under any zoning ordinance or any other applicable land use law, rule or regulation, without the prior written consent of Lender.

          4.2.7 Assets. Borrower shall not purchase or own any property other than the Property and any property necessary or incidental for the operation of the Property.

          4.2.8 No Joint Assessment. Borrower shall not suffer, permit or initiate the joint assessment of the Property (a) with any other real property constituting a tax lot separate from the Property, and (b) with any portion of the Property which may be deemed to constitute personal property, or any other procedure whereby the lien of any taxes which may be levied against such personal property shall be assessed or levied or charged to the Property.

          4.2.9 Intentionally Omitted.

          4.2.10 ERISA. (a) Borrower shall not engage in any transaction which would cause any obligation, or action taken or to be taken, hereunder (or the exercise by Lender of any of its rights under the Note, this Agreement or the other Loan Documents) to be a non-exempt (under a statutory or administrative class exemption) prohibited transaction under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

          (b) Borrower shall deliver to Lender such certifications or other evidence from time to time throughout the term of the Loan, as requested by Lender in its sole discretion, that (i) Borrower is not an “employee benefit plan” as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, or a “governmental plan” within the meaning of Section 3(32) of ERISA; (ii) Borrower is not subject to any state statute regulating investments of, or fiduciary obligations with respect to, governmental plans; and (iii) one or more of the following circumstances is true:

          (A) Equity interests in Borrower are publicly offered securities, within the meaning of 29 C.F.R. §2510.3-101(b)(2);

          (B) Less than twenty-five percent (25%) of each outstanding class of equity interests in Borrower is held by “benefit plan investors” within the meaning of 29 C.F.R. §2510.3-101(f)(2); or

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          (C) Borrower qualifies as an “operating company” or a “real estate operating company” within the meaning of 29 C.F.R. §2510.3-101(c) or (e).

          4.2.11 Material Agreements. Borrower shall not, without Lender’s prior written consent: (a) enter into, surrender or terminate any Material Agreement or Operating Agreement to which it is a party (unless the other party thereto is in material default and the termination of such agreement would be commercially reasonable), (b) increase or consent to the increase of the amount of any charges under any Material Agreement or Operating Agreement to which it is a party, except as provided therein or on an arm’s-length basis and commercially reasonable terms; or (c) otherwise modify, change, supplement, alter or amend, or waive or release any of its rights and remedies under any Material Agreement or Operating Agreement to which it is a party in any material respect, except on an arms’-length basis and commercially reasonable terms.

          V. INSURANCE, CASUALTY AND CONDEMNATION

          Section 5.1 Insurance.

          5.1.1 Insurance Policies. (a) Borrower shall obtain and maintain, or cause to be maintained, insurance for Borrower and the Property providing at least the following coverages:

     (i) comprehensive all risk insurance on the Improvements and the personal property at the Property (A) in an amount equal to one hundred percent (100%) of the “Full Replacement Cost,” which for purposes of this Agreement shall mean actual replacement value (exclusive of costs of excavations, foundations, underground utilities and footings) with a waiver of depreciation, but the amount shall in no event be less than the outstanding principal balance of the Loan; (B) containing an agreed amount endorsement with respect to the Improvements and personal property at the Property waiving all co-insurance provisions; (C) providing for no deductible in excess of One Hundred Thousand and No/100 Dollars ($100,000) for any one loss except for perils of flood ,earthquake and windstorm which deductible shall not exceed 5% of the insurable value per loss for all such insurance coverage; and (D) containing an “Ordinance or Law Coverage” or “Enforcement” endorsement if any of the Improvements or the use of the Property shall at any time constitute legal non-conforming structures or uses. In addition, Borrower shall obtain: (y) if any portion of the Improvements is currently or at any time in the future located in a federally designated “special flood hazard area”, flood hazard insurance in an amount equal to the lesser of (1) the outstanding principal balance of the Note or (2) the maximum amount of such insurance available under the National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 or the National Flood Insurance Reform Act of 1994, as each may be amended or such greater amount as Lender shall require; and (z) earthquake insurance in amounts sufficient to cover the total insured value of the hotel, which includes replacement costs and business interruption proceeds and in form and substance satisfactory to Lender in the event the Property is located in an area with a high degree of seismic activity, provided that the insurance pursuant to clauses (y) and (z) hereof shall be on terms consistent with the comprehensive all risk insurance policy required under this subsection (i).

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     (ii) commercial general liability insurance against claims for personal injury, bodily injury, death or property damage occurring upon, in or about the Property, such insurance (A) to be on the so-called “occurrence” form with an occurrence limit of not less than One Million and No/100 Dollars ($1,000,000) and an aggregate limit of not less than Two Million and No/100 Dollars ($2,000,000); (B) to continue at not less than the aforesaid limit until required to be changed by Lender by reason of changed economic conditions making such protection inadequate; and (C) to cover at least the following hazards: (1) premises and operations; (2) products and completed operations on an “if any” basis; and (3) blanket contractual liability for all legal contracts subject to policy terms and conditions;

     (iii) business income insurance (A) with loss payable to Lender; (B) covering all risks required to be covered by the insurance provided for in subsection (i) above for a period commencing at the time of loss for such length of time as it takes to repair or replace with the exercise of due diligence and dispatch; (C) containing an extended period of indemnity endorsement which provides that after the physical loss to the Improvements and Personal Property has been repaired, the continued loss of income will be insured until such income either returns to the same level it was at prior to the loss, or the expiration of twelve (12) months from the date that the Property is repaired or replaced and operations are resumed, whichever first occurs, and notwithstanding that the policy may expire prior to the end of such period; and (D) in an amount equal to one hundred percent (100%) of the projected gross income from the Property for a period from the date of loss to a date (assuming total destruction) which is six (6) months from the date that the Property is repaired or replaced and operations are resumed. The amount of such business income insurance shall be determined prior to the date hereof and at least once each year thereafter based on Borrower’s reasonable estimate of the gross income from the Property for the succeeding eighteen (18) month period. All proceeds payable to Lender pursuant to this subsection shall be held by Lender and shall be applied to the obligations secured by the Loan Documents from time to time due and payable hereunder and under the Note; provided, however, that nothing herein contained shall be deemed to relieve Borrower of its obligations to pay the obligations secured by the Loan Documents on the respective dates of payment provided for in the Note and the other Loan Documents except to the extent such amounts are actually paid out of the proceeds of such business income insurance;

     (iv) at all times during which structural construction, repairs or alterations are being made with respect to the Improvements, and only if the Property coverage form does not otherwise apply, (A) owner’s contingent or protective liability insurance covering claims not covered by or under the terms or provisions of the above mentioned commercial general liability insurance policy; and (B) the insurance provided for in subsection (i) above written in a so-called builder’s risk completed value form (1) on a non-reporting basis, (2) against all risks insured against pursuant to subsection (i) above, (3) including permission to occupy the Property, and (4) with an agreed amount endorsement waiving co-insurance provisions;

     (v) workers’ compensation, subject to the statutory limits of the state in which the Property is located, and employer’s liability insurance with a limit of at least One

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Million and No/100 Dollars ($1,000,000.00) per accident and per disease per employee, and One Million and No/100 Dollars ($1,000,000.00) for disease aggregate in respect of any work or operations on or about the Property, or in connection with the Property or its operation (if applicable);

     (vi) comprehensive boiler and machinery insurance, if applicable, in amounts as shall be reasonably required by Lender on terms consistent with the commercial property insurance policy required under subsection (i) above;

     (vii) umbrella liability insurance in addition to primary coverage in an amount not less than Thirty Million and No/100 Dollars ($30,000,000.00) per occurrence on terms consistent with the commercial general liability insurance policy required under subsection (ii) above and (viii) below;

     (viii) motor vehicle liability coverage for all owned and non-owned vehicles, including rented and leased vehicles containing minimum limits per occurrence of One Million and No/100 Dollars ($1,000,000.00);

     (ix) so-called “dramshop” insurance or other liability insurance required in connection with the sale of alcoholic beverages;

     (x) insurance against employee dishonesty in an amount not less than one (1) month of Gross Income From Operations from the Property and with a deductible not greater than Five Hundred Thousand and No/100 Dollars ($500,000.00);

     (xi) the insurance required under this Section 5.1.1(a) shall cover perils of terrorism and acts of terrorism and Borrower shall maintain insurance for loss resulting from perils and acts of terrorism on terms (including amounts) consistent with those required under this Section 5.1.1(a) at all times during the term of the Loan; and

     (xii) upon sixty (60) days’ notice, such other reasonable insurance and in such reasonable amounts as Lender from time to time may reasonably request against such other insurable hazards which at the time are commonly insured against for property similar to the Property located in or around the region in which the Property is located.

          (b) All insurance provided for in Section 5.1.1(a) shall be obtained under valid and enforceable policies (collectively, the “Policies” or in the singular, the “Policy”) and, to the extent not specified above, shall be subject to the reasonable approval of Lender as to deductibles, loss payees and insureds. Prior to the expiration dates of the Policies theretofore furnished to Lender, certificates of insurance evidencing the Policies and upon request accompanied by evidence satisfactory to Lender of payment of the premiums then due thereunder (the “Insurance Premiums”), shall be delivered by Borrower to Lender.

          (c) Any blanket insurance Policy shall specifically otherwise provide coverage in amount and scope as would a separate Policy insuring only the Property in compliance with the provisions of Section 5.1.1(a).

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          (d) All Policies of insurance provided for or contemplated by Section 5.1.1(a) shall be primary coverage and, except for the Policy referenced in Section 5.1.1(a)(v), shall name Borrower as the insured and Lender and its successors and/or assigns as the additional insured, as its interests may appear, and in the case of property damage, boiler and machinery, flood, earthquake and terrorism insurance, shall contain a so-called New York standard noncontributing mortgagee clause in favor of Lender providing that the loss thereunder shall be payable to Lender. Borrower shall not procure or permit any of its constituent entities to procure any other insurance coverage which would be on the same level of payment as the Policies or would adversely impact in any way the ability of Lender or Borrower to collect any proceeds under any of the Policies.

          (e) All Policies of insurance provided for in Section 5.1.1(a), except for the Policies referenced in Section 5.1.1(a)(v) and (a)(viii) shall contain clauses or endorsements to the effect that:

     (i) no act or negligence of Borrower, or anyone acting for Borrower, or of any Tenant or other occupant, or failure to comply with the provisions of any Policy, which might otherwise result in a forfeiture of the insurance or any part thereof, shall in any way affect the validity or enforceability of the insurance insofar as Lender is concerned;

     (ii) the Policy shall not be canceled or permitted to lapse without at least thirty (30) days’ written notice to Borrower or Borrower’s Affiliate. Borrower or Borrower’s Affiliate will in turn promptly provide notice of same to Lender; and

     (iii) Lender shall not be liable for any Insurance Premiums thereon or subject to any assessments thereunder.

          (f) If at any time Lender is not in receipt of written evidence that all insurance required hereunder is in full force and effect, Lender shall have the right, without notice to Borrower, to take such action as Lender deems necessary to protect its interest in the Property, including, without limitation, the obtaining of such insurance coverage as Lender in its sole discretion deems appropriate and all premiums incurred by Lender in connection with such action or in obtaining such insurance and keeping it in effect shall be paid by Borrower to Lender upon demand and until paid shall be secured by the Mortgage and shall bear interest at the Default Rate.

          (g) In the event of foreclosure of the Mortgage or other transfer of title to the Property in extinguishment in whole or in part of the Debt, all right, title and interest of Borrower in and to the Policies that are not blanket Policies then in force concerning the Property and all proceeds payable thereunder shall thereupon vest in the purchaser at such foreclosure or Lender or other transferee in the event of such other transfer of title.

          5.1.2 Insurance Company. The Policies shall be issued by financially sound and responsible insurance companies authorized to do business in the state in which the Property is located and having a claims paying ability rating of “A-” or better by S&P and the equivalent

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rating by one of the other Rating Agencies; provided, however, Max Re shall be an acceptable insurance company as long as their ratings do not drop below A-XII by A.M. Best.

          Section 5.2 Casualty and Condemnation.

          5.2.1 Casualty. If the Property shall sustain a Casualty, Borrower shall give prompt notice of such Casualty to Lender and shall promptly commence and diligently prosecute to completion the repair and restoration of the Property as nearly as possible to the condition the Property was in immediately prior to such Casualty (a “Restoration”) and otherwise in accordance with Section 5.3, it being understood, however, that Borrower shall not be obligated to restore the Property to the precise condition of the Property prior to such Casualty provided the Property is restored, to the extent practicable, to be of at least equal value and of substantially the same character as prior to the Casualty. Borrower shall pay all costs of such Restoration whether or not such costs are covered by insurance. Lender may, but shall not be obligated to, make proof of loss if not made promptly by Borrower. In the event of a Casualty where the loss does not exceed Restoration Threshold, Borrower may settle and adjust such claim; provided that (a) no Event of Default has occurred and is continuing and (b) such adjustment is carried out in a commercially reasonable and timely manner. In the event of a Casualty where the loss exceeds the Restoration Threshold or if an Event of Default then exists, Borrower may settle and adjust such claim only with the prior written consent of Lender (which consent shall not be unreasonably withheld or delayed) and Lender shall have the opportunity to participate, at Borrower’s cost, in any such adjustments. Notwithstanding any Casualty, Borrower shall continue to pay the Debt at the time and in the manner provided for its payment in the Note and in this Agreement.

          5.2.2 Condemnation. Borrower shall give Lender prompt notice of any actual or threatened Condemnation by any Governmental Authority of all or any part of the Property and shall deliver to Lender a copy of any and all papers served in connection with such proceedings. Borrower may settle and compromise any Condemnation under Two Hundred Fifty Thousand and No/l00 Dollars ($250,000.00) without the consent of Lender. If the Condemnation is equal to or greater than Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00), Borrower may settle and compromise the Condemnation only with prior written the consent of Lender (which consent shall not be unreasonably withheld or delayed) and Lender shall have the opportunity to participate, at Borrower’s cost, in any litigation and settlement discussions in respect thereof and Borrower shall from time to time deliver to Lender all instruments requested by Lender to permit such participation. Borrower shall, at its expense, diligently prosecute any such proceedings, and shall consult with Lender, its attorneys and experts, and cooperate with them in the carrying on or defense of any such proceedings. From and after and during the continuance of an Event of Default, Lender is hereby irrevocably appointed as Borrower’s attorney-in-fact, coupled with an interest, with exclusive power to collect, receive and retain any Award and to make any compromise or settlement in connection with any such Condemnation. Notwithstanding any Condemnation, Borrower shall continue to pay the Debt at the time and in the manner provided for its payment in the Note and in this Agreement. Lender shall not be limited to the interest paid on the Award by any Governmental Authority but shall be entitled to receive out of the Award interest at the rate or rates provided herein or in the Note. If the Property or any portion thereof is taken by any Governmental Authority, Borrower shall promptly commence and diligently prosecute the Restoration of the

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Property and otherwise comply with the provisions of Section 5.3. If the Property is sold, through foreclosure or otherwise, prior to the receipt by Lender of the Award, Lender shall have the right, whether or not a deficiency judgment on the Note shall have been sought, recovered or denied, to receive the Award, or a portion thereof sufficient to pay the Debt.

          5.2.3 Casualty Proceeds. The Net Proceeds shall be held by Lender in an interest-bearing account and, until disbursed in accordance with the provisions of this Section 5.3, shall constitute additional security for the Debt and Other Obligations under the Loan Documents.

          Section 5.3 Delivery of Net Proceeds.

          5.3.1 Minor Casualty or Condemnation. If a Casualty or Condemnation has occurred to_. the Property and the Net Proceeds shall be less than the Restoration Threshold and the costs of completing the Restoration shall be less than the Restoration Threshold, and provided (a) no Event of Default shall have occurred and remain uncured and (b) the Casualty or Condemnation shall have occurred prior to the Maturity Date, the Net Proceeds will be disbursed by Lender to Borrower. Promptly after receipt of the Net Proceeds, Borrower shall commence and satisfactorily complete with due diligence the Restoration in accordance with the terms of this Agreement. If any Net Proceeds are received by Borrower and may be retained by Borrower pursuant to the terms hereof, such Net Proceeds shall, until completion of the Restoration, be held in trust for Lender and shall be segregated from other funds of Borrower to be used to pay for the cost of Restoration in accordance with the terms hereof.

          5.3.2 Major Casualty or Condemnation. (a) If a Casualty or Condemnation has occurred to the Property and the Net Proceeds are equal to or greater than the Restoration Threshold or the costs of completing the Restoration is equal to or greater than the Restoration Threshold, Lender shall make the Net Proceeds available for the Restoration, provided that each of the following conditions are met:

     (i) no Event of Default shall have occurred and be continuing;

     (ii) (A) in the event the Net Proceeds are insurance proceeds, less than twenty-five percent (25%) of the total floor area of the Improvements at the Property has been damaged, destroyed or rendered unusable as a result of such Casualty or (B) in the event the Net Proceeds are an Award, less than ten percent (10%) of the land constituting the Property is taken, and such land is located along the perimeter or periphery of the Property, and no portion of the Improvements (other than driveways and parking in excess of Legal Requirements) is the subject of the Condemnation;

     (iii) all Major Leases shall remain in full force and effect during and after the completion of the Restoration without abatement of rent beyond the time required for Restoration, notwithstanding the occurrence of such Casualty or Condemnation;

     (iv) Borrower shall commence the Restoration as soon as reasonably practicable (but in no event later than sixty (60) days after such Casualty or Condemnation, whichever the case may be, occurs) and shall diligently pursue the same to satisfactory completion;

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     (v) Lender shall be satisfied that any operating deficits and all payments of principal and interest under the Note will be paid during the period required for Restoration from (A) the Net Proceeds, or (B) other funds of Borrower;

     (vi) Lender shall be satisfied that the Restoration will be completed on or before the earliest to occur of (A) the date six (6) months prior to the Maturity Date, (B) the earliest date required for such completion under the terms of any Lease, (C) such time as may be required under applicable Legal Requirements in order to repair and restore the Property to the condition it was in immediately prior to such Casualty or to as nearly as possible the condition it was in immediately prior to such Condemnation, as applicable or (D) the expiration of the insurance coverage referred to in Section 5.1.1(a)(iii);

     (vii) the Property and the use thereof after the Restoration will be in compliance with and permitted under all applicable Legal Requirements;

     (viii) the Restoration shall be done and completed by Borrower in an expeditious and diligent fashion and in compliance with all applicable Legal Requirements

     (ix) such Casualty or Condemnation, as applicable, does not result in the loss of access to the Property or the related Improvements;

     (x) all Operating Agreements shall remain in full force and effect;

     (xi) After giving effect to such Restoration, the Debt Service Coverage Ratio for the Property shall he equal to the greater of (i) the Debt Service Coverage Ratio for the twelve (12) full calendar months immediately preceding the Closing Date, and (ii) the Debt Service Coverage Ratio for the Property for the twelve (12) full calendar months immediately preceding the Casualty or Condemnation of the Property; and

     (xii) Lender shall be satisfied that, upon the completion of the Restoration, the Loan to Value Ratio for the Property is not greater than 65%, as determined by Lender in its sole discretion.

          (h) The Net Proceeds shall be paid directly to Lender and held by Lender in an interest-bearing account and, until disbursed in accordance with the provisions of this Section 5.3.2, shall constitute additional security for the Debt. The Net Proceeds (including all interest earned thereon) shall be disbursed by Lender to, or as directed by, Borrower from time to time during the course of the Restoration, upon receipt of evidence satisfactory to Lender that (i) all requirements set forth in Section 5.3.2(a) have been satisfied, (ii) all materials installed and work and labor performed (except to the extent that they are to be paid for out of the requested disbursement) in connection with the Restoration have been paid for in full, and (iii) there exist no notices of pendency, stop orders, mechanic’s or materialman’s liens or notices of intention to file same, or any other liens or encumbrances of any nature whatsoever on the Property arising out of the Restoration which have not either been fully bonded to the satisfaction of Lender and discharged of record or in the alternative fully insured to the satisfaction of Lender by the title company issuing the Title Insurance Policy.

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          (c) All plans and specifications required in connection with the Restoration shall be subject to prior approval of Lender and an independent architect selected by Lender (the “Casualty Consultant”). The plans and specifications shall require that the Restoration be completed in a first-class workmanlike manner at least equivalent to the quality and character of the original work in the Improvements (provided, however, that in the case of a partial Condemnation, the Restoration shall be done to the extent reasonable practicable after taking into account the consequences of such partial Condemnation), so that upon completion thereof, the Property shall be at least equal in value and general utility to the Property prior to the damage or destruction; it being understood, however, that Borrower shall not be obligated to restore the Property to the precise condition of the Property prior to such Casualty provided the Property is restored, to the extent practicable, to be of at least equal value and of substantially the same character as prior to the Casualty. Borrower shall restore all Improvements such that when they are fully restored and/or repaired, such Improvements and their contemplated use fully comply with all applicable material Legal Requirements. The identity of the contractors, subcontractors and materialmen engaged in the Restoration, as well as the contracts under which they have been engaged, shall be subject to approval of Lender and the Casualty Consultant. All costs and expenses incurred by Lender in connection with recovering, holding and advancing the Net Proceeds for the Restoration including, without limitation, reasonable attorneys’ fees and disbursements and the Casualty Consultant’s fees and disbursements, shall be paid by Borrower.

          (d) In no event shall Lender be obligated to make disbursements of the Net Proceeds in excess of an amount equal to the costs actually incurred from time to time for work in place as part of the Restoration, as certified by the Casualty Consultant, less the Casualty^. Retainage. The term “Casualty Retainage” shall mean, as to each contractor, subcontractor or materialman engaged in the Restoration, an amount equal to ten percent (10%) of the hard construction costs actually incurred for work in place as part of the Restoration, as certified by the Casualty Consultant, until the Restoration has been completed. The Casualty Retainage shall in no event, and notwithstanding anything to the contrary set forth above in this Section 5.3.2(d), be less than the amount actually held back by Borrower from contractors, subcontractors and materialmen engaged in the Restoration. The Casualty Retainage shall not be released until the Casualty Consultant certifies to Lender that the Restoration has been completed in accordance with the provisions of this Section 5.3.2(d) and that all approvals necessary for the re-occupancy and use of the Property have been obtained from all appropriate Governmental Authorities, and Lender receives evidence satisfactory to Lender that the costs of the Restoration have been paid in full or will be paid in full out of the Casualty Retainage; provided, however, that Lender will release the portion of the Casualty Retainage being held with respect to any contractor, subcontractor or materialman engaged in the Restoration as of the date upon which the Casualty Consultant certifies to Lender that the contractor, subcontractor or materialman has satisfactorily completed all work and has supplied all materials in accordance with the provisions of the contractor’s, subcontractor’s or materialman’s contract, the contractor, subcontractor or materialman delivers the lien waivers and evidence of payment in full of all sums due to the contractor, subcontractor or materialman as may be reasonably requested by Lender or by the title company issuing the Title Insurance Policy, and Lender receives an endorsement to the Title Insurance Policy insuring the continued priority of the lien of the Mortgage and evidence of payment of any premium payable for such endorsement. If required by Lender, the release of any such portion of the Casualty Retainage shall be approved by the surety company, if any,

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which has issued a payment or performance bond with respect to the contractor, subcontractor or materialman.

          (e) Lender shall not be obligated to make disbursements of the Net Proceeds more frequently than once every calendar month.

          (1) If at any time the Net Proceeds or the undisbursed balance thereof shall not, in the opinion of Lender in consultation with the Casualty Consultant, be sufficient to pay in full the balance of the costs which are estimated by the Casualty Consultant to be incurred in connection with the completion of the Restoration, Borrower shall deposit the deficiency (the “Net Proceeds Deficiency”) with Lender before any further disbursement of the Net Proceeds shall be made. The Net Proceeds Deficiency deposited with Lender shall be held by Lender and shall be disbursed for costs actually incurred in connection with the Restoration on the same conditions applicable to the disbursement of the Net Proceeds, and until so disbursed pursuant to this Section 5.3.2 shall constitute additional security for the Debt.

          (g) The excess, if any, of the Net Proceeds and the remaining balance, if any, of the Net Proceeds Deficiency deposited with Lender after the Casualty Consultant certifies to Lender that the Restoration has been completed in accordance with the provisions of this Section 5.3.2, and the receipt by Lender of evidence satisfactory to Lender that all costs incurred in connection with the Restoration have been paid in full, shall be remitted by Lender to Borrower, provided no Event of Default shall have occurred and shall be continuing under any of the Loan Documents; provided, however, the amount of such excess returned to Borrower in the case of a Condemnation shall not exceed the amount of Net Proceeds Deficiency deposited by Borrower with the balance being applied to the Debt in the manner provided for in subsection 5.3.2(h).

          (h) All Net Proceeds not required (i) to be made available for the Restoration or (ii) to be returned to Borrower as excess Net Proceeds pursuant to Section 5.3.2(g) shall be retained and applied by Lender toward the payment of the Debt, whether or not then due and payable, in such order, priority and proportions as Lender in its sole discretion shall deem proper, or, at the discretion of Lender, the same may be paid, either in whole or in part, to Borrower for such purposes as Lender shall designate.

          VI. RESERVE FUNDS

          Section 6.1 Required Repair Funds

          6.1.1 Deposit of Required Repair Funds. Borrower shall perform the repairs at the Property as set forth on Schedule I hereto (such repairs hereinafter referred to as “Required Repairs”) and, subject to Force Majeure (provided no such Force Majeure causes an event of default under the Franchise Agreement), shall complete each of the Required Repairs on or before the respective deadline for each repair as set forth on Schedule I hereof. On the Closing Date, Borrower has deposited with Lender the sum of THREE THOUSAND SEVEN HUNDRED FIFTY AND NO/100 Dollars ($3,750) which amount is one hundred and twenty-five percent (125%) of the cost to perform such Required Repairs as set forth on Schedule I hereto in order to perform the Required Repairs. Amounts deposited pursuant to this Section

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6.1.1 are referred to herein as the “Required Repair Funds” and the account in which such amounts are held shall hereinafter be referred to as Borrower’s “Required Repair Account”.

          6.1.2 Release of Required Repair Funds. With respect to any item of Required Repairs which has been completed, Lender shall, from time to time, disburse to Borrower portions of the Required Repair Funds upon satisfaction by Borrower of each of the following conditions: (a) Borrower shall submit a request for payment to Lender at least ten (10) days prior to the date on which Borrower requests such payment be made and specifies the Required Repairs to be paid, (b) on the date such request is received by Lender and on the date such payment is to be made, no Event of Default shall exist and remain uncured, (c) Lender shall have received a certificate from Borrower (i) stating that all Required Repairs to be funded by the requested disbursement have been completed in a good and workmanlike manner and in accordance with all applicable Legal Requirements, such certificate to be accompanied by a copy of any license, permit or other approval by any Governmental Authority required in connection with the Required Repairs, (ii) identifying each Person that supplied materials or labor in connection with the Required Repairs to be funded by the requested disbursement, and (iii) stating that each such Person has been paid in full or will be paid in full upon such disbursement, such certificate to be accompanied by lien waivers or other evidence of payment satisfactory to Lender, (d) at Lender’s option, a title search for the Property indicating that the Property is free from all liens, claims and other encumbrances other than the Permitted Exceptions or not previously approved by Lender, (e) at Lender’s option, if the cost of any Required Repair exceeds Fifty Thousand and No/100 Dollars ($50,000.00), Lender shall have received a report satisfactory to Lender in its reasonable discretion from an architect or engineer approved by Lender in respect of such architect or engineer’s inspection of the required repairs, and (f) Lender shall have received such other evidence as Lender shall reasonably request that the Required Repairs to be funded by the requested disbursement have been completed and are paid for or will be paid upon such disbursement to Borrower. Lender shall not be required to disburse Required Repair Funds more frequently than once each calendar month, and the requested disbursement must be at least in an amount equal to the Minimum Disbursement Amount (or a lesser amount if the total Required Repair Funds is less than the Minimum Disbursement Amount, in which case only one disbursement of the amount remaining in the account shall be made). From and after and during the continuance of an Event of Default, Lender shall have the right, but not the obligation, to make any of the Required Repairs in the event Borrower fails to perform same in accordance with Section 6.1.1.

          6.1.3 Balance in the Required Repair Account. The insufficiency of any balance in the Required Repair Account shall not relieve Borrower from its obligation to fulfill all preservation and maintenance covenants in the Loan Documents. Upon completion of the Required Repairs, provided no Event of Default has occurred and is continuing, the balance, if any, in the Required Repair Account will be disbursed to Borrower.

          Section 6.2 Tax Funds.

          6.2.1 Deposits of Tax Funds. On the Closing Date, Borrower shall deposit with Lender the amount of NINETY SIX THOUSAND SEVEN HUNDRED EIGHTEEN AND NO/100 Dollars {$96,718) and, on each Monthly Payment Date Borrower shall deposit with Lender an amount equal to one-twelfth of the Taxes that Lender estimates will be payable during

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the next ensuing twelve (12) months in order to accumulate sufficient funds to pay all such Taxes at least ten (10) days prior to their respective due dates. Amounts deposited pursuant to this Section 6.2.1 are referred to herein as the “Tax Funds” and the account in which such amounts are held shall hereinafter be referred to as Borrower’s “Tax Account”. If at any time Lender reasonably determines that the Tax Funds will not be sufficient to pay the Taxes, Lender shall notify Borrower of such determination and the monthly deposits for Taxes shall be increased by the amount that Lender estimates is sufficient to make up the deficiency at least ten (10) days prior to the respective due dates for the Taxes; provided that if Borrower receives notice of any deficiency after the date that is ten (10) days prior to the date that Taxes are due, Borrower will deposit such amount within two (2) Business Days after its receipt of such notice.

          6.2.2 Release of Tax Funds. Lender shall have the right to apply the Tax Funds to payments of Taxes, and provided that no Event of Default has occurred and is continuing and sufficient Tax Funds are on deposit with Lender with respect to any such payment, Lender shall apply the Tax Funds to payments of Taxes. In making any payment relating to Taxes, Lender may do so according to any bill, statement or estimate procured from the appropriate public office (with respect to Taxes) without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim thereof. If the amount of the Tax Funds shall exceed the amounts due for Taxes, Lender shall, in its sole discretion, return any excess to Borrower or credit such excess against future payments to be made to the Tax Funds. Any Tax Funds remaining after the Debt has been paid in full shall be returned to Borrower. Borrower shall not be required to pay any fines or penalties which are assessed due to Lender’s failure to pay Taxes on or before the due date thereof.

          Section 6.3 Insurance Funds.

          6.3.1 Deposits of Insurance Funds. On the Closing Date, Borrower shall deposit with Lender the amount of ONE HUNDRED SEVENTY SEVEN THOUSAND ONE HUNDRED SIXTY TWO AND NO/100 Dollars ($177,162) and, on each Monthly Payment Date Borrower shall deposit with Lender an amount equal to one-twelfth of the Insurance Premiums that Lender estimates will be payable for the renewal of the coverage afforded by the Policies upon the expiration thereof in order to accumulate sufficient funds to pay all such Insurance Premiums at least thirty (30) days prior to the expiration of the Policies. Amounts deposited pursuant to this Section 6.3.1 are referred to herein as the “Insurance Funds” and the account in which such amounts are held shall hereinafter be referred to as Borrower’s “Insurance Account”. If at any time Lender reasonably determines that the Insurance Funds will not be sufficient to pay the Insurance Premiums, Lender shall notify Borrower of such determination and the monthly deposits for Insurance Premiums shall be increased by the amount that Lender estimates is sufficient to make up the deficiency at least thirty (30) days prior to expiration of the Policies.

          6.3.2 Release of Insurance Funds. Lender shall have the right to apply the Insurance Funds to payment of Insurance Premiums, and, provided, that no Event of Default has occurred and is continuing and sufficient Insurance Funds are on deposit with Lender with respect to any such payment, Lender shall apply the Insurance Funds to payment of Insurance Premiums. In making any payment relating to Insurance Premiums, Lender may do so according

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to any bill, statement or estimate procured from the insurer or its agent, without inquiry into the accuracy of such bill, statement or estimate. If the amount of the Insurance Funds shall exceed the amounts due for Insurance Premiums, Lender shall, in its sole discretion, return any excess to Borrower or credit such excess against future payments to be made to the Insurance Funds. Any Insurance Funds remaining after the Debt has been paid in full shall be returned to Borrower.

          Section 6.4 Capital Expenditure Funds.

          6.4.1 Deposits of Capital Expenditure Funds. On the Closing Date, Borrower shall deposit with Lender an amount equal to ONE MILLION SEVEN HUNDRED FIFTEEN THOUSAND TWO HUNDRED NINE AND 67/100 Dollars ($1,715,209.67) to be used to pay for the cost of Capital Expenditures required to be performed under the Franchise Agreement, as more particularly described in the section of the Product Improvement Plan attached hereto as Schedule II, which Capital Expenditures are hereby approved by the Lender subject to the provisions of this Section 6.4.1 (the “PIP Repairs”), Amounts deposited pursuant to this Section 6.4.1 are referred to herein as the “Capital Expenditure Funds” and the account in which such amounts are held shall hereinafter be referred to as Borrower’s “Capital Expenditure Account”. In lieu of making the deposit (or any portion thereof) to the Capital Expenditure Funds required pursuant to this Section 6.4, Borrower may deliver to Lender a Letter of Credit in an amount equal to the amount that is otherwise required to be deposited into the Capital Expenditure Funds issued by a Approved Bank, which Letter of Credit shall be otherwise acceptable in form and substance to Lender and Borrower shall pay to Lender all of Lender’s reasonable out of pocket costs and expenses in connection therewith, including any fee charged by the Rating Agencies. Any such Letter of Credit shall be additional security for Borrower’s obligations under the Loan Documents. Lender shall have the right to draw in full upon any Letter of Credit: (A) if Lender has not received at least thirty (30) days prior to the date on which the then outstanding Letter of Credit is scheduled to expire, a notice from the issuing financial institution that it has renewed the applicable Letter of Credit; (B) upon receipt of notice from the issuing financial institution that the applicable Letter of Credit will be terminated; (C) ten (10) days after Lender has given notice to Borrower that the financial institution issuing the applicable Letter of Credit ceases to meet the rating requirement set forth in this Section 6.4; and (D) upon the occurrence of an Event of Default.

          6.4.2 Release of Capital Expenditure Funds. (a) Lender shall direct Agent to disburse Capital Expenditure Funds only for PIP Repairs.

          (b) Lender shall direct Agent to disburse to Borrower the Capital Expenditure Funds from time to time upon satisfaction by Borrower of each of the following conditions: (i) Borrower shall submit a request for payment to Lender at least ten (10) days prior to the date on which Borrower requests such payment be made and specifies the PIP Repairs to be paid, (ii) on the date such request is received by Lender and on the date such payment is to be made, no Event of Default shall exist and remain uncured, (iii) Lender shall have received a certificate from Borrower (A) stating that the items to be funded by the requested disbursement are PIP Repairs, (B) stating that all PIP Repairs at the Property to be funded by the requested disbursement have been completed in a good and workmanlike manner and in accordance with all applicable Legal Requirements, such certificate to be accompanied by a copy of any license, permit or other approval required by any Governmental Authority in connection with the PIP

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Repairs, (C) identifying each Person that supplied materials or labor in connection with the PIP Repairs to be funded by the requested disbursement, and (D) stating that each such Person has been paid in full or will be paid in full upon such disbursement, such certificate to be accompanied by, unless such Person is being paid out of the disbursement being made, lien waivers or other evidence of payment satisfactory to Lender, (iv) at Lender’s option, a title search for the Property indicating that the Property is free from all Liens, claims and other encumbrances other than the Permitted Exceptions or otherwise not previously approved by Lender, (v) at Lender’s option, if the cost of any individual PIP Repair exceeds Fifty Thousand and No/100 Dollars ($50,000.00), Lender shall have received a report satisfactory to Lender in its reasonable discretion from an architect or engineer approved by Lender in respect of such architect or engineer’s inspection of the PIP Repairs, and (vi) Lender shall have received such other evidence as Lender shall reasonably request that the PIP Repairs at the Property to be funded by the requested disbursement have been completed and are paid for or will be paid upon such disbursement to Borrower. Lender shall not be required to disburse Capital Expenditure Funds more frequently than once each calendar month, and must be at least an amount greater than the Minimum Disbursement Amount (or a lesser amount if the total amount of Capital Expenditure Funds is less than the Minimum Disbursement Amount, in which, case only one disbursement of the amount remaining in the account shall be made).

          (c) Nothing in this Section 6.4.2 shall (i) make Lender responsible for making or completing the Capital Expenditures Work; (ii) require Lender to expend funds in addition to the Capital Expenditure Funds to complete any Capital Expenditures Work; (iii) obligate Lender to proceed with the Capital Expenditures Work; or (iv) obligate Lender to demand from Borrower additional sums to complete any Capital Expenditures Work.

          (d) Borrower shall peituit Lender and Lender’s agents and representatives (including, without limitation, Lender’s engineer, architect, or inspector) or third parties to enter onto the Property during normal business hours (subject to the rights of Tenants under their Leases) and not to unreasonably interfere with Hotel guests or business operations at the Property to inspect the progress of any Capital Expenditures Work and all materials being used in connection therewith and to examine all plans and shop drawings relating to such Capital Expenditures Work. Borrower shall cause all contractors and subcontractors to cooperate with Lender or Lender’s representatives or such other Persons described above in connection with inspections described in this Section 6.4.2(d).

          (e) If a PIP Repairs disbursement will exceed Fifty Thousand and No/I00 Dollars ($50,000.00), Lender may require an inspection of the Property at Borrower’s expense prior to making a disbursement of Capital Expenditure Funds in order to verify completion of the Capital Expenditures Work for which reimbursement is sought. Lender may require that such inspection be conducted by an appropriate independent qualified professional selected by Lender and may require a certificate of completion by an independent qualified professional architect acceptable to Lender prior to the disbursement of Capital Expenditure Funds. Borrower shall pay the expense of the inspection as required hereunder, whether such inspection is conducted by Lender or by an independent qualified professional architect.

          (1) In addition to any insurance required under the Loan Documents, Borrower shall provide or cause to be provided workmen’s compensation insurance, builder’s

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risk, and public liability insurance and other insurance to the extent required under applicable law in connection with Capital Expenditures Work. All such policies shall be in form and amount reasonably satisfactory to Lender.

          6.4.3 Balance in the Capital Expenditure Account. The insufficiency of any balance in the Capital Expenditure Account shall not relieve Borrower from its obligation to fulfill all preservation and maintenance covenants in the Loan Documents. Upon completion of the PIP Repairs, provided no Event of Default has occurred and is continuing, the balance, if any, in the Capital Expenditure Account will be disbursed to Borrower.

          Section 6.5 Replacements and Replacement Reserve.

          6.5.1 Replacement Reserve Fund. Borrower shall pay to Lender on each Payment Date one twelfth (1/12) of the amount equal to four percent (4%) of annual Gross Income from Operations (the “Replacement Reserve Monthly Deposit”) to fund the costs of Capital Expenditures, replacements, repairs, furniture, fixtures and hotel equipment required to be made to the Properties and the Improvements during the calendar year (collectively, the “Replacements”). Amounts so deposited shall hereinafter be referred to as Borrower’s “Replacement Reserve Fund” and the account in which such amounts are held shall hereinafter be referred to as Borrower’s “Replacement Reserve Account”.

          6.5.2 Disbursements from Replacement Reserve Account. (a) Lender shall make disbursements from the Replacement Reserve Account from time to time to pay Borrower only for the costs of the Replacements. Lender shall not be obligated to make disbursements from the Replacement Reserve Account to reimburse Borrower for the costs of routine maintenance to the Property or replacements of inventory or for costs which are to be reimbursed from the Capital Expenditure Funds.

          (b) Lender shall, upon written request from Borrower and satisfaction of the requirements set forth in this Section 6.5.2, disburse to Borrower amounts from the Replacement Reserve Account necessary to pay for the actual approved costs of Replacements or to reimburse Borrower therefor, upon completion of such Replacements (or, upon partial completion in the case of Replacements made pursuant to Section 6.5.2(e) hereof) as determined by Lender. In no event shall Lender be obligated to disburse funds from the Replacement Reserve Account if a Default or an Event of Default exists.

          (c) Each request for disbursement from the Replacement Reserve Account shall be in a form specified or approved by Lender and shall specify (i) the specific Replacements for which the disbursement is requested, (ii) the quantity and price of each item purchased, if the Replacement includes the purchase or replacement of specific items, (iii) the price of all materials (grouped by type or category) used in any Replacement other than the purchase or replacement of specific items, and (iv) the cost of all contracted labor or other services applicable to each Replacement for which such request for disbursement is made. With each request Borrower shall certify that all Replacements have been made in accordance with all applicable Legal Requirements of any Governmental Authority having jurisdiction over the Property. Each request for disbursement shall include copies of invoices for all items or materials purchased and all contracted labor or services provided and, unless Lender has agreed

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to issue joint checks as described below in connection with a particular Replacement, each request shall include evidence satisfactory to Lender of payment of all such amounts. Except as provided in Section 6.5.2(e) hereof, each request for disbursement from the Replacement Reserve Account shall be made only after completion of the Replacement for which disbursement is requested. Borrower shall provide Lender evidence of completion of the subject Replacement satisfactory to Lender in its reasonable judgment.

          (d) Borrower shall pay all invoices in connection with the Replacements with respect to which a disbursement is requested prior to submitting such request for disbursement from the Replacement Reserve Account or, at the request of Borrower, Lender will issue checks, payable to the contractor, supplier, materialman, mechanic, subcontractor or other party to whom payment is due in connection with a Replacement. In the case of payments made by joint check, Lender may require a waiver of lien from each Person receiving payment prior to Lender’s disbursement in excess of Fifty Thousand and 00/100 Dollars ($50,000.00) from the Replacement Reserve Account. In addition, as a condition to any disbursement, Lender may require Borrower to obtain lien waivers from each contractor, supplier, materialman, mechanic or subcontractor who receives payment in an amount equal to or greater than One Hundred Thousand and 00/100 Dollars ($100,000.00) for completion of its work or delivery of its materials. Any lien waiver delivered hereunder shall conform to the requirements of applicable law and shall cover all work performed and materials supplied (including equipment and fixtures) for the Property by that contractor, supplier, subcontractor, mechanic or materialman through the date covered by the current reimbursement request (or, in the event that payment to such contractor, supplier, subcontractor, mechanic or materialmen is to be made by a joint check, the release of lien shall be effective through the date covered by the previous release of funds request).

          (e) If (i) the cost of a Replacement exceeds Fifty Thousand and 00/100 Dollars ($50,000.00), (ii) the contractor performing such Replacement requires periodic payments pursuant to terms of a written contract, and (iii) Lender has approved in writing in advance such periodic payments, a request for reimbursement from the Replacement Reserve Account may be made after completion of a portion of the work under such contract, provided (A) such contract requires payment upon completion of such portion of the work, (B) the materials^. for which the request is made are on site at the Property and are properly secured or have been installed in the Property, (C) all other conditions in this Agreement for disbursement have been satisfied, (D) funds remaining in the Replacement Reserve Account are, in Lender’s judgment, sufficient to complete such Replacement and other Replacements when required, and (E) if required by Lender, each contractor or subcontractor receiving payments in excess of $100,000.00 under such contract shall provide a waiver of lien with respect to amounts which have been paid to that contractor or subcontractor.

          (f) Borrower shall not make a request for disbursement from the Replacement Reserve Account more frequently than once in any calendar month and (except in connection with the final disbursement) the total cost of all Replacements in any request shall not be less than the Minimum Disbursement Amount.

          6.5.3 Performance of Replacements. (a) Borrower shall make Replacements when required in order to keep the Property in condition and repair consistent with other first

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class, full service hotels in the same market segment in the metropolitan area in which the Property is located, and to keep the Property or any portion thereof from deteriorating. Borrower shall complete all Replacements in a good and workmanlike manner as soon as practicable following the commencement of making each such Replacement.

          (b) Lender reserves the right, at its option, to approve all contracts or work orders with materialmen, mechanics, suppliers, subcontractors, contractors or other parties providing labor or materials in connection with the Replacements costing in excess of $100,000.00. Upon Lender’s request, Borrower shall assign any contract or subcontract to Lender.

          (c) In the event Lender determines in its reasonable discretion that any Replacement is not being performed in a workmanlike or timely manner or that any Replacement has not been completed in a workmanlike or timely manner, Lender shall have the option to withhold disbursement for such unsatisfactory Replacement until such faulty work is corrected and upon the occurrence and continuing of an Event of Default to proceed under existing contracts or to contract with third parties to complete such Replacement and to apply the Replacement Reserve Fund toward the labor and materials necessary to complete such Replacement, without providing any prior notice to Borrower and to exercise any and all other remedies available to Lender upon an Event of Default hereunder.

          (d) In order to facilitate Lender’s completion or making of such Replacements pursuant to Section 6.5.3(c) above, Borrower grants from and after the occurrence and during the continuance of an Event of Default Lender the right to enter onto the Property and perform any and all work and labor necessary to complete or make such Replacements and/or employ watchmen to protect the Property from damage. All sums so expended by Lender, to the extent not from the Replacement Reserve Fund, shall be deemed to have been advanced under the Loan to Borrower and secured by the Mortgage. For this purpose from and after the occurrence and during the continuance of an Event of Default Borrower constitutes and appoints Lender its true and lawful attorney in fact with full power of substitution to complete or undertake such Replacements in the name of Borrower. Such power of attorney shall be deemed to be a power coupled with an interest and cannot be revoked.

          (e) Nothing in this Section 6.5.3 shall: (i) make Lender responsible for making or completing any Replacements; (ii) require Lender to expend funds in addition to the Replacement Reserve Fund to make or complete any Replacement; (iii) obligate Lender to proceed with any Replacements; or (iv) obligate Lender to demand From Borrower additional sums to make or complete any Replacement.

               Upon reasonable prior notice to Borrower, Borrower shall permit Lender and Lender’s agents and representatives (including, without limitation, Lender’s engineer, architect, or inspector) or third parties making Replacements pursuant to this Section 6.5.3 to enter onto the Property during normal business hours (subject to the rights of tenants under their Leases, and without disturbing guests of the Hotel or unreasonably interfering with business operations at the Hotel) to inspect the progress of any Replacements and all materials being used in connection therewith, to examine all plans and shop drawings relating to such Replacements which are or may be kept at the Property, and to complete any Replacements which Lender has a

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right to complete pursuant to this Section 6.5.3. Borrower shall cause all contractors and subcontractors to cooperate with Lender or Lender’s representatives or such other persons described above in connection with inspections described in this Section 6.5.3(f) or the completion of Replacements pursuant to this Section 6.5.3.

          (g) Lender may require an inspection of the Property at Borrower’s expense prior to making a monthly disbursement from the Replacement Reserve Account in order to verify completion of the Replacements costing in excess of $50,000.00 for which reimbursement is sought. Lender may require that such inspection be conducted by an appropriate independent qualified professional selected by Lender and/or may require a copy of a certificate of completion by an independent qualified professional acceptable to Lender prior to the disbursement of any amounts from the Replacement Reserve Account. Borrower shall pay the expense of the inspection as required hereunder, whether such inspection is conducted by Lender or by an independent qualified professional.

          (h) The Replacements and all materials, equipment, fixtures, or any other item comprising a part of any Replacement shall be constructed, installed or completed, as applicable, free and clear of all mechanic’s, materialmen’s or other liens (except for those Liens which have been approved in writing by Lender and those Liens being contested by Borrower pursuant to Section 4.1.2 hereof).

          (i) Before each disbursement from the Replacement Reserve Account, Lender may require Borrower to provide Lender with a search of title to the Property effective to the date of the disbursement, which search shows that no mechanic’s or materialmen’s liens or other liens of any nature have been placed against the Property since the date of recordation of the related Mortgage and that title to the Property is free and clear of all Liens (other than the lien of the related Mortgage and any other Liens previously approved in writing by Lender, if any).

               In addition to any insurance required under the Loan Documents, Borrower shall provide or cause to be provided workmen’s compensation insurance, builder’s risk, and public liability insurance and other insurance to the extent required under applicable law in connection with a particular Replacement. All such policies shall be in farm and amount reasonably satisfactory to Lender. All such policies which can be endorsed with standard mortgagee clauses making loss payable to Lender or its assigns shall be so endorsed. Certified copies of such policies shall be delivered to Lender.

          6.5.4 Balance in the Replacement Reserve Account. The insufficiency of any balance in the Replacement Reserve Account shall not relieve Borrower from its obligation to fulfill all preservation and maintenance covenants in the Loan Documents. Upon payment of the Debt in full, the balance, if any, in the Replacement Reserve Account will be disbursed to Borrower.

          Section 6.6 Intentionally Omitted.

          Section 6.7 Security Interest in Reserve Funds.

          6.7.1 Grant of Security Interest. Borrower hereby pledges to Lender, and grants a security interest in, any and all monies now or hereafter deposited in the Funds as

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additional security for the payment of the Loan. The Funds shall be held in Lender’s name and may be commingled with Lender’s own funds at financial institutions selected by Lender in its sole discretion. Upon the occurrence of an Event of Default, Lender may apply any sums then present in the Funds to the payment of the Loan in any order in its sole discretion. Until expended or applied as above provided, the Funds shall constitute additional security for the Loan. Lender shall have no obligation to release any of the Funds while any Event of Default or Default then exists.

          6.7.2 Income Taxes. Borrower shall report on its federal, state and local income tax returns all interest or income earned by Borrower on the applicable Reserve Funds.

          6.7.3 Prohibition Against Further Encumbrance. Borrower shall not, without the prior consent of Lender, further pledge, assign or grant any security interest in the Reserve Funds or permit any lien or encumbrance to attach thereto, or any levy to be made thereon, or any UCC-1 Financing Statements, except those naming Lender as the secured party, to be filed with respect thereto.

          VII. PROPERTY MANAGEMENT

          Section 7.1 The Management Agreement. Borrower shall cause Manager to manage the Property in accordance with the Management Agreement. Borrower shall (a) diligently perform and observe all of the terms, covenants and conditions of the Management Agreement on the part of Borrower to be performed and observed, (b) promptly notify Lender of any notice to Borrower of any default by Borrower in the performance or observance of any of the terms, covenants or conditions of the Management Agreement on the part of Borrower to be performed and observed, and (c) promptly deliver to Lender a copy of each financial statement, business plan, capital expenditures plan, report and estimate received by it under the Management Agreement. If Borrower shall default in the performance or observance of any material term, covenant or condition of the Management Agreement on the part of Borrower to be performed or observed, then, without limiting Lender’s other rights or remedies under this Agreement or the other Loan Documents, and without waiving or releasing Borrower from any of its obligations hereunder or under the Management Agreement, Lender shall have the right, but shall be under no obligation, to pay any sums and to perform any act as may be appropriate to cause all the material terms, covenants and conditions of the Management Agreement on the part of Borrower to be performed or observed.

          Section 7.2 The Franchise Agreement. Borrower shall (a) diligently perform and observe all of the terms, covenants and conditions of the Franchise Agreement on the part of Borrower to be performed and observed, (b) promptly notify Lender of any notice to Borrower of any default by Borrower in the performance or observance of any of the terms, covenants or conditions of the Franchise Agreement on the part of Borrower to be performed and observed, and (c) promptly deliver to Lender a copy of each financial statement, business plan, capital expenditures plan, report and estimate received by it under the Franchise Agreement. If Borrower shall default in the performance or observance of any material term, covenant or condition of the Franchise Agreement on the part of Borrower to be perfornied or observed, then, without limiting Lender’s other rights or remedies under this Agreement or the other Loan Documents, and without waiving or releasing Borrower from any of its obligations hereunder or

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under the Franchise Agreement, Lender shall have the right, but shall be under no obligation, to pay any sums and to perform any act as may be appropriate to cause all the material terms, covenants and conditions of the Franchise Agreement on the part of Borrower to be peifoinied or observed.

          Section 7.3 Prohibition Against Termination or Modification. (a) Borrower shall not surrender, terminate, cancel, modify, renew, amend or extend the Management Agreement, or enter into any other agreement relating to the management or operation of the Property with Manager or any other Person, or consent to the assignment by the Manager of its interest under the Management Agreement, in each case without the express consent of Lender, which consent shall not be unreasonably withheld; provided, however, with respect to a new manager such consent may be conditioned upon Borrower delivering a Rating Agency Confirmation as to such new manager and management agreement and, if such new manager is an Affiliate of Borrower, upon delivery of a non-consolidation opinion acceptable to the Rating Agencies. If at any time Lender consents to the appointment of a new manager, such new manager and Borrower shall, as a condition of Lender’s consent, execute a subordination of management agreement in the form then used by Lender.

          (b) Borrower shall not surrender, terminate, cancel, modify, renew, amend or extend the Franchise Agreement, or enter into any other agreement relating to the management or operation of the Property with Franchisor or any other Person, or consent to the assignment by the Franchisor of its interest under the Franchise Agreement (except to the extent such assignment is permitted thereunder), in each case without the express consent of Lender, which consent shall not be unreasonably withheld; provided, however, with respect to a new franchisor such consent may be conditioned upon Borrower delivering a Rating Agency Confirmation as to such new franchisor and franchise agreement and, if such new franchisor is an Affiliate of Borrower, upon delivery of a non-consolidation opinion acceptable to the Rating Agencies. If at any time Lender consents to the appointment of a new franchisor, such new franchisor and Borrower shall, as a condition of Lender’s consent, execute a subordination of franchise agreement in the form of the comfort letter delivered to Lender on the Closing Date or the form of comfort letter then used by such new franchisor subject to the reasonable approval of Lender.

          Section 7.4 Replacement of Manager. Lender shall have the right to require Borrower to replace the Manager with a Person which is not an Affiliate of, but is chosen by, Borrower and approved by Lender upon the occurrence of any one or more of the following events: (a) at any time following the occurrence of an Event of Default and/or (b) if Manager shall be in default under the Management Agreement beyond any applicable notice and cure period or if at any time the Manager has engaged in gross negligence, fraud or willful misconduct.

          Section 7.5 Matters Concerning Franchisor. If (i) Franchisor shall become bankrupt or insolvent or (ii) a default on the part of Franchisor occurs under the Franchise Agreement beyond all applicable notice and cure period which would give Borrower the right to terminate the Franchise pursuant to the teinis thereof, Borrower shall, at the request of Lender, shall use diligent good faith efforts to terminate the Franchise Agreement, and upon the effectiveness of any such termination replace the Franchisor with a franchisor selected by Borrower and approved by Lender on terms and conditions satisfactory to Lender, it being

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understood and agreed that the franchise fee for such replacement franchisor shall not exceed then prevailing market rates.

          VIII. PERMITTED TRANSFERS

          Section 8.1 Transfer or Encumbrance of Property. (a) Unless the same is a Permitted Transfer, without the prior written consent of Lender, neither Borrower nor any other Person having an ownership or beneficial interest in Borrower shall (i) directly or indirectly sell, transfer, convey, mortgage, pledge, or assign the Property, any part thereof or any interest therein (including any partnership or any other ownership interest in Borrower); (ii) further encumber, alienate, grant a Lien or grant any other interest in the Property or any part thereof (including any partnership or other ownership interest in Borrower), whether voluntarily or involuntarily; or (iii) enter into any easement or other agreement granting rights in or restricting the use or development of the Property.

          (b) As used in this Article VIII, ”transfer” shall include (i) an installment sales agreement wherein Borrower agrees to sell the Property or any part thereof for a price to be paid in installments; (ii) an agreement by Borrower leasing all or a substantial part of the Property for other than actual occupancy by a space tenant thereunder or a sale, assignment or other transfer of, or the grant of a security interest in, Borrower’s right, title and interest in and to any Leases or any Rents; (iii) if Borrower or any general partner or managing member of Borrower is a corporation, the voluntary or involuntary sale, conveyance or transfer of such corporation’s stock (or the stock of any corporation directly or indirectly controlling such corporation by operation of law or otherwise) or the creation or issuance of new stock such that such corporation’s stock shall be vested in a party or parties who are not now stockholders or any change in the control of such corporation; and (iv) if Borrower or any general partner or managing member of Borrower is a limited or general partnership, joint venture or limited liability company, the change, removal, resignation or addition of a general partner, managing partner, limited partner, joint venturer or member or the transfer of the partnership interest of any general partner, managing partner or limited partner or the transfer of the interest of any joint venture or member.

          (c) Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default hereunder in order to declare the Debt immediately due and payable upon Borrower’s sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property, other than a Permitted Transfer, without Lender’s consent. This provision shall apply to every sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property, other than a Permitted Transfer, regardless of whether voluntary or not, or whether or not Lender has consented to any previous sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property.

          (d) Lender’s consent to one sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property for which Lender’s consent is required shall not be deemed to be a waiver of Lender’s right to require such consent to any future occurrence of same for which Lender’s consent is required. Any sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property made in contravention of this paragraph shall be null and void and of no force and effect.

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          (e) Borrower agrees to bear and shall pay or reimburse Lender on demand for all reasonable expenses (including, without limitation, reasonable attorneys’ fees and disbursements, title search costs and title insurance endorsement premiums) incurred by Lender in connection with the review, approval and documentation of any such sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer.

          (f) Lender’s consent to the sale or transfer of the Property will not be unreasonably withheld if after consideration of all relevant factors and provided that Borrower satisfies the following conditions:

     (i) no Event of Default or event which with the giving of notice or the passage of time would constitute an Event of Default shall have occurred and remain uncured;

     (ii) the proposed transferee (“Transferee”) shall be a reputable entity or person of good character, creditworthy, with sufficient financial worth considering the obligations assumed and undertaken, as evidenced by financial statements and other infoitnation reasonably requested by Lender;

     (iii) the Transferee and its property manager shall have sufficient experience in the ownership and management of properties similar to the Property, and Lender shall be provided with reasonable evidence thereof (and Lender reserves the right to approve the Transferee without approving the substitution of the property manager);

     (iv) Lender shall have received confirmation in writing from the Rating Agencies to the effect that such transfer will not result in a re-qualification, reduction or withdrawal of any rating initially assigned or to be assigned in a Securitization;

     (v) Lender shall have received evidence satisfactory to it (which shall include a legal non-consolidation opinion acceptable to Lender) that the single purpose nature and bankruptcy remoteness of Borrower its shareholders, partners, or members, as the case may be, following such transfers are in accordance with the standards of the Rating Agencies;

     (vi) the Transferee shall have executed and delivered to Lender an assumption agreement in form and substance acceptable to Lender, evidencing such Transferee’s agreement to abide and be bound by the terms of the Note, the Mortgage and the other Loan Documents, together with such legal opinions and title insurance endorsements as may be reasonably requested by Lender;

     (vii) Lender shall have received on or prior to the date of the sale or transfer (A) an assumption fee equal to one percent (1%) of the then unpaid principal balance of the Note, (B) a rating confirmation fee for each of the Rating Agencies delivering a confirmation pursuant to clause (iv) above, which confirmation fees shall be equal to the then customary fees charged by each applicable Rating Agency for such a confirmation and (C) the payment of all costs and expenses incurred by Lender and the Rating Agencies in connection with such assumption (including reasonable attorneys’ fees and costs); and

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     (viii) the Transferee and Borrower shall company with the provisions of Section 3.1.41 hereof.

          (g) In addition, Lender’s consent shall not be required with respect to the following Transfers (each, a “Permitted Transfer”):

     (i) the one time conveyance of the entire Property (a) to a Permitted Transferee provided that Borrower and such Transferee complies with the conditions set forth in clauses (i) through (viii) in Section 8.1(f) above;

     (ii) (A) a transfer, in one or a series of related transactions, of not more than forty-nine percent (49%) of the stock, general partnership interest or managing membership interest (as the case may be) in a Restricted Party; provided, however, no such transfers shall result in the change of voting control in the Restricted Party, and as a condition to each such transfer, Lender shall receive written notice of such transfer not less than thirty (30) days prior written notice of such proposed transfer, (B) a transfer, in one or a series of related transactions, of not more than forty-nine percent (49%) of the limited partnership interests or non-managing membership interests (as the case may be) in a Restricted Party; provided, however, as a condition to each such transfer, Lender shall receive written notice of such transfer not less than thirty (30) days prior written notice of such proposed transfer; provided; however, with respect to any such transfers under clauses (A) and (B) above, at all times, Interstate Hotels & Resorts, Inc. (“IHR”) shall continue to control Borrower and own directly or indirectly 51 % of the legal and beneficial interest in Borrower;

     (iii) the merger or consolidation of IHR, Interstate Operating Company, LP (“IOC”), and/or Interstate Property Corporation (“IPC”) provided, that: (A) after such merger, consolidation, Borrower and Principal shall continue to comply with the terms of Section 3.1.24 hereof, (B) following such merger or reorganization IHR shall Control and own, directly or indirectly, not less than 51% of the direct or indirect legal and beneficial ownership interests of Borrower, IOC, IPC and Principal, or such merger or consolidation is to a Permitted Transferee or to a Person Controlled by a Permitted Transferee which Permitted Transferee shall Control and own, directly or indirectly, not less than 51% of the direct or indirect legal and beneficial ownership interests of Borrower and Principal, and (C) the surviving entity is primarily involved in, or has a significant business line involving, the ownership and operation of real estate similar to the Property; and

     (iv) (A) the issuance or sale of stock in IHR; (B) the issuance or sale of limited partnership interests in IOC, provided that with respect to the issuance or sale of limited partnership interests in IOC, immediately after such issuance or sale IHR shall continue to Control and own, directly or indirectly, not less than 51% of the direct or indirect legal and beneficial interests in IOC, Borrower and Principal; (C) the issuance or sale of stock in IPC, provided that with respect to the issuance or sale of stock in IPC, immediately after such issuance or sale IHR shall continue to Control and own, directly or indirectly, not less than 51% of the direct or indirect legal and beneficial interests in IPC, Borrower and Principal, or (D) the sale, transfer, alienation, pledge, mortgaging, granting of a security interest in, hypothecation or encumbrance of any partnership

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interest in IOC to a Permitted Transferee which is not directly or indirectly owned legally or beneficially by IHR, provided that after any such sale, transfer, alienation, pledge or encumbrance IHR shall continue to Control and own, directly or indirectly, not less than 51% of the direct or indirect legal and beneficial interests in IOC, Borrower and Principal.

          IX. SALE AND SECURITIZATION OF MORTGAGE

          Section 9.1 Sale of Mortgage and Securitization. (a) Lender shall have the right (i) to sell or otherwise transfer the Loan or any portion thereof as a whole loan, (ii) to sell participation interests in the Loan or (iii) to securitize the Loan or any portion thereof in one or more private or public single-asset or pooled-loan securitizations. (The transactions referred to in clauses (i), (ii) and (iii) shall hereinafter be referred to collectively as “Secondary Market Transactions” and the transaction referred to in clause (iii) shall hereinafter be referred to as a “Securitization.” Any certificates, notes or other securities issued in connection with a Securitization are hereinafter referred to as “Securities”).

          (b) If requested by Lender, Borrower shall assist Lender in satisfying the market standards to which Lender customarily adheres or which may be reasonably required in the marketplace or by the Rating Agencies in connection with any Secondary Market Transactions, including, without limitation, to:

     (i) (A) provide updated financial and other information with respect to the Property, the business operated at the Property, Borrower and the Manager, (B) provide updated budgets relating to the Property and (C) provide updated appraisals, market studies, environmental reviews (Phase I’s and, if appropriate, Phase II’s), property condition reports and other due diligence investigations of the Property (the “Updated Information”), together with appropriate verification of the Updated Information through letters of auditors or opinions of counsel acceptable to Lender and the Rating Agencies;

     (ii) provide opinions of counsel, which may be relied upon by Lender, the Rating Agencies and their respective counsel, agents and representatives, as to non-consolidation, fraudulent conveyance, and “true sale” or any other opinion customary in Secondary Market Transactions or required by the Rating Agencies with respect to the Property and Borrower and Affiliates, which counsel and opinions shall be satisfactory to Lender and the Rating Agencies;

     (iii) provide updated, as of the closing date of the Secondary Market Transaction, representations and warranties made in the Loan Documents and such additional representations and warranties as the Rating Agencies may require (provided, however, that Borrower shall only be required to provide such updated or additional representations and warranties to the extent the same are then true and correct and to the extent not then true and correct shall provide an explanation satisfactory to Lender with respect thereto);

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     (iv) execute such amendments to the Loan Documents and Borrower’s organizational documents reasonably requested by Lender, including, without limitation, the modification of all operative dates (including, without limitation, the Monthly Payment Date, the Interest Period, the Determination Date and the Maturity Date) under the Loan Documents by up to ten (10) days (such modification a “Re-Dating”), the execution of one or more replacement loan agreements, as may be requested by Lender or the Rating Agencies to effect the Securitization and/or deliver one or more new component notes to replace the original note or modify the original note to reflect multiple components of the Loan (and such new notes or modified note shall initially have the same weighted average coupon of the original note, but such new notes or modified note may change the interest rate, Monthly Payment Date and amortization of the Loan), such that the pricing and marketability of the Securities and the size of each class of Securities and the rating assigned to each such class by the Rating Agencies shall provide the most favorable rating levels and achieve the optimum rating levels for the Loan; provided, however, any such amendments or agreements will not materially alter the payment terms set forth in this Agreement or the other Loan Documents or materially and adversely affect Borrower or reduce in a material manner Borrower’s rights under this Agreement and the other Loan Documents, or impose additional material obligations or liabilities upon Borrower or materially reduce the rights of Borrower. In connection with a Securitization, Borrower shall cooperate with Lender to implement any Re-Dating (including obtaining a modification of any Interest Rate Cap Agreement), and to satisfy all requirements of each of the Rating Agencies with respect to the Loan and the Securitization as required by this Section 9.1. If Borrower shall fail to cooperate with Lender as set forth in this Section 9.1 within ten (10) Business Days of each initial request by Lender, Lender is hereby appointed as Borrower’s attorney in fact to execute any and all documents necessary to accomplish the Re-Dating, including, without limitation, obtaining a modification of any Interest Rate Cap Agreement. For purposes of this subsection (v), (y) the phrase “initial request” shall mean the initial request made by Lender with respect to a particular issue with reasonable specificity and shall include all related issues arising directly or logically therefrom such that issues arising directly or logically therefrom shall not serve to extend the ten (10) Business Day deadline imposed pursuant to this subsection (v) and (z) the ten (10) Business Day deadline referred to in this subsection (v) shall be extended with respect to any “initial request” to the extent reasonably necessary to enable Borrower to comply with such request. Notwithstanding the foregoing, in the event that the Securitization is a participation or syndication of the Loan, then for so long as UBS retains an ownership interest in the Loan, which interest is not immaterial, Borrower shall deal solely with UBS and the Servicer of UBS for all purposes under this Agreement and the other Loan Documents, provided that Borrower shall cooperate with UBS with respect to reasonable requests made to UBS by any of the other interest holders in the Loan.

     (v) attend management meetings and conduct tours of the Property.

          (c) If, at the time one or more Disclosure Documents are being prepared for a securitization, Lender reasonably expects that Borrower alone or Borrower and one or more affiliates of Borrower collectively, or the Property alone or the Property and any other parcel(s) of real property, together with improvements thereon and personal property related thereto, that

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is “related”, within the meaning of the definition of Significant Obligor, to the Property (a “Related Property”) collectively, will be a Significant Obligor, Borrower shall furnish to Lender upon request (1) the selected financial data or, if applicable, net operating income, required under Item 1112(b)(1) of Regulation AB and meeting the requirements thereof, if Lender expects that the principal amount of the Loan, together with any loans made to an affiliate of Borrower or secured by a Related Property that is included in a securitization with the Loan (a “Related Loan”), as of the cut-off date for such securitization may, or if the principal amount of the Loan together with any Related Loans as of the cut-off date for such securitization and at any time during which the Loan and any Related Loans are included in a securitization does, equal or exceed ten percent (10%) (but less than twenty percent (20%)) of the aggregate principal amount of all mortgage loans included or expected to be included, as applicable, in the securitization or (ii) the financial statements required under Item 1112(b)(2) of Regulation AB and meeting the requirements thereof, if Lender expects that the principal amount of the Loan together with any Related Loans as of the cut-off date for such securitization may, or if the principal amount of the Loan together with any Related Loans as of the cut-off date for such securitization and at any time during which the Loan and any Related Loans are included in a securitization does, equal or exceed twenty percent (20%) of the aggregate principal amount of all mortgage loans included or expected to be included, as applicable, in the securitization. Such financial data or financial statements shall be furnished to Lender (A) within ten (10) Business Days after notice from Lender in connection with the preparation of Disclosure Documents for the securitization, (B) not later than thirty (30) days after the end of each fiscal quarter of Borrower and (C) not later than seventy-five (75) days after the end of each fiscal year of Borrower; provided, however, that Borrower shall not be obligated to furnish financial data or financial statements pursuant to clauses (B) or (C) of this sentence with respect to any period for which a filing pursuant to the Securities Exchange Act of 1934 in connection with or relating to the securitization (an “Exchange Act Filing”) is not required. As used herein, “Regulation AB” shall mean Regulation AB under the Securities Act of 1933 and the Securities Exchange Act of 1934 (as amended). As used herein, “Disclosure Document” shall mean a prospectus, prospectus supplement, private placement memorandum, or similar offering memorandum or offering circular, in each case in preliminary or final form, used to offer securities in connection with a securitization. As used herein, “Significant Obligor” shall have the meaning set forth in Item 1101(k) of Regulation AB.

          (d) If requested by Lender, Borrower shall furnish, or shall cause the applicable tenant to furnish, to Lender financial data and/or financial statements in accordance with Regulation AB (as defined above) for any tenant of any Property if, in connection with a securitization, Lender expects there to be, with respect to such tenant or group of affiliated tenants, a concentration within all of the mortgage loans included or expected to be included, as applicable, in such securitization such that such tenant or group of affiliated tenants would constitute a Significant Obligor (as defined above); provided, however, that in the event the related lease does not require the related tenant to provide the foregoing information, Borrower shall use commercially reasonable efforts to cause the applicable tenant to furnish such information.

          (e) All reasonable third party costs and expenses incurred by Borrower in connection with Borrower’s complying with requests made under this Section 9.1 (including, without limitation, the fees and expenses of the Rating Agencies) shall be paid by Lender.

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          Section 9.2 Securitization Indemnification. (a) Borrower understands that information provided to Lender by Borrower and its agents, counsel and representatives may be included in disclosure documents in connection with the Securitization, including, without limitation, an offering circular, a prospectus, prospectus supplement, private placement memorandum or other offering document (each, an “Disclosure Document”) and may also be included in filings with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the “Securities Act”), or the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and may be made available to investors or prospective investors in the Securities (or any class thereof), the Rating Agencies, and service providers relating to the Securitization.

          (b) Borrower, within three (3) Business Days of receipt of an Disclosure Document, shall provide in connection with each of (i) a preliminary and a final private placement memorandum or (ii) a preliminary and final prospectus or prospectus supplement, as applicable, an agreement (A) certifying that Borrower has examined such Disclosure Documents specified by Lender and that each such Disclosure Document, as it relates to Borrower, Borrower Affiliates, the Property, Manager and all other aspects of the Loan, does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, (B) indemnifying Lender (and for purposes of this Section 9.2, Lender hereunder shall include its officers and directors), the Affiliate of Lender that has filed the registration statement relating to the Securitization (the “Registration Statement”), each of its directors, each of its officers who have signed the Registration Statement and each Person that controls the Affiliate within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively, the “Lender Group”), and Lender, and any other placement agent or underwriter with respect to the Securitization, each of their respective directors and each Person who controls Lender or any other placement agent or underwriter within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act (collectively, the “Underwriter Group”) for any losses, claims, damages or liabilities (collectively, the “Liabilities”) to which Lender, the Lender Group or the Underwriter Group may become subject insofar as the Liabilities arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such sections, all as they relate to Borrower, Borrower Affiliates, the Property, Manager and all other aspects of the Loan, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated in such sections or necessary in order to make the statements in such sections, in light of the circumstances under which they were made, not misleading, all as they relate to Borrower, Borrower Affiliates, the Property, Manager and all other aspects of the Loan, and (C) agreeing to reimburse Lender, the Lender Group and/or the Underwriter Group for any legal or other expenses reasonably incurred by Lender, the Lender Group and the Underwriter Group in connection with investigating or defending the Liabilities; provided, however, that Borrower will be liable in any such case under clause (B) or (C) above only to the extent that any such loss claim, damage or liability arises out of or is based upon any such untrue statement or omission made therein in reliance upon and in conformity with infouxiation furnished to Lender by or on behalf of Borrower in connection with the preparation of the Disclosure Document or in connection with the underwriting or closing of the Loan, including, without limitation, financial statements of Borrower, operating statements and rent rolls with respect to the Property. This indemnity agreement will be in addition to any liability which Borrower may otherwise have.

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          (c) In connection with Exchange Act Filings, Borrower shall (i) indemnify Lender, the Lender Group and the Underwriter Group for Liabilities to which Lender, the Lender Group or the Underwriter Group may become subject insofar as the Liabilities arise out of or are based upon the omission or alleged omission to state in the Disclosure Document a material fact required to be stated in the Disclosure Document in order to make the statements in the Disclosure Document, in light of the circumstances under which they were made, not misleading, all as they relate to Borrower, Borrower Affiliates, the Property, Manager and all other aspects of the Loan, and (ii) reimburse Lender, the Lender Group or the Underwriter Group for any legal or other expenses reasonably incurred by Lender, the Lender Group or the Underwriter Group in. connection with defending or investigating the Liabilities, all as they relate to Borrower, Borrower Affiliates, the Property, Manager and all other aspects of the Loan; provided, however, that Borrower will be liable in any such case under this subsection only to the extent that any such loss claim, damage or liability arises out of or is based upon any such untrue statement or omission made therein in reliance upon and in conformity with information furnished to Lender by or on behalf of Borrower in connection with the preparation of the Disclosure Document or in connection with the underwriting or closing of the Loan, including, without limitation, financial statements of Borrower, operating statements and rent rolls with respect to the Property.

          (d) Promptly after receipt by an indemnified party under this Section 9.2 of notice of the making of any claim or the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 9.2, notify the indemnifying party in writing thereof, but the omission to so notify the indemnifying party will not relieve the indemnifying party from any liability which the indemnifying party may have to any indemnified party hereunder except to the extent that failure to notify causes prejudice to the indemnifying party. In the event that any claim is made or action is brought against any indemnified party, and it notifies the indemnifying party, and such indemnified party seeks or intends to seek indemnity from the indemnifying party, of the commencement thereof, the indemnifying party will be entitled, jointly with any other indemnifying party, to participate therein and, to the extent that it (or they) may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. After notice from the indemnifying party to such indemnified party under this Section 9.2, such indemnified party shall pay for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there are any legal defenses available to it and/or other indemnified parties that are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assert such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party at the cost of the indemnifying party. The indemnifying party shall not be liable for the expenses of more than one separate counsel unless an indemnified party shall have reasonably concluded that there may be legal defenses available to it that are different from or additional to those available to another indemnified party.

          (e) In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in Section 9.2(b) or (e) is for any reason held to be

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unenforceable as to an indemnified party in respect of any losses, claims, damages or liabilities (or action in respect thereof) referred to therein which would otherwise be indemnifiable under Section 9.2(b) or (c), the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages or liabilities (or action in respect thereof); provided, however, that no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. In determining the amount of contribution to which the respective parties are entitled, the following factors shall be considered: (i) Lender’s and Borrower’s relative knowledge and access to information concerning the matter with respect to which the claim was asserted; (ii) the opportunity to correct and prevent any statement or omission; and (iii) any other equitable considerations appropriate in the circumstances. Lender and Borrower hereby agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation.

          (f) The liabilities and obligations of both Borrower and Lender under this Section 9.2 shall survive the termination of this Agreement and the satisfaction and discharge of the Debt.

          X. DEFAULTS

          Section 10.1 Event of Default. (a) Each of the following events shall constitute an event of default hereunder (an “Event of Default”):

     (i) if (A) any monthly installment of principal and/or interest due under the Note or the payment due on the Maturity Date is not paid when due or (B) any other portion of the Debt is not paid when due and such non-payment in Section 10.1(a)(i)(B) continues for ten (10) Business Days following notice to Borrower that the same is due and payable;

     (ii) subject to Borrower’s right to contest in Section 4.1.2 hereof, if any of the Taxes or Other Charges are not paid when due, unless the same were not paid by Lender pursuant to Section 6.2;

     (iii) if the Policies are not kept in full force and effect, unless the failure of such Policies to be in full force and effect were the result of Lender’s failure to pay the premiums therefore pursuant to Section 6.3;

     (iv) if Borrower breaches or permits or suffers a breach of Article 6 of the Mortgage;

     (v) if any representation or warranty made by Borrower herein or in any other Loan Document, or in any report, certificate, financial statement or other instrument, agreement or document furnished to Lender shall have been false or misleading in any material respect as of the date the representation or warranty was made (or, if such representation or warranty relates to an earlier date, then as of such earlier date);

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     (vi) if Borrower or any SPC Party shall make an assignment for the benefit of creditors;

     (vii) if Borrower fails or admits its inability to pay debts generally as they become due;

     (viii) if a receiver, liquidator or trustee shall be appointed for Borrower or any SPC Party or if Borrower or any SPC Party shall be adjudicated a bankrupt or insolvent, or if any petition for bankruptcy, reorganization or arrangement pursuant to federal bankruptcy law, or any similar federal or state law, shall be filed by or against, consented to, or acquiesced in by, Borrower or any SPC Party, or if any proceeding for the dissolution or liquidation of Borrower or any SPC Party shall be instituted; provided, however, if such appointment, adjudication, petition or proceeding was involuntary and not consented to by Borrower and SPC Party, upon the same not being discharged, stayed or dismissed within sixty (60) days or if an order for relief is entered;

     (ix) if Borrower attempts to assign its rights under this Agreement or any of the other Loan Documents or any interest herein or therein in contravention of the Loan Documents;

     (x) subject to Borrower’s right to contest Section 4.1.2 hereof, a default under any agreement the result of which creates a Lien or encumbrance on the Property which has not been satisfied within ten (10) days after creation thereof;

     (xi) if any of the assumptions contained in the Insolvency Opinion, or in any other non-consolidation opinion delivered to Lender in connection with the Loan, or in any other non-consolidation delivered subsequent to the closing of the Loan, is or shall become untrue in any material respect;

     (xii) if Borrower breaches any representation, warranty or covenant contained in Section 3.1.24 hereof, provided, however, such violation or breach shall not constitute an Event of Default in the event that (1) such violation or breach is not knowing and intentional, (2) such violation or breach is immaterial, (3) such violation or breach shall be remedied within a timely manner and (4) within fifteen (15) Business Days of the request of Lender, Borrower delivers to Lender an Additional Insolvency Opinion, or a modification of the Insolvency Opinion, to the effect that such breach or violation shall not change the opinions rendered in the Insolvency Opinion, which opinion or modification and any counsel delivering such opinion or modification shall be acceptable to Lender in its reasonable discretion;

     (xiii) intentionally omitted;

     (xiv) intentionally omitted;

     (xv) intentionally omitted;

     (xvi) if Borrower shall continue to be in Default under any of the other terms, covenants or conditions of this Agreement not specified in subsections (i) to (xv) above,

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for ten (10) days after notice to Borrower from Lender, in the case of any Default which can be cured by the payment of a sum of money, or for thirty (30) days after notice from Lender in the case of any other Default; provided, however, that if such non-monetary Default is susceptible of cure but cannot reasonably be cured within such thirty (30) day period and provided, further, that Borrower shall have commenced to cure such Default within such thirty (30) day period and thereafter diligently and expeditiously proceeds to cure the same, such thirty (30) day period shall be extended for such time as is reasonably necessary for Borrower in the exercise of due diligence to cure such Default, such additional period not to exceed sixty (60) days beyond the original thirty (30) day period;

     (xvii) if there shall be a Default under any of the other Loan Documents beyond any applicable cure periods contained in such Loan Documents, whether as to Borrower or the Property, or if any other such event shall occur or condition shall exist, if the effect of such event or condition is to accelerate the maturity of any portion of the Debt or to permit Lender to accelerate the maturity of all or any portion of the Debt;

     (xviii) if a material default has occurred and continues beyond any applicable cure period under the Franchise Agreement which default, permits the Franchisor to terminate or cancel the Franchise Agreement;

     (xix) if a material default has occurred and continues beyond any applicable cure period under the Management Agreement which default permits the Manager to terminate or cancel the Management Agreement;

     (xx) if Borrower ceases to do business as a hotel at the Property or terminates such business for any reason whatsoever (other than temporary cessation in connection with any continuous and diligent renovation or restoration of the Property following a Casualty or Condemnation); or

     (xxi) if Borrower fails to obtain or maintain an Interest Rate Protection Agreement or replacement thereof in accordance with Section 2.5 hereof.

          (b) Upon the occurrence of an Event of Default (other than an Event of Default described in Section 10.1(a)(vi), (vii) or (viii) above) and at any time thereafter Lender may, in addition to any other rights or remedies available to it pursuant to this Agreement and the other Loan Documents or at law or in equity, take such action, without notice or demand, that Lender deems advisable to protect and enforce its rights against Borrower and in and to the Property, including, without limitation, declaring the Debt to be immediately due and payable, and Lender may enforce or avail itself of any or all rights or remedies provided in the Loan Documents against Borrower and the Property, including, without limitation, all rights or remedies available at law or in equity; and upon any Event of Default described in Section 10.1(a)(vi), (vii) or (viii) above, the Debt and all other obligations of Borrower hereunder and under the other Loan Documents shall immediately and automatically become due and payable, without notice or demand, and Borrower hereby expressly waives any such notice or demand, anything contained herein or in any other Loan Document to the contrary notwithstanding.

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          Section 10.2 Remedies. (a) Upon the occurrence and during the continuance of an Event of Default, all or any one or more of the rights, powers, privileges and other remedies available to Lender against Borrower under this Agreement or any of the other Loan Documents executed and delivered by, or applicable to, Borrower or at law or in equity may be exercised by Lender at any time and from time to time, whether or not all or any of the Debt shall be declared due and payable, and whether or not Lender shall have commenced any foreclosure proceeding or other action for the enforcement of its rights and remedies under any of the Loan Documents with respect to the Property. Any such actions taken by Lender shall be cumulative and concurrent and may be pursued independently, singly, successively, together or otherwise, at such time and in such order as Lender may determine in its sole discretion, to the fullest extent permitted by law, without impairing or otherwise affecting the other rights and remedies of Lender permitted by law, equity or contract or as set forth herein or in the other Loan Documents. Without limiting the generality of the foregoing, if an Event of Default is continuing (i) Lender is not subject to any “one action” or “election of remedies” law or rule, and (ii) all liens and other rights, remedies or privileges provided to Lender shall remain in full force and effect until Lender has exhausted all of its remedies against the Property and the Mortgage has been foreclosed, sold and/or otherwise realized upon in satisfaction of the Debt or the Debt has been paid in full.

          (b) Lender shall have the right from time to time to partially foreclose the Mortgage in any manner and for any amounts secured by the Mortgage then due and payable as determined by Lender in its sole discretion including, without limitation, the following circumstances: (i) in the event Borrower defaults beyond any applicable grace period in the payment of one or more scheduled payments of principal and interest, Lender may foreclose the Mortgage to recover such delinquent payments, or (ii) in the event Lender elects to accelerate less than the entire outstanding principal balance of the Loan, Lender may foreclose the Mortgage to recover so much of the principal balance of the Loan as Lender may accelerate and such other sums secured by the Mortgage as Lender may elect. Notwithstanding one or more partial foreclosures, the Property shall remain subject to the Mortgage to secure payment of sums secured by the Mortgage and not previously recovered.

          (c) Subject to Section 9.1 (except if in connection with an Event of Default) Lender shall have the right from time to time to sever the Note and the other Loan Documents into one or more separate notes, mortgages and other security documents (the “Severed Loan Documents”) in such denominations as Lender shall determine in its sole discretion for purposes of evidencing and enforcing its rights and remedies provided hereunder. Borrower shall execute and deliver to Lender from time to time, promptly after the request of Lender, a severance agreement and such other documents as Lender shall request in order to effect the severance described in the preceding sentence, all in form and substance reasonably satisfactory to Lender. From and after and during the continuance of an Event of Default, Borrower hereby absolutely and irrevocably appoints Lender as its true and lawful attorney, coupled with an interest, in its name and stead to make and execute all documents necessary or desirable to effect the aforesaid severance, Borrower ratifying all that its said attorney shall do by virtue thereof; provided, however, Lender shall not make or execute any such documents under such power until three (3) days after notice has been given to Borrower by Lender of Lender’s intent to exercise its rights under such power. Provided no Event of Default has occurred and is continuing, (i) Borrower shall not be obligated to pay any costs or expenses incurred in connection with the preparation,

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execution, recording or filing of the Severed Loan Documents, (ii) the Severed Loan Documents shall not contain any representations, warranties or covenants not contained in the Loan Documents and any such representations and warranties contained in the Severed Loan Documents will be given by Borrower only as of the Closing Date and (iii) the Severed Loan Documents will not materially increase the Borrower’s obligations under this Agreement and the other Loan Documents nor materially increase the Borrower’s rights under this Agreement and the other Loan Documents.

          (d) Any amounts recovered from the Property or any other collateral for the Loan after an Event of Default may be applied by Lender toward the payment of any interest and/or principal of the Loan and/or any other amounts due under the Loan Documents in such order, priority and proportions as Lender in its sole discretion shall determine.

          Section 10.3 Right to Cure Defaults. From and after and during the continuance of an Event of Default, Lender may, but without any obligation to do so and without notice to or demand on Borrower and without releasing Borrower from any obligation hereunder or being deemed to have cured any Event of Default hereunder, make, do or perform any obligation of Borrower hereunder in such manner and to such extent as Lender may deem necessary. From and after and during the continuance of an Event of Default, Lender is authorized to enter upon the Property for such purposes, or appear in, defend, or bring any action or proceeding to protect its interest in the Property for such purposes, and the cost and expense thereof (including reasonable attorneys’ fees to the extent permitted by law), with interest as provided in this Section 10.3, shall constitute a portion of the Debt and shall be due and payable to Lender upon demand. All such costs and expenses incurred by Lender in remedying such Event of Default or such failed payment or act or in appearing in, defending, or bringing any action or proceeding shall bear interest at the Default Rate, for the period after such cost or expense was incurred into the date of payment to Lender. All such costs and expenses incurred by Lender together with interest thereon calculated at the Default Rate shall be deemed to constitute a portion of the Debt and be secured by the liens, claims and security interests provided to Lender under the Loan Documents and shall be immediately due and payable upon demand by Lender therefore.

          Section 10.4 Remedies Cumulative. The rights, powers and remedies of Lender under this Agreement shall be cumulative and not exclusive of any other right, power or remedy which Lender may have against Borrower pursuant to this Agreement or the other Loan Documents, or existing at law or in equity or otherwise. Lender’s rights, powers and remedies may be pursued singly, concurrently or otherwise, at such time and in such order as Lender may determine in Lender’s sole discretion. No delay or omission to exercise any remedy, right or power accruing upon an Event of Default shall impair any such remedy, right or power or shall be construed as a waiver thereof, but any such remedy, right or power may be exercised from time to time and as often as may be deemed expedient. A waiver of one Default or Event of Default with respect to Borrower shall not be construed to be a waiver of any subsequent Default or Event of Default by Borrower or to impair any remedy, right or power consequent thereon.

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          XI. MISCELLANEOUS

          Section 11.1 Successors and Assigns. All covenants, promises and agreements in this Agreement, by or on behalf of Borrower, shall inure to the benefit of the legal representatives, successors and assigns of Lender.

          Section 11.2 Lender’s Discretion. Whenever pursuant to this Agreement Lender exercises any right given to it to approve or disapprove, or any arrangement or term is to be satisfactory to Lender, the decision of Lender to approve or disapprove or to decide whether arrangements or terms are satisfactory or not satisfactory shall (except as is otherwise specifically herein provided) be in the sole discretion of Lender and shall be final and conclusive. Prior to a Securitization, whenever pursuant to this Agreement the Rating Agencies are given any right to approve or disapprove, or any arrangement or term is to be satisfactory to the Rating Agencies, the decision of Lender to approve or disapprove or to decide whether arrangements or terms are satisfactory or not satisfactory, based upon Lender’s determination of Rating Agency criteria, shall be substituted therefore.

          Section 11.3 Governing Law. (A) THIS AGREEMENT WAS NEGOTIATED IN THE STATE OF NEW YORK, AND MADE BY LENDER AND ACCEPTED BY BORROWER IN THE STATE OF NEW YORK, AND THE PROCEEDS OF THE NOTE DELIVERED PURSUANT HERETO WERE DISBURSED FROM THE STATE OF NEW YORK, WHICH STATE THE PARTIES AGREE HAS A SUBSTANTIAL RELATIONSHIP TO THE PARTIES AND TO THE UNDERLYING TRANSACTION EMBODIED HEREBY, AND IN ALL RESPECTS, INCLUDING, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE (WITHOUT REGARD TO PRINCIPLES OF CONFLICT LAWS) AND ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA, EXCEPT THAT AT ALL TIMES THE PROVISIONS FOR THE CREATION, PERFECTION, AND ENFORCEMENT OF THE LIENS AND SECURITY INTERESTS CREATED WITH RESPECT TO THE PROPERTY PURSUANT TO THE MORTGAGE AND THE ASSIGNMENT OF LEASES SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE IN WHICH THE PROPERTY IS LOCATED, AS AND TO THE EXTENT PROVIDED IN THE MORTGAGE AND THE ASSIGNMENT OF LEASES, IT BEING UNDERSTOOD THAT, TO THE FULLEST EXTENT PERMITTED BY THE LAW OF SUCH STATE, THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE CONSTRUCTION, VALIDITY AND ENFORCEABILITY OF ALL LOAN DOCUMENTS AND ALL OF THE OBLIGATIONS ARISING HEREUNDER OR THEREUNDER. TO THE FULLEST EXTENT PERMITTED BY LAW, BORROWER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT AND THE NOTE, AND THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY AND CONSTRUED IN

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ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

          (B) ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER OR BORROWER ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY AT LENDER’S OPTION BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN THE CITY OF NEW YORK, COUNTY OF NEW YORK, PURSUANT TO SECTION 54402 OF THE NEW YORK GENERAL OBLIGATIONS LAW AND BORROWER WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING. BORROWER DOES HEREBY DESIGNATE AND APPOINT:

DECAMPO, DIAMOND & ASH
747 THIRD AVENUE
37TH FLOOR
NEW YORK, NY 10017
ATTENTION: WILLIAM H. DIAMOND, ESQ.

AS ITS AUTHORIZED AGENT TO ACCEPT AND ACKNOWLEDGE ON ITS BEHALF SERVICE OF ANY AND ALL PROCESS WHICH MAY BE SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY FEDERAL OR STATE COURT IN NEW YORK, NEW YORK, AND AGREES THAT SERVICE OF PROCESS UPON SAID AGENT AT SAID ADDRESS AND WRITTEN NOTICE OF SAID SERVICE MAILED OR DELIVERED TO BORROWER IN THE MANNER PROVIDED HEREIN SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON BORROWER, IN ANY SUCH SUIT, ACTION OR PROCEEDING IN THE STATE OF NEW YORK. BORROWER (I) SHALL GIVE PROMPT NOTICE TO LENDER OF ANY CHANGED ADDRESS OF ITS AUTHORIZED AGENT HEREUNDER, (II) MAY AT ANY TIME AND FROM TIME TO TIME DESIGNATE A SUBSTITUTE AUTHORIZED AGENT WITH AN OFFICE IN NEW YORK, NEW YORK (WHICH SUBSTITUTE AGENT AND OFFICE SHALL BE DESIGNATED AS THE PERSON AND ADDRESS FOR SERVICE OF PROCESS), AND (III) SHALL PROMPTLY DESIGNATE SUCH A SUBSTITUTE IF ITS AUTHORIZED AGENT CEASES TO HAVE AN OFFICE IN NEW YORK, NEW YORK OR IS DISSOLVED WITHOUT LEAVING A SUCCESSOR.

          Section 11.4 Modification, Waiver in Writing. No modification, amendment, extension, discharge, termination or waiver of any provision of this Agreement or of any other Loan Document, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in a writing signed by the party against whom enforcement is sought, and then such waiver or consent shall be effective only in the specific instance, and for the purpose, for which given. Except as otherwise expressly provided herein, no notice to, or demand on Borrower, shall entitle Borrower to any other or future notice or demand in the same, similar or other circumstances..

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          Section 11.5 Delay Not a Waiver. Neither any failure nor any delay on the part of Lender in insisting upon strict performance of any term, condition, covenant or agreement, or exercising any right, power, remedy or privilege hereunder, or under any other Loan Document, shall operate as or constitute a waiver thereof, nor shall a single or partial exercise thereof preclude any other future exercise, or the exercise of any other right, power, remedy or privilege. In particular, and not by way of limitation, by accepting payment after the due date of any amount payable under this Agreement or any other Loan Document, Lender shall not be deemed to have waived any right either to require prompt payment when due of all other amounts due under this Agreement or the other Loan Documents, or to declare a default for failure to effect prompt payment of any such other amount. Lender shall have the right to waive or reduce any time periods that Lender is entitled to under the Loan Documents in its sole and absolute discretion.

          Section 11.6 Notices. All notices, demands, requests, consents, approvals or other communications (any of the foregoing, a “Notice”) required, permitted, or desired to be given hereunder shall be in writing sent by telefax (with answer back acknowledged) or by registered or certified mail, postage prepaid, return receipt requested, or delivered by hand or reputable overnight courier addressed to the party to be so notified at its address hereinafter set forth, or to such other address as such party may hereafter specify in accordance with the provisions of this Section 11.6. Any Notice shall be deemed to have been received: (a) three (3) days after the date such Notice is mailed, (b) on the date of sending by telefax if sent during business hours on a Business Day (otherwise on the next Business Day), (c) on the date of delivery by hand if delivered during business hours on a Business Day (otherwise on the next Business Day), and (d) on the next Business Day if sent by an overnight commercial courier, in each case addressed to the parties as follows:

If to Lender:	UBS REAL ESTATE SECURITIES INC.
	1285 Avenue of the Americas
	New York, New York 10019
	Attention: Jeffrey N. Lavine
	Facsimile No.: (212) 713-4062
with a copy to:	Cadwalader, Wickersham & Taft LLP
	One World Financial Center
	New York, New York 10281
	Attention: William P. McInerney, Esq.
	Facsimile No.: (212) 504-6666
If to Borrower:	INTERSTATE ARLINGTON, LP
	c/o Interstate Hotels & Resorts Inc.
	4501 North Fairfax Drive
	Arlington, VA 22203
	Attention: Christopher L. Bennett, Esq.
	Facsimile No.: (703) 542-0965

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with a copy to:	DECAMPO, DIAMOND & ASH
	747 Third Avenue
	37th Floor
	New York, NY 10017
	Attention: William H. Diamond, Esq.
	Facsimile No.: (973) 758-1728

          Section 11.7 Trial by Jury. BORROWER AND LENDER EACH HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THE LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY BORROWER AND LENDER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. EACH PARTY IS HEREBY AUTHORIZED TO HLE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER.

          Section 11.8 Headings. The Article and/or Section headings and the Table of Contents in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.

          Section 11.9 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

          Section 11.10 Preferences. Lender shall have the continuing and exclusive right to apply or reverse and reapply any and all payments by Borrower to any portion of the obligations of Borrower hereunder. To the extent Borrower makes a payment or payments to Lender, which payment or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the obligations hereunder or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment or proceeds had not been received by Lender.

          Section 11.11 Waiver of Notice. Borrower shall not be entitled to any notices of any nature whatsoever from Lender except with respect to matters for which this Agreement or the other Loan Documents specifically and expressly provide for the giving of notice by Lender to Borrower and except with respect to matters for which Borrower is not, pursuant to applicable Legal Requirements, permitted to waive the giving of notice. Borrower hereby expressly waives the right to receive any notice from Lender with respect to any matter for which this Agreement

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or the other Loan Documents do not specifically and expressly provide for the giving of notice by Lender to Borrower.

          Section 11.12 Remedies of Borrower. In the event that a claim or adjudication is made that Lender or its agents have acted unreasonably or unreasonably delayed acting in any case where, by law or under this Agreement or the other Loan Documents, Lender or such agent, as the case may be, has an obligation to act reasonably or promptly, neither Lender nor its agents shall be liable for any monetary damages, and Borrower’s sole remedy shall be limited to commencing an action seeking injunctive relief or declaratory judgment. Any action or proceeding to determine whether Lender has acted reasonably shall be determined by an action seeking declaratory judgment.

          Section 11.13 Expenses; Indemnity. (a) Borrower shall pay or, if Borrower fails to pay, reimburse Lender upon receipt of notice from Lender, for all reasonable costs and expenses (including reasonable attorneys’ fees and disbursements but excluding Lender’s internal costs of overhead) incurred by Lender in connection with (i) Borrower’s ongoing performance of and compliance with Borrower’s agreements and covenants contained in this Agreement and the other Loan Documents on its part to be performed or complied with after the Closing Date, including, without limitation, confirming compliance with environmental and insurance requirements; (ii) Lender’s ongoing performance of and compliance with all agreements and covenants contained in this Agreement and the other Loan Documents on its part to be performed or complied with after the Closing Date with respect to the negotiation, preparation, execution, delivery and administration of any consents, amendments, waivers or other modifications to this Agreement and the other Loan Documents and any other documents or matters requested by Borrower; (iii) the filing and recording fees and expenses, title insurance and reasonable fees and expenses of counsel for providing to Lender all required legal opinions, and other similar expenses incurred, in creating and perfecting the Liens in favor of Lender pursuant to this Agreement and the other Loan Documents; (iv) enforcing or preserving any rights, in response to third party claims or the prosecuting or defending of any action or proceeding or other litigation or otherwise, in each case against, under or affecting Borrower, this Agreement, the other Loan Documents, the Property, or any other security given for the Loan; and (v) enforcing any obligations of or collecting any payments due from Borrower under this Agreement, the other Loan Documents or with respect to the Property or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a “work-out” or of any insolvency or bankruptcy proceedings; provided, however, that Borrower shall not be liable for the payment of any such costs and expenses to the extent the same arise by reason of the gross negligence, illegal acts, fraud or willful misconduct of Lender. Any costs due and payable to Lender shall be paid to Lender within ten (10) days of Lender’s demand therefor.

          (b) Borrower shall indemnify, defend and hold harmless Lender and its officers, directors, agents, employees (and the successors and assigns of the foregoing) (the “Lender Indemnitees”) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for the Lender Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Lender Indemnitees shall be

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designated a party thereto), that may be imposed on, incurred by, or asserted against the Lender Indemnitees in any manner relating to or arising out of (i) any breach by Borrower of its obligations under, or any material misrepresentation by Borrower contained in, this Agreement or the other Loan Documents, or (ii) the use or intended use of the proceeds of the Loan (collectively, the “Indemnified Liabilities”); provided, however, that Borrower shall not have any obligation to the Lender Indemnitees hereunder to the extent that such Indemnified Liabilities arise from the gross negligence, illegal acts, fraud or willful misconduct of the Lender Indemnitees. To the extent that the undertaking to indemnify, defend and hold harmless set forth in the preceding sentence may be unenforceable because it violates any law or public policy, Borrower shall pay the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by the Lender Indemnitees.

          Section 11.14 Schedules Incorporated. The Schedules annexed hereto are hereby incorporated herein as a part of this Agreement with the same effect as if set forth in the body hereof.

          Section 11.15 Offsets, Counterclaims and Defenses. Any assignee of Lender’s interest in and to this Agreement and the other Loan Documents shall take the same free and clear of all offsets, counterclaims or defenses which are unrelated to such documents which Borrower may otherwise have against any assignor of such documents, and no such unrelated counterclaim or defense shall be interposed or asserted by Borrower in any action or proceeding brought by any such assignee upon such documents and any such right to interpose or assert any such unrelated offset, counterclaim or defense in any such action or proceeding is hereby expressly waived by Borrower.

          Section 11.16 No Joint Venture or Partnership; No Third Party Beneficiaries. (a) Borrower and Lender intend that the relationships created hereunder and under the other Loan Documents be solely that of borrower and lender. Nothing herein or therein is intended to create a joint venture, partnership, tenancy-in-common, or joint tenancy relationship between Borrower and Lender nor to grant Lender any interest in the Property other than that of mortgagee, beneficiary or lender.

          (b) This Agreement and the other Loan Documents are solely for the benefit of Lender and Borrower and nothing contained in this Agreement or the other Loan Documents shall be deemed to confer upon anyone other than Lender and Borrower any right to insist upon or to enforce the performance or observance of any of the obligations contained herein or therein. All conditions to the obligations of Lender to make the Loan hereunder are imposed solely and exclusively for the benefit of Lender and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that Lender will refuse to make the Loan in the absence of strict compliance with any or all thereof and no other Person shall under any circumstances be deemed to be a beneficiary of such conditions, any or all of which may be freely waived in whole or in part by Lender if, in Lender’s sole discretion, Lender deems it advisable or desirable to do so.

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          Section 11.17 Publicity. All news releases, publicity or advertising by Borrower or its Affiliates through any media intended to reach the general public which refers to the Loan Documents or the financing evidenced by the Loan Documents, to Lender or any of its Affiliates shall be subject to the prior written approval of Lender. Borrower authorizes Lender to issue press releases, advertisements and other promotional materials in connection with Lender’s own promotional and marketing activities, including in connection with a Secondary Market Transaction, and such materials may describe the Loan in general terms or in detail and Lender’s participation therein in the Loan. All references to Lender contained in any press release, advertisement or promotional material issued by Borrower shall be approved in writing by Lender in advance of issuance.

          Section 11.18 Waiver of Marshalling of Assets. To the fullest extent permitted by law, Borrower, for itself and its successors and assigns, waives all rights to a marshalling of the assets of Borrower, Borrower’s partners and others with interests in Borrower, and of the Property, and shall not assert any right under any laws pertaining to the marshalling of assets, the sale in inverse order of alienation, homestead exemption, the administration of estates of decedents, or any other matters whatsoever to defeat, reduce or affect the right of Lender under the Loan Documents to a sale of the Property for the collection of the Debt without any prior or different resort for collection or of the right of Lender to the payment of the Debt out of the net proceeds of the Property in preference to every other claimant whatsoever.

          Section 11.19 Waiver of Offsets/Defenses/Counterclaims. Borrower hereby waives the right to assert a counterclaim, other than a compulsory counterclaim, in any action or proceeding brought against it by Lender or its agents or otherwise to offset any obligations to make the payments required by the Loan Documents. No failure by Lender to perform any of its obligations hereunder shall be a valid defense to, or result in any offset against, any payments which Borrower is obligated to make under any of the Loan Documents.

          Section 11.20 Conflict; Construction of Documents; Reliance. In the event of any conflict between the provisions of this Agreement and any of the other Loan Documents, the provisions of this Agreement shall control. The parties hereto acknowledge that they were represented by competent counsel in connection with the negotiation, drafting and execution of the Loan Documents and that such Loan Documents shall not be subject to the principle of construing their meaning against the party which drafted same. Borrower acknowledges that, with respect to the Loan, Borrower shall rely solely on its own judgment and advisors in entering into the Loan without relying in any manner on any statements, representations or recommendations of Lender or any parent, subsidiary or Affiliate of Lender. Lender shall not be subject to any limitation whatsoever in the exercise of any rights or remedies available to it under any of the Loan Documents or any other agreements or instruments which govern the Loan by virtue of the ownership by it or any parent, subsidiary or Affiliate of Lender of any equity interest any of them may acquire in Borrower, and Borrower hereby irrevocably waives the right to raise any defense or take any action on the basis of the foregoing with respect to Lender’s exercise of any such rights or remedies. Borrower acknowledges that Lender engages in the business of real estate financings and other real estate transactions and investments which may be viewed as adverse to or competitive with the business of Borrower or its Affiliates.

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          Section 11.21 Brokers and Financial Advisors. Borrower hereby represents that it has dealt with no financial advisors, brokers, underwriters, placement agents, agents or finders in connection with the transactions contemplated by this Agreement. Borrower shall indemnify, defend and hold Lender harmless from and against any and all claims, liabilities, costs and expenses of any kind (including Lender’s expenses and reasonable attorneys’ fees) in any way relating to or arising from a claim by any Person that such Person acted on behalf of Borrower or Lender (which has been disclosed by Lender to Borrower) in connection with the transactions contemplated herein. The provisions of this Section 11.21 shall survive the expiration and termination of this Agreement and the payment of the Debt.

          Section 11.22 Exculpation. Notwithstanding anything to the contrary contained in this Agreement, in the Note or in any other Loan Document, but subject to the qualifications below, Lender shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in the Note, this Agreement, the Mortgage or the other Loan Documents by any action or proceeding wherein a money judgment shall be sought against Borrower, except that Lender may bring a foreclosure action, an action for specific performance or any other appropriate action or proceeding to enable Lender to enforce and realize upon its interest under the Note, this Agreement, the Mortgage and the other Loan Documents, or in the Property, the Rents, or any other collateral given to Lender pursuant to the Loan Documents; provided, however, that, except as specifically provided herein, any judgment in any such action or proceeding shall be enforceable against Borrower only to the extent of Borrower’s interest in the Property, in the Rents, Net Proceeds and in any other collateral given to Lender, and Lender, by accepting the Note, this Agreement, the Mortgage and the other Loan Documents, shall not sue for, seek or demand any deficiency judgment against Borrower in any such action or proceeding under or by reason of or under or in connection with the Note, this Agreement, the Mortgage or the other Loan Documents. The provisions of this Section shall not, however, (a) constitute a waiver, release or impairment of any obligation evidenced or secured by any of the Loan Documents; (b) impair the right of Lender to name Borrower as a party defendant in any action or suit for foreclosure and sale under the Mortgage; (c) affect the validity or enforceability of any guaranty made in connection with the Loan or any of the rights and remedies of Lender thereunder; (d) impair the right of Lender to obtain the appointment of a receiver; (e) impair the enforcement of the Assignment of Leases; (f) constitute a prohibition against Lender to seek a deficiency judgment against Borrower in order to fully realize the security granted by the Mortgage or to commence any other appropriate action or proceeding in order for Lender to exercise its remedies against the Property; or (g) constitute a waiver of the right of Lender to enforce the liability and obligation of Borrower, by money judgment or otherwise, to the extent of any loss, damage, cost, expense, liability, claim or other obligation incurred by Lender (including attorneys’ fees and costs reasonably incurred) arising out of or in connection with and Borrower shall be personally liable for the following:

     (i) fraud or intentional misrepresentation by Borrower or any guarantor in connection with the Loan;

     (ii) the gross negligence or willful misconduct of Borrower;

     (iii) the intentional breach of any representation, warranty, covenant or indemnification provision in the Environmental Indemnity or in the Mortgage concerning

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environmental laws, hazardous substances and asbestos and any indemnification of Lender with respect thereto in either document;

     (iv) the removal or disposal of any portion of the Property after an Event of Default;

     (v) the misapplication or conversion by Borrower of (A) any insurance proceeds paid by reason of any loss, damage or destruction to the Property, (B) any Awards or other amounts received in connection with the Condemnation of all or a portion of the Property, or (C) any Rents following an Event of Default or any Rents collected for more than one month in advance to the extent such Rents or any other payments in respect of the Leases and other income of the Property or any other collateral are not applied to the costs of maintenance and operation of the Property and to the payment of taxes, lien claims, insurance premiums, Debt Service and other amounts due under the Loan Documents;

     (vi) subject to the provisions of Section 4.1.2 of this Agreement, failure to pay and discharge any mechanic’s or materialmen’s Liens on any portion of the Property;

     (vii) any security deposits, advance deposits or any other deposits collected with respect to the Property which are not delivered to Lender upon a foreclosure of the Property or action in lieu thereof, except to the extent any such security deposits were applied in accordance with the terms and conditions of any of the Leases prior to the occurrence of the Event of Default that gave rise to such foreclosure or action in lieu thereof^.;

     (viii) Borrower’s indemnification of Lender set forth in Section 9.2 hereof;

     (ix) Subject to Sections 4.1.2, 6.2 6.3 and 7.1, Borrower’s failure to maintain insurance as required by this Agreement or to pay any Taxes or Other Charges affecting the Property;

     (x) damage or destruction to the Property caused by the gross negligence or willful misconduct of Borrower, its agents, employees, or contractors;

     (xi) any intentional failure of Borrower to maintain its status as a single purpose entity as required by, and in accordance with, the terms hereof;

     (xii) Borrower’s commission of a criminal act;

     (xiii) the breach of any representation, warranty or covenant set forth in Section 3.1.24 hereof; or

     (xiv) Borrower’s failure to permit on-site inspections of the Property, failure to provide financial information, failure to maintain its status as a single purpose entity or failure to appoint a new property manager upon the request of Lender after an Event of Default, each as required by, and in accordance with the terms and provisions of, this Agreement and the Mortgage;

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          Notwithstanding anything to the contrary in this Agreement, the Note or any of the Loan Documents, (A) Lender shall not be deemed to have waived any right which Lender may have under Section 506(a), 506(b), 1111(b) or any other provisions of the Bankruptcy Code to file a claim for the full amount of the Debt or to require that all collateral shall continue to secure all of the Debt owing to Lender in accordance with the Loan Documents, and (B) the Debt shall be fully recourse to Borrower in the event that: (i) Borrower fails to obtain Lender’s prior consent to any subordinate financing or other voluntary Lien encumbering the Property other than the Permitted Encumbrances or as otherwise specifically permitted by this Agreement; (ii) Borrower fails to obtain Lender’s prior consent to any assignment, transfer, or conveyance of the Property or any interest therein as required by the Mortgage or this Agreement other than to any such assignment, transfer or conveyance for which Lender’s consent is not required under this Agreement ; (iii) Borrower files a voluntary petition under the Bankruptcy code or any other Federal or state bankruptcy or insolvency law; (iv) an Affiliate, officer, director, or representative which controls, directly or indirectly, Borrower files, or joins in the filing of, an involuntary petition against Borrower under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law, or solicits or causes to be solicited petitioning creditors for any involuntary petition against Borrower from any Person; (v) Borrower files an answer consenting to or otherwise acquiescing in or joining in any involuntary petition filed against it, by any other Person under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law, or solicits or causes to be solicited petitioning creditors for any involuntary petition from any Person; (vi) any Affiliate, officer, director, or representative which controls Borrower consents to or acquiesces in or joins in an application for the appointment of a custodian, receiver, trustee, or examiner for Borrower or any portion of the Property; or (vii) Borrower makes an assignment for the benefit of creditors, or admits, in writing or in any legal proceeding, its insolvency or inability to pay its debts as they become due.

          Section 11.23 Prior Agreements. This Agreement and the other Loan Documents contain the entire agreement of the parties hereto and thereto in respect of the transactions contemplated hereby and thereby, and all prior agreements among or between such parties, whether oral or written, including, without limitation, the Application Letter dated January 29, 2007 between Borrower and Lender, are superseded by the terms of this Agreement and the other Loan Documents.

          Section 11.24 Servicer. (a) At the option of Lender, the Loan may be serviced by a servicer (the “Servicer”) selected by Lender and Lender may delegate all or any portion of its responsibilities under this Agreement and the other Loan Documents to the Servicer pursuant to a servicing agreement (the “Servicing Agreement”) between Lender and Servicer. Borrower shall be responsible for the monthly or annual servicing fees relating to or arising under the Servicing Agreement (such money or annual fees not to exceed one basis point (0.01%) of the original principal amount of the Loan). Servicer shall, however, be entitled to reimbursement of costs and expenses as and to the same extent (but without duplication) as Lender is entitled thereto under the applicable provisions of this Agreement and the other Loan Documents. Lender or Servicer shall deliver notice to Borrower of the appointment of such Servicer.

          (b) Servicer shall have the right to exercise all rights of Lender and enforce all obligations of Borrower pursuant to the provisions of this Agreement, the Note and the other Loan Documents.

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          (c) Provided Borrower shall have been given notice of Servicer’s address by Lender, Borrower shall deliver to Servicer duplicate originals of all notices and other instruments (other than promissory notes) which Borrower may or shall be required to deliver to Lender pursuant to this Agreement, the Note and the other Loan Documents (and no delivery of such notices or other instruments by Borrower shall be of any force or effect unless delivered to Lender and Servicer as provided above).

          Section 11.25 Joint and Several Liability. If more than one Person has executed this Agreement as “Borrower,” the representations, covenants, warranties and obligations of all such Persons hereunder shall be joint and several.

          Section 1126 Creation of Security Interest. Notwithstanding any other provision set forth in this Agreement, the Note, the Mortgage or any of the other Loan Documents, Lender may at any time create a security interest in all or any portion of its rights under this Agreement, the Note, the Mortgage and any other Loan Document (including, without limitation, the advances owing to it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System.

          Section 11.27 Assignments and Participations. (a) The Lender may assign to one or more Persons all or a portion of its rights and obligations under this Loan Agreement.

          (b) Upon such execution and delivery, from and after the effective date specified in such Assignment and Acceptance, the assignee thereunder shall be a party hereto and have the rights and obligations of Lender hereunder.

          (c) Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 11.27, disclose to the assignee or participant or proposed assignee or participant, as the case may be, any information relating to Borrower or any of its Affiliates or to any aspect of the Loan that has been furnished to the Lender by or on behalf of the Borrower or any of its Affiliates.

          Section 11.28 Intentionally Omitted.

          Section 11.29 Component Notes. (a) Borrower covenants and agrees that in connection with any Securitization of the Loan, upon Lender’s request and at Lender’s cost, Borrower shall deliver one or more new component notes to replace the original note or modify the original note to reflect multiple components of the Loan or create one or more additional mezzanine loans (including amending Borrower’s organizational structure to provide for one or more additional mezzanine borrowers) (each a “Resizing Event”). Lender agrees that such new notes or modified note or mezzanine notes shall immediately after the Resizing Event have the same initial weighted average coupon as the original note prior to such Resizing Event, notwithstanding that such new notes or modified note or mezzanine notes or may, in connection with the application of principal to such new notes or modified note or mezzanine notes, subsequently cause the weighted average spread of such new notes or modified note or mezzanine notes to change (but not increase, except that the weighted average spread may subsequently increase due to involuntary prepayments or if an Event of Default shall occur) and apply principal, interest rates and amortization of the Loan between such new components and/or

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mezzanine loans in a manner specified by Lender in its sole discretion such that the pricing and marketability of the Securities and the size of each class of Securities and the rating assigned to each such class by the Rating Agencies shall provide the most favorable rating levels and achieve the optimum bond execution for the Loan. In connection with any Resizing Event, Borrower covenants and agrees to resize the Interest Rate Protection Agreement to reflect the newly created components and/or mezzanine loans. Such Resizing Event shall not materially increase Borrower’s obligations or materially decrease Borrower’s rights hereunder.

          (b) It shall be an Event of Default under this Agreement, the Note, the Mortgage and the other Loan Documents if Borrower fails to comply with any of the terms, covenants or conditions of this Section 11.29 within ten (10) Business Days of notice thereof.

          Section 1130 Mezzanine Loan Option. Lender shall have the right, at no material cost to Borrower, at any time to divide the Loan into two parts (the “Mezzanine Option”): a mortgage loan (the “Mortgage Loan”) and a mezzanine loan (the “Mezzanine Loan”). The principal amount of the Mortgage Loan plus the principal amount of the Mezzanine Loan shall equal the outstanding principal balance of the Loan immediately prior to the creation of the Mortgage Loan and the Mezzanine Loan. In effectuating the foregoing, Lender (in its capacity as the lender under the Mezzanine Loan, the “Mezzanine Lender”) will make a loan to the direct or indirect owner of Borrower (in its capacity as the borrower under the Mezzanine Loan, the “Mezzanine Borrower”); Mezzanine Borrower will contribute the amount of the Mezzanine Loan to Borrower (in its capacity as Borrower under the Mortgage Loan, “Mortgage Borrower”) and Mortgage Borrower will apply the contribution to pay down the Loan to its Mortgage Loan amount. The Mortgage Loan and the Mezzanine Loan will be on the same terms and subject to the same conditions set forth in this Agreement, the Note, the Mortgage and the other Loan Documents and shall not increase Borrower’s obligations or decrease Borrower’s rights hereunder in a material manner except as follows:

          (a) Lender (in its capacity as the lender under the Mortgage Loan, the “Mortgage Lender”) shall have the right to establish different interest rates and debt service payments for the Mortgage Loan and the Mezzanine Loan and to require the payment of the Mortgage Loan and the Mezzanine Loan in such order of priority as may be designated by Lender; provided, that (i) the total loan amounts for the Mortgage Loan and the Mezzanine Loan shall equal the amount of the Loan immediately prior to the creation of the Mortgage Loan and the Mezzanine Loan and (ii) the initial weighted average spread of the Loan and any Mezzanine Loan following any such reallocation, modification or change shall equal the weighted average spread in effect immediately preceding such reallocation, modification or creation of any new Mezzanine Loan.

          (b) Mezzanine Borrower shall be a special purpose, bankruptcy remote entity pursuant to applicable Rating Agency criteria and shall own directly or indirectly one hundred percent (100%) of Mortgage Borrower. The security for the Mezzanine Loan shall be a pledge of one hundred percent (100%) of the direct and indirect ownership interests in Mortgage Borrower.

          (c) Mezzanine Borrower and Mortgage Borrower shall cooperate with all reasonable requests of Lender in order to convert the Loan into a Mortgage Loan and a

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Mezzanine Loan and shall execute and deliver such documents as shall reasonably be required by Lender and any Rating Agency in connection therewith, including, without limitation, the delivery of non-consolidation opinions and the modification of organizational documents and loan documents. In the event Mortgage Borrower and/or Mezzanine Borrower fail to execute and deliver such documents to Lender within five (5) Business Days (as may be reasonably extended by Lender upon Borrower’s request) following such request by Lender, Mortgage Borrower and/or Mezzanine Borrower, as applicable, hereby absolutely and irrevocably appoint Lender as their true and lawful attorney, coupled with an interest, in their name and stead to make and execute all documents necessary or desirable to effect such transactions, Mortgage Borrower and/or Mezzanine Borrower, as applicable, ratifying all that such attorney shall do by virtue thereof. Mezzanine Borrower and Mortgage Borrower shall pay all costs and expenses in connection with the creation of the Mortgage Loan and the Mezzanine Loan and all requirements relating thereto.

          (d) It shall be an Event of Default under this Agreement, the Note, the Mortgage and the other Loan Documents if Borrower or Mezzanine Borrower fails to comply with any of the terms, covenants or conditions of this Section 11.30 within ten (10) Business Days of notice thereof.

          (e) All reasonable third party costs and expenses incurred by Borrower (other than Borrower’s legal fees) in connection with Borrower’s complying with requests made under this Section 11.30 (including, without limitation, the fees and expenses of the Rating Agencies) shall be paid by Lender.

          Section 11.31 Approvals; Third Parties; Conditions. All approval rights retained or exercised by Lender with respect to Leases, contracts, plans, studies and other matters are solely to facilitate Lender’s credit underwriting, and shall not be deemed or construed as a determination that Lender has passed on the adequacy thereof for any other purpose and the adequacy thereof may not be relied upon by Borrower or any other Person. This Agreement is for the sole and exclusive use of Lender and Borrower and may not be enforced, nor relied upon, by any Person other than Lender and Borrower. All conditions of the obligations of Lender hereunder, including the obligation to make advances, if any, are imposed solely and exclusively for the benefit of Lender, its successors and assigns, and no other Person shall have standing to require satisfaction of such conditions or be entitled to assume that Lender will refuse to make advances in the absence of strict compliance with any or all of such conditions, and no other Person shall, under any circumstances, be deemed to be a beneficiary of such conditions, any and all of which may be freely waived in whole or in part by Lender at any time in Lender’s sole discretion.

          Section 11.32 Limitation on Liability of Lender’s Officers, Employees, etc. Any obligation or liability whatsoever of Lender which may arise at any time under this Agreement or any other Loan Document shall be satisfied, if at all, out of Lender’s interest in the Property only. No such obligation or liability shall be personally binding upon, nor shall resort for the enforcement thereof be had to, the property of any of Lender’s shareholders, directors, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort or otherwise.

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          Section 11.33 Certain Additional Rights of Lender (VCOC).

          Notwithstanding anything to the contrary contained in this Agreement, Lender shall have:

          (a) the right to routinely consult with and advise Borrower’s management regarding the significant business activities and business and financial developments of Borrower; provided, however, that such consultations shall not include discussions of environmental compliance programs or disposal of hazardous substances. Consultation meetings should occur on a regular basis (no less frequently than quarterly) with Lender having the right to call special meetings at any reasonable times and upon reasonable advance notice;

          (b) the right, in accordance with the terms of this Agreement, to examine the books and records of Borrower at any reasonable times upon reasonable notice;

          (c) the right, in accordance with the terms of this Agreement, including, without limitation, Section 4.1.6 hereof, to receive monthly, quarterly and year end financial reports, including balance sheets, statements of income, shareholder’s equity and cash flow, a management report and schedules of outstanding indebtedness; and

          (d) the right, without restricting any other rights of Lender under this Agreement (including any similar right), to approve any acquisition by Borrower of any other significant property (other than personal property required for the day to day operation of the Property).

          The rights described above in this Section 11.33 may be exercised by any entity which owns and controls, directly or indirectly, substantially all of the interests in Lender.

          Section 11.34 Certain Agreements of Lender. (a) All costs and expenses in connection with any Secondary Market Transaction, any Resizing Event or Mezzanine Option (collectively, a “Restructuring Event”) shall be borne by Lender (other than the cost in obtaining and delivering any UCC-9 title insurance policy), including without limitation any costs and expenses incurred by Borrower or any Affiliate of Borrower in cooperating with Lender in connection with any Restructuring Event or performing any of their respective undertakings and covenants (other than Borrower’s indemnification obligations) under this Agreement or any other Loan Document in connection with any Restructuring Event. No agreement or other document required from Borrower or any Affiliate of Borrower in connection with any Restructuring Event shall serve to materially increase Borrower’s and its Affiliates’ obligations under this Agreement or any other Loan Document or materially reduce Borrower’s and its Affiliates’ rights under this Agreement or any other Loan Document (with respect to the Mezzanine Loan Option, which is not intended to include any customary requirements and market standards typically provided by Borrowers with respect to any Restructuring Event); provided, however, that Borrower shall pay the costs and expenses of Borrower’s counsel (including, the cost of counsel delivering any Insolvency Opinion) in the event Borrower engages counsel in connection with any Restructuring Event or in responding to Lender’s requests for cooperation hereunder.

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          XII. CASH MANAGEMENT

          Section 12.1 Lockbox Account and Cash Management Account.

          (a) Borrower acknowledges and confirms that Borrower has established, and Borrower covenants that it shall maintain, (i) pursuant to the Lockbox Agreement, a non-interest bearing Eligible Account into which Borrower shall, and shall cause Manager to, deposit or cause to be deposited, all Rents and other revenue from the Property (such account, all funds at any time on deposit therein and any proceeds, replacements or substitutions of such account or funds therein, are referred to herein as the “Lockbox Account”), and (ii) a non-interest bearing Eligible Account into which funds in the Lockbox Account shall be transferred pursuant to the terms of Section 12.2(c) hereof (such account, the sub-accounts thereof, all funds at any time on deposit therein and any proceeds, replacements or substitutions of such account or funds therein, are referred to herein as the “Cash Management Account”).

          (b) The Lockbox Account and Cash Management Account shall each be in the name of Borrower for the benefit of Lender as secured party, provided that Borrower shall be the owner of all funds on deposit in such accounts for federal and applicable state and local tax purposes. Sums on deposit in the Cash Management Account shall not, provided no Event of Default is continuing, be invested except in such Permitted Investments as determined and directed by Lender and all income earned thereon shall be the income of Borrower and be applied to and become part of the Cash Management Account, to be disbursed in accordance with this Article XII. Neither Lockbox Bank nor Lender shall have any liability for any loss resulting from the investment of funds in Permitted Investments in accordance with the terms and conditions of this Agreement.

          (c) The Lockbox Account and Cash Management Account shall be subject to the exclusive dominion and control of Lender and, except as otherwise expressly provided herein, neither Borrower, Manager nor any other party claiming on behalf of, or through, Borrower or Manager, shall have any right of withdrawal therefrom or any other right or power with respect thereto.

          (d) Borrower agrees to pay the customary fees and expenses of Deposit Bank (incurred in connection with maintaining the Lockbox Account) and Lender (incurred in connection with maintaining the Lockbox Account) and any successors thereto in connection therewith, as separately agreed by them from time to time.

          (e) Lender shall be responsible for the performance only of such duties with respect to the Cash Management Account as are specifically set forth herein, and no duty shall be implied from any provision hereof. Lender shall not be under any obligation or duty to perform any act which would involve it in expense or liability or to institute or defend any suit in respect hereof, or to advance any of its own monies. Borrower shall indemnify and hold Lender and its directors, employees, officers and agents harmless from and against any loss, cost or damage (including, without limitation, reasonable attorneys’ fees and disbursements) incurred by such parties in connection with the Cash Management Account other than such as result from the gross negligence or willful misconduct of Lender or intentional nonperformance by Lender of its obligations under this Agreement.

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          Section 12.2 Deposits and Withdrawals.

          (a) Borrower represents, warrants and covenants that:

     (i) Concurrently with the execution of this Agreement, Borrower shall notify and advise each Tenant under each Major Lease (whether such Major Lease is presently effective or executed after the date hereof) to send directly to the Lockbox all payments of Rents or any other item payable under such Major Leases pursuant to an instruction letter in form reasonably approved by Lender (a “Tenant Direction Letter”). If Borrower fails to provide any such notice (and without prejudice to Lender’s rights with respect to such default), Lender shall have the right, and Borrower hereby grants to Lender a power of attorney (which power of attorney shall be coupled with an interest and irrevocable so long as any portion of the Debt remains outstanding), to sign and deliver a Tenant Direction Letter;

     (ii) Borrower shall, and shall cause Manager to, instruct all Persons that maintain open accounts with Borrower or Manager with respect to the Property or with whom Borrower or Manager does business on an “accounts receivable” basis with respect to the Property to deliver all payments due under such accounts to the Lockbox Account. Neither Borrower nor Manager shall direct any such Person to make payments due under such accounts in any other manner. Borrower and Manager shall cause all credit card receipts to be deposited directly into the Lockbox Account. On or before the date hereof Borrower shall or shall cause Manager to instruct each of the respective credit card companies or credit card clearing banks (collectively, a “Credit Card Company”) with which Borrower or Manager has entered into merchant’s agreements pursuant to an instruction letter in a form reasonably acceptable to Lender (a “Payment Direction Letter”) that all receipts payable with respect to the Property, in accordance with such merchants’ agreements or otherwise, shall be transferred by wire transfer to Lockbox Bank for deposit in the Lockbox Account.

     (iii) All Rents or other income from the Property shall (A) be deemed additional security for payment of the Debt and shall be held in trust for the benefit, and as the property, of Lender, (B) not be commingled with any other funds or property of Borrower or Manager (except as permitted hereunder), and (C) if received by Borrower or Manager notwithstanding the delivery of a Tenant Direction Letter or Payment Direction Letter, be deposited in the Lockbox Account within one (1) Business Day of receipt;

     (iv) Without the prior written consent of Lender, so long as any portion of the Debt remains outstanding, neither Borrower nor Manager shall terminate, amend, revoke or modify any Tenant Direction Letter or Payment Direction Letter in any manner whatsoever or direct or cause any Tenant or Credit Card Company to pay any amount in any manner other than as provided in this Agreement;

     (v) If, notwithstanding the provisions of this Section 12.2, Borrower or Manager receives any Rents from the Property prior to their deposit into the Lockbox Account, then (i) such amounts shall be deemed to be collateral for the Loan and shall be

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held in trust for the benefit, and as the property, of Lender, (ii) such amounts shall not be commingled with any other funds or property of Borrower or Manager and (iii) Borrower or Manager shall deposit such amounts in the Lockbox Account within one (1) Business Day of the receipt thereof. In addition, Borrower shall cause all payments made under the Interest Rate Protection Agreement or any replacement Interest Rate Protection Agreement to be deposited into the Lockbox Account; and

     (vi) So long as any portion of the Debt remains outstanding, neither Borrower, Manager nor any other Person shall open or maintain any accounts other than the Lockbox Account into which revenues from the ownership and operation of the Property are initially deposited. The foregoing shall not prohibit Borrower from utilizing one or more separate accounts for the disbursement or retention of funds that have been transferred to Borrower pursuant to the express terms of this Agreement.

          (b) So long as no Event of Default has occurred and is continuing, on each Business Day all collected and available balances in the Lockbox Account shall be transferred by wire transfer or other method of transfer mutually agreeable to Lockbox Bank and Borrower to an account to be designated by Borrower.

          (c) During the continuance of an Event of Default, all transfers as provided in Section 12.2(b) above shall cease and all collected and available balances in the Lockbox Account shall be transferred by wire transfer or other method of transfer mutually agreeable to Lockbox Bank and Lender to the Cash Management Account to be held by Lender and applied in Lender’s sole and absolute discretion.

          (d) If an Event of Default shall have occurred and be continuing, Borrower hereby irrevocably authorizes Lender to make any and all withdrawals from the Lockbox Account and Cash Management Account and transfers between any of the Reserve Accounts as Lender shall determine in Lender’s sole and absolute discretion and Lender may use all funds contained in any such accounts for any purpose, including but not limited to repayment of the Debt in such order, proportion and priority as Lender may determine in its sole and absolute discretion. Lender’s right to withdraw and apply funds as stated herein shall be in addition to all other rights and remedies provided to Lender under this Agreement, the Note, the Mortgage and the other Loan Documents.

          Section 12.3 Security Interest.

          (a) Borrower acknowledges and agrees that the Cash Management Account and the Lockbox Accounts are subject to the sole dominion, control and discretion of Lender, its authorized agents or designees, including Lockbox Bank. Borrower shall not have the right of withdrawal with respect to either the Lockbox Account or the Cash Management Account; provided, however, that the foregoing provision shall not be deemed to limit the provision of Section 12.2(b) above. To secure the full and punctual payment of the Debt and performance of all obligations of Borrower now or hereafter existing under this Agreement and the other Loan Documents, Borrower hereby grants to Lender a first-priority continuing security interest in the Lockbox Account and Cash Management Account, and until such time as disbursed therefrom in accordance with the provisions of this Article XII, all interest, cash, checks, drafts, certificates

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and instruments, if any, from time to time deposited or held therein, any and all amounts invested in Permitted Investments, and all “proceeds” (as defined in the UCC as in effect in the state in which the Lockbox Account and Cash Management Account are located or maintained) of any or all of the foregoing. Furthermore, Borrower shall not, without obtaining the prior written consent of Lender, further pledge, assign or grant any security interest in any of the foregoing or permit any Lien to attach thereto or any levy to be made thereon or any UCC Financing Statements to be filed with respect thereto. Borrower will maintain the security interest created by this Section 12.3(a) as a first priority continuing security interest and will defend the right, title and interest of Lender in and to the Lockbox Account and Cash Management Account against the claims and demands of all Persons whomsoever.

          (b) Borrower authorizes Lender to file any financing statement or statements required by Lender to establish or maintain the validity, perfection and priority of the security interest granted herein in connection with the Lockbox Account and Cash Management Account. Borrower agrees that at any time and from time to time, at the expense of Borrower, Borrower will promptly and duly execute and deliver all further reasonable instruments and documents, and take all further action, that may be necessary or desirable, or that Lender may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby (including, without limitation, any security interest in and to any Permitted Investments) or to enable Lender to exercise and enforce its rights and remedies hereunder; provided, however, that the same do not increase in any material respect Borrower’s obligations hereunder or decrease in any material respect Borrower’s rights hereunder.

          (c) Upon the occurrence of an Event of Default, Lender may exercise any or all of its rights and remedies as a secured party, pledgee and lienholder with respect to the Lockbox Account and Cash Management Account. Without limitation of the foregoing, upon any Event of Default, Lender may use the Lockbox Account and Cash Management Account for any of the following purposes: (A) repayment of the Debt, including, but not limited to, principal prepayments and the prepayment premium applicable to such full or partial prepayment (as applicable); (B) reimbursement of Lender for all losses, fees, costs and expenses (including, without limitation, reasonable legal fees) suffered or incurred by Lender as a result of such Event of Default; (C) payment of any amount expended in exercising any or all rights and remedies available to Lender at law or in equity or under this Agreement or under any of the other Loan Documents; (D) payment of any item as required or permitted under this Agreement; or (E) any other purpose permitted by applicable law; provided, however, that any such application of funds shall not cure or be deemed to cure any Event of Default. Without limiting any other provisions hereof, each of the remedial actions described in the immediately preceding sentence shall be deemed to be a commercially reasonable exercise of Lender’s rights and remedies as a secured party with respect to the Lockbox Account and Cash Management Account and shall not in any event be deemed to constitute a setoff or a foreclosure of a statutory banker’s lien. Nothing in this Agreement shall obligate Lender to apply all or any portion of the Lockbox Account or Cash Management Account to effect a cure of any Event of Default, or to pay the Debt, or in any specific order of priority. The exercise of any or all of Lender’s rights and remedies under this Agreement or under any of the other Loan Documents shall not in any way prejudice or affect Lender’s right to initiate and complete a foreclosure under the Mortgage.

-103-

          Section 12.4 Definitions. Notwithstanding anything to the contrary contained herein, For purposes of this Article XII only, Business Day shall mean a day on which Lender and Lockbox Bank are both open for the conduct of substantially all of their respective banking business at the office in the city in which the Note is payable, with respect to Lender and at the office in the city where the Lockbox Account is maintained, with respect to Lockbox Bank (in both instances, excluding Saturdays and Sundays).

[NO FURTHER TEXT ON THIS PAGE]

-104-

          IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed by their duly authorized representatives, all as of the day and year first above written.

LENDER:
UBS REAL ESTATE SECURITIES INC., a
Delaware corporation
By:
	Name:
	Title:
BORROWER:
INTERSTATE WESTCHASE, LP, a
Delaware limited partnership
By:	Interstate Westchase GP, LLC, a Delaware
	limited liability company, general partner
	By:	Interstate Westchase MC, LLC, a
		Delaware limited liability company,
		Manager and sole member
		By:
			Name:
			Title:

SCHEDULE I

(REQUIRED REPAIRS)

Component or System	Comments	Quantity	Unit Cost	Total $
		Total Repair Cost:
		125%:

SCHEDULE III

SCHEDULE H

(PIP REPAIRS)

SCHEDULE III

SCHEDULE IV

(ORGANIZATIONAL CHART)

SCHEDULE IV

(FORM OF SUBORDINATION, NON-DISTURBANCE AND
ATTORNMENT AGREEMENT)

UBS REAL ESTATE SECURITIES INC.
(Lender)

- and -

(Tenant)

SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT

Dated:

Location:

Section:
Block:
Lot:
County:

PREPARED BY AND UPON
RECORDATION RETURN TO:

Messrs. Cadwalader, Wickersham & Taft LLP
One World Financial Center
New York, New York 10281
Attention: William P. McInerney, Esq.

File No.:
Title No.:

SCHEDULE IV — PAGE 1

SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT

           THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (this “Agreement”) is made as of the [                     day of I                    1, 20[ 1 by and between UBS REAL ESTATE SECURITIES INC., a Delaware corporation, having an address at 1285 Avenue of the Americas, Twenty-Ninth Floor, New York, New York 10019 (“Lender”) and [                     ], having an address        at        ₁ (“Tenant”).

RECITALS:

          A. Lender has made a loan in the approximate amount of $1^. ] to Landlord (defined below), which Loan is given pursuant to the terms and conditions of that certain Loan Agreement dated [ ], 20[ 1, between Lender and Landlord (the “Loan Agreement”). The Loan is evidenced by a certain Promissory Note dated       1, 20[ 1, given by Landlord to Lender (the “Note”) and secured by a certain [Mortgage][Deed of Trust] and Security Agreement dated 1, 201 1, given by Landlord to Lender (the “Mortgage”), which encumbers the fee estate of Landlord in certain premises described in Exhibit A attached hereto (the “Property”);

          B. Tenant occupies a portion of the Property under and pursuant to the provisions of a certain lease dated r                     ₁, r                      between 1,       as landlord (“Landlord”) and Tenant, as tenant (the “Lease”); and

          C. Tenant has agreed to subordinate the Lease to the Mortgage and to the lien thereof and Lender has agreed to grant non-disturbance to Tenant under the Lease on the terms and conditions hereinafter set forth.

AGREEMENT:

          For good and valuable consideration, Tenant and Lender agree as follows:

          1. Subordination. Tenant agrees that the Lease and all of the terms, covenants and provisions thereof and all rights, remedies and options of Tenant thereunder are and shall at all times continue to be subject and subordinate in all respects to the Mortgage and to the lien thereof and all terms, covenants and conditions set forth in the Mortgage and the Loan Agreement including without limitation all renewals, increases, modifications, spreaders, consolidations, replacements and extensions thereof and to all sums secured thereby with the same force and effect as if the Mortgage and Loan Agreement had been executed, delivered and (in the case of the Mortgage) recorded prior to the execution and delivery of the Lease.

          2. Non-Disturbance. Lender agrees that if any action or proceeding is commenced by Lender for the foreclosure of the Mortgage or the sale of the Property, Tenant shall not be named as a party therein unless such joinder shall be required by law, provided, however, such joinder shall not result in the termination of the Lease or disturb the Tenant’s possession or use of the premises demised thereunder, and the sale of the Property in any such action or proceeding and the exercise by Lender of any of its other rights under the Note, the

SCHEDULE IV — PAGE 2

Mortgage and the Loan Agreement shall be made subject to all rights of Tenant under the Lease, provided that at the time of the commencement of any such action or proceeding or at the time of^. any such sale or exercise of any such other rights (a) the term of the Lease shall have commenced pursuant to the provisions thereof, (b) Tenant shall be in possession of the premises demised under the Lease, (c) the Lease shall be in full force and effect and (d) Tenant shall not be in default under any of the terms, covenants or conditions of the Lease or of this Agreement on Tenant’s part to be observed or performed beyond the expiration of any applicable notice or grace periods.

          3. Attornment. Lender and Tenant agree that upon the conveyance of the Property by reason of the foreclosure of the Mortgage or the acceptance of a deed or assignment in lieu of foreclosure or otherwise, the Lease shall not be terminated or affected thereby (at the option of the transferee of the Property (the “Transferee”) if the conditions set forth in Section 2 above have not been met at the time of such transfer) but shall continue in full force and effect as a direct lease between the Transferee and Tenant upon all of the terms, covenants and conditions set forth in the Lease and in that event, Tenant agrees to attorn to the Transferee and the Transferee shall accept such attornment, provided, however, that the provisions of the Mortgage and the Loan Agreement shall govern with respect to the disposition of any casualty insurance proceeds or condemnation awards and the Transferee shall not be (a) obligated to complete any construction work required to be done by Landlord pursuant to the provisions of the Lease or to reimburse Tenant for any construction work done by Tenant, (b) liable (i) for Landlord’s failure to perform any of its obligations under the Lease which have accrued prior to the date on which the Transferee shall become the owner of the Property, or (ii) for any act or omission of Landlord, whether prior to or after such foreclosure or sale, (c) required to make any repairs to the Property or to the premises demised under the Lease required as a result of fire, or other casualty or by reason of condemnation unless the Transferee shall be obligated under the Lease to make such repairs and shall have received sufficient casualty insurance proceeds or condemnation awards to finance the completion of such repairs, (d) required to make any capital improvements to the Property or to the premises demised under the Lease which Landlord may have agreed to make, but had not completed, or to perform or provide any services not related to possession or quiet enjoyment of the premises demised under the Lease, (e) subject to any offsets, defenses, abatements or counterclaims which shall have accrued to Tenant against Landlord prior to the date upon which the Transferee shall become the owner of the Property, (f) liable for the return of rental security deposits, if any, paid by Tenant to Landlord in accordance with the Lease unless such sums are actually received by the Transferee, (g) bound by any payment of rents, additional rents or other sums which Tenant may have paid more than one (1) month in advance to any prior Landlord unless (i) such sums are actually received by the Transferee or (ii) such prepayment shall have been expressly approved of by the Transferee, (h) bound to make any payment to Tenant which was required under the Lease, or otherwise, to be made prior to the time the Transferee succeeded to Landlord’s interest, (i) bound by any agreement amending, modifying or terminating the Lease made without the Lender’s prior written consent prior to the time the Transferee succeeded to Landlord’s interest or (j) bound by any assignment of the Lease or sublease of the Property, or any portion thereof, made prior to the time the Transferee succeeded to Landlord’s interest other than if pursuant to the provisions of the Lease.

SCHEDULE IV — PAGE 3

          4. Notice to Tenant. After notice is given to Tenant by Lender that the Landlord is in default under the Note and the Mortgage and that the rentals under the Lease should be paid to Lender pursuant to the terms of the assignment of leases and rents executed and delivered by Landlord to Lender in connection therewith, Tenant shall thereafter pay to Lender or as directed by the Lender, all rentals and all other monies due or to become due to Landlord under the Lease and Landlord hereby expressly authorizes Tenant to make such payments to Lender and hereby releases and discharges Tenant from any liability to Landlord on account of any such payments.

          5. Lender’s Consent. Tenant shall not, without obtaining the prior written consent of Lender, (a) enter into any agreement amending, modifying or terminating the Lease, (b) prepay any of the rents, additional rents or other sums due under the Lease for more than one (1) month in advance of the due dates thereof, (c) voluntarily surrender the premises demised under the Lease or terminate the Lease without cause or shorten the term thereof, or (d) assign the Lease or sublet the premises demised under the Lease or any part thereof other than pursuant to the provisions of the Lease; and any such amendment, modification, termination, prepayment, voluntary surrender, assignment or subletting, without Lender’s prior consent, shall not be binding upon Lender.

          6. Lender to Receive Notices. Tenant shall provide Lender with copies of all written notices sent to Landlord pursuant to the Lease simultaneously with the transmission of such notices to the Landlord. Tenant shall notify Lender of any default by Landlord under the Lease which would entitle Tenant to cancel the Lease or to an abatement of the rents, additional rents or other sums payable thereunder, and agrees that, notwithstanding any provisions of the Lease to the contrary, no notice of cancellation thereof or of such an abatement shall be effective unless Lender shall have received notice of default giving rise to such cancellation or abatement and shall have failed within sixty (60) days after receipt of such notice to cure such default, or if such default cannot be cured within sixty (60) days, shall have failed within sixty (60) days after receipt of such notice to commence and thereafter diligently pursue any action necessary to cure such default.

          7. Notices. All notices or other written communications hereunder shall be deemed to have been properly given (i) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged by the recipient thereof and confirmed by telephone by sender, (ii) one (1) Business Day (hereinafter defined) after having been deposited for overnight delivery with any reputable overnight courier service, or (iii) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows:

If to Tenant:	F                             1
	Attention: r             1
	Facsimile No.: F     1

SCHEDULE IV — PAGE 4

If to Lender:	UBS REAL ESTATE SECURITIES INC.
	1285 Avenue of the Americas
	New York, New York 10019
	Attention:
	Facsimile No.:
With a copy to:	Cadwalader, Wickersham & Taft LLP
	One World Financial Center
	New York, New York 10281
	Attention: William P. McInerney, Esq.
	Facsimile No.: (212) 504-6666

or addressed as such party may from time to time designate by written notice to the other parties. For purposes of this Section, the term “Business Da^y” shall mean a day on which commercial banks are not authorized or required by law to close in New York, New York.

Either party by notice to the other may designate additional or different addresses for subsequent notices or communications.

          8. Joint and Several Liability. If Tenant consists of more than one person, the obligations and liabilities of each such person hereunder shall be joint and several. This Agreement shall be binding upon and inure to the benefit of Lender and Tenant and their respective successors and assigns.

          9. Definitions. The term “Lender” as used herein shall include the successors and assigns of Lender and any person, party or entity which shall become the owner of the Property by reason of a foreclosure of the Mortgage or the acceptance of a deed or assignment in lieu of foreclosure or otherwise. The term “Landlord” as used herein shall mean and include the present landlord under the Lease and such landlord’s predecessors and successors in interest under the Lease, but shall not mean or include Lender. The term “Property” as used herein shall mean the Property, the improvements now or hereafter located thereon and the estates therein encumbered by the Mortgage.

          10. No Oral Modifications. This Agreement may not be modified in any manner or terminated except by an instrument in writing executed by the parties hereto.

          11. Governing Law. This Agreement shall be deemed to be a contract entered into pursuant to the laws of the State where the Property is located and shall in all respects be governed, construed, applied and enforced in accordance with the laws of the State where the Property is located.

          12. Inapplicable Provisions. If any term, covenant or condition of this Agreement is held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed without such provision.

          13. Duplicate Originals; Counterparts. This Agreement may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. This Agreement may be executed in several counterparts, each of which counterparts shall be

SCHEDULE IV — PAGE 5

deemed an original instrument and all of which together shall constitute a single Agreement. The failure of any party hereto to execute this Agreement, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder.

          14. Number and Gender. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa.

          15. Transfer of Loan. Lender may sell, transfer and deliver the Note and assign the Mortgage, this Agreement and the other documents executed in connection therewith to one or more investors in the secondary mortgage market (“Investors”). In connection with such sale, Lender may retain or assign responsibility for servicing the loan, including the Note, the Mortgage, this Agreement and the other documents executed in connection therewith, or may delegate some or all of such responsibility and/or obligations to a servicer including, but not limited to, any subservicer or master servicer, on behalf of the Investors. All references to Lender herein shall refer to and include any such servicer to the extent applicable.

          16. Further Acts. Tenant will, at the cost of Tenant, and without expense to Lender, do, execute, acknowledge and deliver all and every such further acts and assurances as Lender shall, from time to time, require, for the better assuring and confirming unto Lender the property and rights hereby intended now or hereafter so to be, or for carrying out the intention or facilitating the performance of the terms of this Agreement or for filing, registering or recording this Agreement, or for complying with all applicable laws.

          17. Limitations on Lender’s Liability. Tenant acknowledges that Lender is obligated only to Landlord to make the Loan upon the terms and subject to the conditions set forth in the Loan Agreement. In no event shall Lender or any purchaser of the Property at foreclosure sale or any grantee of the Property named in a deed-in-lieu of foreclosure, nor any heir, legal representative, successor, or assignee of Lender or any such purchaser or grantee (collectively the Lender, such purchaser, grantee, heir, legal representative, successor or assignee, the “Subsequent Landlord”) have any personal liability for the obligations of Landlord under the Lease and should the Subsequent Landlord succeed to the interests of the Landlord under the Lease, Tenant shall look only to the estate and property of any such Subsequent Landlord in the Property for the satisfaction of Tenant’s remedies for the collection of a judgment (or other judicial process) requiring the payment of money in the event of any default by any Subsequent Landlord as landlord under the Lease, and no other property or assets of any Subsequent Landlord shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant’s remedies under or with respect to the Lease; provided, however, that the Tenant may exercise any other right or remedy provided thereby or by law in the event of any failure by Subsequent Landlord to perform any such material obligation.

SCHEDULE IV — PAGE 6

          IN WITNESS WHEREOF, Lender and Tenant have duly executed this Agreement as of the date first above written.

LENDER: UBS REAL ESTATE SECURITIES INC., a     Delaware corporation
By:
	Name:
	Title:
TENANT:		,
a
By:
	Name:
	Title:

The undersigned accepts and agrees to the provisions of Section 4 hereof:
LANDLORD:
		a
By:
	Name:
	Title:

SCHEDULE IV — PAGE 7

ACKNOWLEDGMENTS

[INSERT STATE SPECIFIC ACKNOWLEDGMENT]

SCHEDULE IV — PAGE 8

EXHIBIT A

LEGAL DESCRIPTION

TRACT 1 (FEE SIMPLE):

DESCRIPTION OF A 7.8282 ACRE TRACT OUT OF UNRESTRICTED RESERVE “0”, BLOCK 15, OF WESTCHASE SUBDIVISION, SECTION EIGHT, AS RECORDED IN VOLUME 241, PAGE 143 OF THE HARRIS COUNTY MAP RECORDS, LOCATED IN THE GEORGE BELLOWS SURVEY, ABSTRACT NO. 3, CITY OF HOUSTON, HARRIS COUNTY, TEXAS AND BEING MORE FULLY DESCRIBED BY METES AND BOUNDS AS FOLLOWS (WITH BEARINGS REFERENCED TO SAID PLAT OF WESTCHASE SUBDIVISION, SECTION EIGHT);

BEGINNING AT A 1/2 INCH IRON ROD FOUND IN THE SOUTH RIGHT-OF-WAY LINE OF WESTHEIMER ROAD (120 FEET WIDE) MARKING THE MOST EASTERLY CUT BACK CORNER LOCATED AT THE SOUTHEAST CORNER OF THE INTERSECTION OF SAID WESTHEIMER ROAD AND BRIARPARK DRIVE AND BEING THE MOST NORTHERLY NORTHWEST CORNER OF SAID UNRESTRICTED RESERVE “0” OF WESTCHASE SUBDIVISION;

THENCE N 87 DEG. 29 MIN. 36 SEC. E, ALONG THE SOUTH RIGHT-OF-WAY LINE OF SAID WESTHEIMER ROAD, A DISTANCE OF 716.68 FEET TO A 1/2 INCH IRON ROD FOUND FOR A NORTHWEST CORNER OF A CALLED 1.4516 ACRE TRACT CONVEYED TO FRANK M. PUTMAN, TRUSTEE, BY A SPECIAL WARRANTY DEED RECORDED IN HARRIS COUNTY CLERK’S FILE NO. M202529 AND BEING THE NORTHEAST CORNER OF THE HEREIN DESCRIBED TRACT;

THENCE S 02 DEG. 30 MIN. 24 SEC. E, ALONG THE EAST LINE OF THIS TRACT AND A WEST LINE OF SAID PUTMAN TRACT, A DISTANCE OF 462.00 FEET TO A 1/2 INCH IRON ROD FOUND FOR THE SOUTHEAST CORNER OF THE HEREIN DESCRIBED TRACT;

THENCE S 87 DEG. 29 MIN. 36 SEC. W, ALONG A NORTH LINE OF SAID PUTMAN TRACT AND THE SOUTH LINE OF THE HEREIN DESCRIBED TRACT, PASS AT 687.43 FEET THE WEST CORNER OF SAID PUTMAN 1.4516 ACRE TRACT AND THE NORTHEAST CORNER OF A 3.6713 ACRE TRACT CONVEYED TO FRANK M. PUTMAN, TRUSTEE, BY A SPECIAL WARRANTY DEED RECORDED IN HARRIS COUNTY CLERK’S FILE NO. M236697, AND CONTINUE ALONG THE NORTH LINE OF SAID 3.6713 ACRE TRACT, IN ALL, A DISTANCE OF 769.80 FEET TO A 1/2 INCH IRON ROD FOUND IN THE ARC OF A CURVE IN THE EAST RIGHT-OF-WAY LINE OF BRIARPARK DRIVE (80 FEET WIDE);

THENCE NORTHEASTERLY, ALONG THE EAST RIGHT-OF-WAY LINE OF SAID BRIARPARK DRIVE AND THE ARC OF SAID CURVE TO THE LEFT HAVING A RADIUS OF 1626.01 FEET, A CENTRAL ANGLE OF 13 DEG. 13 MN. 31 SEC. A CHORD BEARING N 04 DEG. 06 MIN. 21 SEC. E, 374.49 FEET, AN ARC LENGTH OF 375.32 FEET TO A 3/4 INCH IRON ROD FOUND FOR THE POINT OF TANGENCY OF SAID CURVE;

THENCE N 02 DEG. 30 MIN. 24 SEC. W, CONTINUING ALONG THE EAST RIGHT-OF-WAY LINE OF SAID BRIARPARK DRIVE, A DISTANCE OF 80.00 FEET TO A 1/2 INCH IRON ROD FOUND FOR THE MOST SOUTHERLY CUT BACK CORNER LOCATED AT THE AFOREMENTIONED INTERSECTION OF BRIARPARK DRIVE AND WESTHEIMER ROAD;

THENCE N 42 DEG. 29 MIN. 36 SEC. E, ALONG A CUT BACK LINE, A DISTANCE OF 14.14 FEET TO THE POINT OF BEGINNING AND CONTAINING 7.8282 ACRES OF LAND.

TRACT 2 (OFFSITE ROADWAY EASEMENT):

DESCRIPTION OF A 0.9727 ACRE TRACT OF LAND OUT OF A CALLED 1.1166 ACRE TRACT DESCRIBED IN ROADWAY EASEMENT AGREEMENT BETWEEN GEORGE C. BALLAS, TRUSTEE, AND 9999 WESTHEIMER HOTEL JOINT VENTURE AS RECORDED IN HARRIS COUNTY CLERICS FILE NO. 11427392 IN THE GEORGE BELLOWS SURVEY, ABSTRACT NO. 3, CITY OF HOUSTON, HARRIS COUNTY, TEXAS AND BEING MORE FULLY DESCRIBED BY METES AND BOUNDS AS FOLLOWS (WITH BEARINGS REFERENCED TO THE PLAT OF WESTCHASE SUBDIVISION, SECTION EIGHT, AS RECORDED IN VOLUME 241, PAGE 143, OF THE HARRIS COUNTY MAP RECORDS):

COMMENCING AT A 1/2 INCH IRON ROD FOUND IN THE SOUTH RIGHT-OF-WAY LINE OF WESTHEIMER ROAD (120 FEET WIDE) MARKING THE MOST NORTHERLY NORTHWEST CORNER OF UNRESTRICTED RESERVE “0”, BLOCK 15, OF THE AFORESAID WESTCHASE SUBDIVISION, SECTION EIGHT;

THENCE N 87 DEG. 29 MN. 36 SEC. E, ALONG THE SOUTH RIGHT-OF-WAY LINE OF SAID WESTHEIMER ROAD, A DISTANCE OF 726.95 FEET TO CONCRETE NAM FOR THE MOST NORTHERLY NORTHWEST CORNER OF THE AFORESAID 1.1166 ACRE TRACT AND THE POINT OF BEGINNING OF THE HEREIN DESCRIBED TRACT;

THENCE N 87 DEG. 29 MIN. 36 SEC. E, CONTINUING ALONG THE RIGHT-OF-WAY LINE OF WESTHEIMER ROAD AND THE MOST NORTHERLY LINE OF SAID 1.1166 ACRES, A DISTANCE OF 36.00 FEET TO A POINT FOR CORNER;

THENCE S 02 DEG. 25 MIN. 36 SEC. E ALONG AN EASTERLY LINE OF SAID 1.1166 ACRES, A DISTANCE OF 304.56 FEET TO AN “X” CUT IN CONCRETE FOUND FOR THE BEGINNING OF A CURVE TO THE LEFT;

THENCE SOUTHEASTERLY, ALONG THE ARC OF SAID CURVE TO THE LEFT HAVING A RADIUS OF 2.00 FEET, A CENTRAL ANGLE OF 46 DEG. 01 MN. 00 SEC., A CHORD BEARING S 25 DEG. 26 MN. 06 SEC. E. 1.56 FEET, AN ARC LENGTH OF 1.61 FEET TO AN “X” CUT IN CONCRETE FOUND FOR THE END OF SAID CURVE;

THENCE S. 52 DEG. 27 MIN. 56 SEC. E, A DISTANCE OF 9.17 FEET TO A 5/8 INCH IRON ROD FOUND FOR THE BEGINNING OF A CURVE TO THE RIGHT;

THENCE SOUTHEASTERLY, ALONG THE ARC OF SAID CURVE TO THE RIGHT HAVING A RADIUS OF 130.50 FEET, A CENTRAL ANGLE OF 30 DEG. 15 MN. 49 SEC., A CHORD BEARING S 43 DEG. 40 MN. 49 SEC. E, 68.13 FEET, AN ARC LENGTH OF 68.93 FEET TO AN “X” CUT IN CONCRETE FOUND FOR A POINT OF COMPOUND CURVATURE;

THENCE SOUTHEASTERLY, ALONG THE ARC OF SAID COMPOUND CURVE TO THE RIGHT HAVING A RADIUS OF 73.00 FEET, A CENTRAL ANGLE OF 54 DEG. 54 MN. 37 SEC., A CHORD BEARING S 01 DEG. 05 MN. 36 SEC. E. 67.31 FEET, AN ARC LENGTH OF 69.96 FEET TO A “X” CUT IN CONCRETE FOUND FOR A POINT OF COMPOUND CURVATURE;

THENCE SOUTHWESTERLY, ALONG THE ARC OF SAID COMPOUND CURVE TO THE RIGHT HAVING A RADIUS OF 183.00 FEET, A CENTRAL ANGLE OF 29 DEG. 34 MIN. 55 SEC., A CHORD BEARING 5 41 DEG. 09 MN. 10 SEC. W, 93.44 FEET, AN ARC LENGTH OF 94.49 FEET TO A POINT OF COMPOUND CURVATURE.

THENCE SOUTHWESTERLY, ALONG THE ARC OF SAID COMPOUND CURVE TO THE RIGHT HAVING A RADIUS OF 68.00 FEET, A CENTRAL ANGLE OF 31 DEG. 30 MN. 43 SEC. A CHORD BEARING S 71 DEG. 41 MN. 59 SEC. W. 36.93 FEET, AN ARC LENGTH OF 37.40 FEET TO A 5/8 INCH IRON ROD FOUND FOR THE POINT OF TANGENCY OF SAID COMPOUND CURVE;

THENCE S 87 DEG. 27 MN. 21 SEC. W, ALONG THE SOUTHERLY LINE OF THE AFORESAID 1.1166 ACRE TRACT, A DISTANCE OF 548.89 FEET TO A POINT FOR THE BEGINNING OF A CURVE TO THE RIGHT

THENCE NORTHWESTERLY, ALONG THE ARC OF SAID CURVE TO THE RIGHT HAVING A RADIUS OF 99.97 FEET, A CENTRAL ANGLE OF 48 DEG. 35 MN. 14 SEC., A CHORD BEARING N 68 DEG. 15 MN. 02 SEC. W, 82.26 FEET, AN ARC LENGTH OF 84.78 FEET TO A 5/8 INCH IRON ROD FOUND FOR THE POINT OF TANGENCY OF SAID CURVE;

THENCE N 43 DEG. 57 MIN. 25 SEC. W, A DISTANCE OF 16.93 FEET TO A POINT ON THE SOUTH LINE OF A CALLED 7.1388 ACRE TRACT DESCRIBED AS PARCEL 1 IN A DEED RECORDED IN HARRIS COUNTY CLERK’S FILE NO. G427172;

THENCE N 87 DEG. 29 MIN. 36 SEC. E, ALONG THE SOUTH LINE OF SAID CALLED 7.1388 ACRE TRACT, A DISTANCE OF 51.04 FEET TO A 1/2 INCH IRON ROD FOUND IN THE ARC OF A CURVE;

THENCE SOUTHEASTERLY, ALONG THE ARC OF SAID CURVE TO THE LEFT HAVING A RADIUS OF 63.97 FEET, A CENTRAL ANGLE OF 33 DEG. 18 MIN. 15 SEC., A CHORD BEARING S 75 DEG. 53 MIN. 33 SEC. E, 36.67 FEET, AN ARC LENGTH OF 37.19 FEET TO A 5/8 INCH IRON ROD FOUND FOR THE POINT OF TANGENCY OF SAID CURVE;

THENCE N 87 DEG. 27 MN. 21 SEC. E, ALONG THE NORTH LINE OF THE AFOREMENTIONED 1.1166 ACRE TRACT, A DISTANCE OF 548.89 FEET TO A 5/8 INCH IRON ROD FOR THE BEGINNING OF A CURVE TO THE LEFT;

THENCE NORTHEASTERLY, ALONG THE ARC OF SAID CURVE TO THE LEFT HAVING A RADIUS OF 32.00 FEET, A CENTRAL ANGLE OF 31 DEG. 30 MN. 43 SEC., A CHORD BEARING N 71 DEG. 41 MIN. 59 SEC. E. A 17.38 FEET, AN ARC LENGTH OF 17.60 FEET TO A 5/8 INCH IRON ROD FOUND FOR A POINT OF COMPOUND CURVATURE;

THENCE NORTHEASTERLY, ALONG THE ARC OF SAID COMPOUND CURVE TO THE LEFT HAVING A RADIUS OF 147.00 FEET, A CENTRAL ANGLE 29 DEG. 34 MIN. 55 SEC., A CHORD BEARING N 41 DEG. 09 MIN. 10 SEC. E. 75.06 FEET, AN ARC LENGTH OF 75.90 FEET TO A CONCRETE NAIL FOUND FOR A POINT OF COMPOUND CURVATURE;

THENCE NORTHWESTERLY, ALONG THE ARC OF SAID COMPOUND CURVE TO THE LEFT HAVING A RADIUS OF 37.00 FEET, A CENTRAL ANGLE OF 54 DEG. 54 MN. 37

SEC., A CHORD BEARING N 01 DEG. 05 MIN. 36 SEC. W. 34.12 FEET, AN ARC LENGTH OF 35.46 FEET TO A 5/8 INCH IRON ROD FOUND FOR A POINT OF COMPOUND CURVATURE;

THENCE NORTHWESTERLY, ALONG THE ARC OF SAID COMPOUND CURVE TO THE LEFT HAVING A RADIUS OF 94.50 FEET, A CENTRAL ANGLE OF 30 DEG. 15 MIN. 49 SEC., A CHORD BEARING N 43 DEG. 40 MIN. 49 SEC. W, 49.34 FEET, AN ARC LENGTH OF 49.92 FEET TO A 5/8 INCH IRON ROD FOUND FOR THE END OF SAID COMPOUND CURVE;

THENCE N 52 DEG. 56 MIN. 53 SEC. W, A DISTANCE OF 15.67 FEET TO A 5/8 INCH IRON ROD FOUND FOR THE BEGINNING OF A CURVE TO THE RIGHT;

THENCE NORTHWESTERLY, ALONG THE ARC OF SAID CURVE TO THE RIGHT HAVING A RADIUS OF 38.00 FEET, A CENTRAL ANGLE OF 46 DEG. 01 MTN. 00 SEC., A CHORD BEARING N 25 DEG. 26 MIN. 06 SEC. W. 29.71 FEET, AN ARC LENGTH OF 30.52 FEET TO A 5/8 INCH IRON ROD FOUND FOR THE END OF SAID CURVE;

THENCE N 02 DEG. 25 MIN. 36 SEC. W, ALONG A WEST LINE OF SAID 1.1166 ACRE TRACT, A DISTANCE OF 304.50 FEET TO THE POINT OF BEGINNING AND CONTAINING 0.9727 ACRE OF LAND.

TRACT 3 (EASEMENT):

NONEXCLUSIVE RIGHTS AND EASEMENTS CREATED BY ROADWAY EASEMENT AGREEMENT BY AND BETWEEN GEORGE C. BALLAS, TRUSTEE AND 9999 WESTHEIMER HOTEL JOINT VENTURE RECORDED APRIL 29, 1982 UNDER HARRIS COUNTY CLERK’S FILE NO. H427392 AND FIRST AMENDMENT TO ROADWAY EASEMENT AGREEMENT AND EASEMENT RECORDED FEBRUARY 3, 1997 UNDER HARRIS COUNTY CLERK’S FILE NO. S307192, OF OFFICIAL RECORDS OF HARRIS COUNTY, TEXAS.

EX-10.15.1

Exhibit 10.15.1

FIRST AMENDMENT TO LOAN AGREEMENT

Dated as of December 26, 2007

By and Between

INTERSTATE WESTCHASE, LP,

as Borrower,

and

UBS REAL ESTATE SECURITIES INC.,

as Lender

AMENDMENT TO LOAN AGREEMENT

          THIS AMENDMENT TO LOAN AGREEMENT, dated as of December 26^th, 2007 this “Amendment”), by and between the INTERSTATE WESTCHASE, LP, a Delaware limited partnership (“Borrower”), having its address at c/o Interstate Hotels & Resorts, Inc., 4501 North Fairfax Drive, Arlington, Virginia 22203 and UBS REAL ESTATE SECURITIES INC., a Delaware corporation, having an address 1285 Avenue of the Americas, New York, New York 10019 (“Lender”).

W I T N E S S E T H:

          WHEREAS, Borrower and Lender have executed and delivered a Loan Agreement dated as of February 8, 2007 (the “Original Loan Agreement”) which evidenced a loan made by Lender to Borrower in the original principal amount of Thirty-Two Million Eight Hundred Twenty-Five Thousand and No/ 100 Dollars (32,825,000.00) (the “Original Loan Amount”); and

          WHEREAS, Borrower and Lender desire to amend the Original Loan Agreement as more particularly set forth herein (the Original Loan Agreement as amended by this Amendment is hereafter referred to as the “Loan Agreement”).

          NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00) and for other good and valuable consideration, each to the other given, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender hereby agree that the Original Loan Agreement is hereby amended to read as follows:

          1. Sections Modified:

     (ⁱ) For all purposes under the Loan Agreement, Section 4.1.6(d) shall be added or deleted and replaced with the following:

          “(d) Annual Reports. Within ninety (90) days after the end of each calendar year of Borrower’s operation of the Property, Borrower will furnish to Lender a complete copy of Borrower’s, annual financial statements prepared in accordance with GAAP covering the Property for such fiscal year and containing statements of profit and loss for Borrower and the Property and a balance sheet for Borrower. Such statements shall set forth the financial condition and the results of operations for the Property for such Fiscal Year, shall include (hut not be limited to) amounts representing annual Net Cash Flow, Gross Income from Operations, Operating Expenses and Capital Expenditures and shall be accompanied by a reasonably detailed schedule of all Capital Expenditures for such fiscal year. Borrower’s annual financial statements shall be accompanied by (i) a comparison of (A) the budgeted income and expenses and Capital Expenditures and (B) the actual income and expenses and Capital Expenditures for the prior fiscal year, (ii) an Officer’s Certificate stating that, to such officer’s knowledge after reasonable inquiry, each such annual financial statement presents fairly the financial condition and the results of operations of Borrower and the Property being reported upon and has been prepared in accordance with GAAP and (iiii) occupancy statistics for the Property. Together with Borrower’s annual financial statements, Borrower shall furnish to Lender an Officer’s Certificate

certifying as of the date thereof whether, to such officer’s knowledge after reasonable inquiry, there exists an event or circumstance which constitutes a Default or Event of Default under the Loan Documents executed and delivered by, or applicable to, Borrower, and if such Default or Event of Default exists, the nature thereof, the period of time it has existed and the action then being taken to remedy the same.

     (ii) For all purposes under the Loan Agreement, Borrower’s notice information in Section 11.6 shall be added or deleted and replaced with the following:

If to Borrower:	INTERSTATE WESTCHASE, LP
	c/o Interstate Hotels Resorts Inc,
	4501 North Fairfax Drive
	Arlington, VA 22203
	Attention: Christopher L. Bennett, Esq.
	Facsimile No.: (703) 542-0965

          2. Borrower Representations and Warranties. Borrower represents and warrants as of the date hereof that: (i) The representations, warranties, certifications and agreements of Borrower contained in the Loan Documents made by Borrower in favor of Lender are true, complete and accurate in all material respects as of the date hereof; (ii) both Borrower and, to the best of Borrower’s knowledge, Lender have performed all of their respective obligations under the Loan Documents and Borrower has no knowledge of any event which with the giving of notice, the passage of time or both would constitute a default by Borrower or Lender under the Loan Documents; (iii) Borrower has no claim against Lender and no offset or defense to the payment of the Debt or any counterclaim or right to rescission to enforcement of any of the terms of the Loan Documents; (iv) no voluntary actions or involuntary actions are pending against Borrower, any member of Borrower, the Borrower’s managing member, or any guarantor or indemnitor of the Loan under the bankruptcy or insolvency laws of the United States or any state thereof; and (v) the Loan Documents, as any of the same have been modified, amended and restated, are the valid, legal and binding obligation of Borrower.

          3. No Other Amendments. Except as specifically modified and amended herein, all other terms, conditions and covenants contained in the Original Loan Agreement shall remain in full force and effect.

          4. References to Loan Agreement. Wherever reference is made in the Original Loan Agreement to “the Loan Agreement”, “this Agreement”, “hereof’, “hereunder”, “herein” or words of similar import, the same shall be deemed to refer to the Loan Agreement (as defined in this Amendment) and wherever reference is made in any of the Loan Documents to “the Loan Agreement,” the same shall be deemed to refer to the Loan Agreement (as defined in this Amendment). Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Loan Agreement.

          5. Counterparts. This Amendment may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All such counterparts shall be construed together and shall constitute one instrument, but in making proof hereof it shall only be necessary to produce one such counterpart.

          6. Binding Effect. This Amendment shall be binding upon and inure to the benefit of the parties and their respective successors and assigns.

          7. Governing Law. This Amendment shall be governed by New York law, without regard to conflicts of law principles.

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]

-4-

          IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their duly authorized representatives, all as of the day and year first above written.

BORROWER:

INTERSTATE WESTCHASE, LP, a Delaware limited partnership
By:	INTERSTATE WESTCHASE GP, LLC, a
	Delaware limited liability company, general
	partner
	By: INTERSTATE WESTCHASE MC, LLC, a Delaware limited liability company, manager and sole member.
	By: /s/ Bruce Riggins
	Name: Bruce Riggins
	Title: President

[SIGNATURES CONTINUE ON NEXT PAGE]

-5-

LENDER: UBS REAL ESTATE SECURITIES INC.,     a Delaware corporation
By:	/s/ Maryann Fisher
	Name:	Maryann Fisher
	Title:	Associate Director
By:	/s/ Henry Chung
	Name:	Henry Chung
	Title:	Director

EX-21

EXHIBIT 21

INTERSTATE HOTELS & RESORTS, INC.
Subsidiaries
Updated as of: March 31, 2009
Consolidated Subsidiaries

Subsidiary	Jurisdiction	Ownership
Crossroads Hospitality Management Company, LLC	Delaware	100% Interstate Hotels & Resorts, Inc.
Interstate Arlington, LP	Delaware	99% Interstate Arlington LP, LLC
		1% Interstate Arlington GP, LLC
Interstate Atlanta Airport, LLC	Delaware	100% Interstate Operating Company, LP
Interstate Baton Rouge, LLC	Delaware	100% Interstate Operating Company, LP
Interstate Columbia, LLC	Delaware	100% Interstate Operating Company, LP
Interstate Concord Holdings, LLC	Delaware	100% Interstate Concord, LLC
Interstate Durham, LLC	Delaware	100% Interstate Operating Company, LP
Interstate Hotels Company	Delaware	100% Interstate Hotels & Resorts, Inc.
Interstate Management Company, LLC	Delaware	99% Interstate Operating Company, LP
		1% Interstate Hotels & Resorts, Inc.
Interstate Management Services, Inc.	Delaware	100% Interstate Hotels & Resorts, Inc.
Interstate Member, Inc.	Delaware	100% Interstate Hotels & Resorts, Inc.
Interstate Operating Company, LP	Delaware	98% Interstate Hotels & Resorts, Inc. (LP)
		1% Interstate Hotels & Resorts, Inc. (GP)
		<1% Other Limited Partners
Interstate Partner Corporation	Delaware	100% Interstate Hotels & Resorts, Inc.
Interstate Property Corporation	Delaware	100% Interstate Hotels & Resorts, Inc.
Interstate Westchase, LP	Delaware	99% Interstate Westchase LP, LLC
		1% Interstate Westchase GP, LLC
Northridge Holdings, Inc.	Delaware	100% Interstate Hotels & Resorts, Inc.
Sunstone Hotel Properties, Inc.	Colorado	100% Interstate Hotels & Resorts, Inc.

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Interstate Hotels & Resorts, Inc.:

We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 333-113229, 333-92109, 333-89740, 333-61731, 333-60545 and 333-60539), of our reports dated March 31, 2009, with respect to the consolidated balance sheets of Interstate Hotels & Resorts, Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2008 and financial statement schedule III, and the effectiveness of internal control over financial reporting as of December 31, 2008, which reports appear in the December 31, 2008 annual report on Form 10-K of Interstate Hotels & Resorts, Inc.

Our report on the consolidated financial statements as of December 31, 2008 dated March 31, 2009 contains an explanatory paragraph that states that the Company may violate certain covenants included in its credit facility loan arrangement. Violation of one or more covenants would place the Company in default under this loan arrangement. The lenders would then have the right to demand an immediate repayment of all outstanding amounts if such an immediate demand for repayment was made. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty.

/s/ KPMG LLP
McLean, Virginia
March 31, 2009

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Thomas F. Hewitt, certify that:

1.	I have reviewed this annual report on Form 10-K of Interstate Hotels & Resorts, Inc.;
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 we 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 the 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 the 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.

Dated: March 31, 2009

/s/ Thomas F. Hewitt  

Thomas F. Hewitt 

Chief Executive Officer 

EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Bruce A. Riggins, certify that:

1.	I have reviewed this annual report on Form 10-K of Interstate Hotels & Resorts, Inc.;
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 we 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 the 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 the 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.

Dated: March 31, 2009

/s/ Bruce A. Riggins  

Bruce A. Riggins 

Chief Financial Officer 

EX-32

EXHIBIT 32

Section 906 Certification

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of Interstate Hotels & Resorts, Inc. (the “Company”) hereby certify, to such officers’ knowledge, that:

(i) the accompanying Annual Report on Form 10-K of the Company for the period ended December 31, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended;

and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 31, 2009

/s/ Thomas F. Hewitt  

Thomas F. Hewitt 

Chief Executive Officer 

/s/ Bruce A. Riggins  

Bruce A. Riggins 

Chief Financial Officer