10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-33738

Morgans Hotel Group Co.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	16-1736884 (I.R.S. Employer Identification No.)
475 Tenth Avenue	10018
New York, New York	(Zip Code)
(Address of principal executive offices)

(212) 277-4100
(Registrant’s telephone number, including area code)

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

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value	The NASDAQ Stock Market LLC

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. Yes o No þ

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

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

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 this 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.

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 Act). Yes o No þ

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant was approximately $256,543,000, based on a closing sale price of $10.30 as reported on the NASDAQ Global Market (formerly the NASDAQ National Market) on June 30, 2008.

As of March 12, 2009, the registrant had issued and outstanding 29,525,383 shares of common stock, par value $0.01 per share.

INDEX

	Page
PART I
ITEM 1 BUSINESS		4
ITEM 1A RISK FACTORS		14
ITEM 1B UNRESOLVED STAFF COMMENTS		31
ITEM 2 PROPERTIES		32
ITEM 3 LEGAL PROCEEDINGS		45
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		46
PART II
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		46
ITEM 6 SELECTED FINANCIAL INFORMATION		48
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		51
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		75
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		76
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		76
ITEM 9A CONTROLS AND PROCEDURES		76
ITEM 9B OTHER INFORMATION		79
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		79
ITEM 11 EXECUTIVE COMPENSATION		79
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		79
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		79
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES		79
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		80
Exhibit 10.44
Exhibit 10.45
Exhibit 10.61
Exhibit 10.62
Exhibit 10.63
Exhibit 10.64
Exhibit 10.65
Exhibit 10.66
Exhibit 21.1
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 99.1
Exhibit 99.2
Exhibit 99.3

2

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. References to “we,” “our” and the “Company” refer to Morgans Hotel Group Co. together in each case with our consolidated subsidiaries and any predecessor entities unless the context suggests otherwise.

The forward-looking statements contained in this Annual Report on Form 10-K reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ materially from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Important risks and factors that could cause our actual results to differ materially from those expressed in any forward-looking statements include, but are not limited to changes in economic, business, competitive market and regulatory conditions such as:

• downturns in economic and market conditions, particularly levels of spending in the business, travel and leisure industries;

• tightening of the global credit markets;

• general volatility of the capital markets and our ability to access the capital markets;

• hostilities, including future terrorist attacks, or fear of hostilities that affect travel;

• risks related to natural disasters, such as earthquakes and hurricanes;

• risks associated with the acquisition, development and integration of properties;

• the seasonal nature of the hospitality business;

• changes in the tastes of our customers;

• increases in real property tax rates;

• increases in interest rates and operating costs;

• the impact of any material litigation;

• the loss of key members of our senior management;

• changes in the competitive environment in our industry and the markets where we invest; and

• other risks discussed in this Annual Report on Form 10-K in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Result of Operations.”

We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual results.

3

PART I

ITEM 1. BUSINESS

Overview

Morgans Hotel Group Co. is a fully integrated hospitality company that operates, owns, acquires, develops and redevelops boutique hotels primarily in gateway cities and select resort markets in the United States, Europe and in select international locations. Over our 25-year history, we have gained experience operating in a variety of market conditions. At December 31, 2008, we owned or partially owned, and managed a portfolio of twelve luxury hotel properties in New York, Miami, Los Angeles, Scottsdale, San Francisco, London and Las Vegas, comprising approximately 3,700 rooms. In addition, we have two hotel developments, in Boston and New York, and a hotel expansion in Las Vegas with identified financing, representing an estimated 1,300 additional guest rooms and currently scheduled to open in late 2009 or early 2010. We have five other hotel development projects, including projects to be developed by third-parties but managed by us upon completion, in various stages of advancement and pending financing, representing an estimated 1,900 additional guest rooms. These potential development projects are located in Miami, Dubai, Palm Springs and Las Vegas.

Unlike traditional brand-managed or franchised hotels, boutique hotels provide their guests with what we believe is a distinctive lodging experience. Each of our hotels has a personality specifically tailored to reflect the local market environment and features a modern, sophisticated design that includes critically acclaimed public spaces, popular “destination” bars and restaurants and highly personalized service. Significant media attention has been devoted to our hotels, which we believe is the result of their distinctive nature, renowned design, dynamic and exciting atmosphere, celebrity guests and high-profile events. We believe that the Morgans Hotel Group brand, and each of our individual property brands are synonymous with style, innovation and service. We believe that this combination of lodging and social experiences, and association with our brands, increases our occupancy levels and pricing power.

At December 31, 2008, our owned or partially owned and managed portfolio of hotel properties consisted of:

• seven hotels that we own and manage, or the Owned Hotels — Morgans, Royalton and Hudson in New York, Delano Miami in Miami, Mondrian Los Angeles in Los Angeles, Clift in San Francisco and Mondrian Scottsdale in Scottsdale, comprising approximately 2,100 rooms;

• a 50% interest in two hotels in London, St Martins Lane and Sanderson, comprising approximately 350 rooms, which we manage;

• a 50% interest in Mondrian South Beach in Miami, which is a hotel condominium project that opened in December 2008, comprising approximately 330 rooms, which we manage;

• a 7% interest in the 300-room Shore Club in Miami which we manage; and

• a 20% interest in the Hard Rock Hotel and Casino in Las Vegas, or Hard Rock, which we also manage.

In addition to our current portfolio, we expect to operate, own, acquire, redevelop and develop new hotel properties that are consistent with our portfolio in major metropolitan cities and select resort markets in the United States, Europe and other select international destinations. We currently have development or expansion projects in Boston, New York and Las Vegas, all of which have identified financing. In addition, we have development or expansion projects in Miami and Las Vegas and projects in Dubai and Palm Springs to be developed by third-parties but managed by us upon completion. As a result of the current economic environment, and specifically the tightening of the credit markets, financing for certain of these projects has not yet been obtained. We and our joint venture partners or the project developers, as applicable, may not be able to obtain adequate project financing in a timely manner or at all. If project financing is not obtained, we and our joint venture partners or the project developers, as applicable, may seek additional equity investors to raise capital, limit the scope of the project, defer the project or cancel the project all together.

4

We conduct our operations through Morgans Group LLC, a Delaware limited liability company and our operating company, which we refer to as Morgans Group. Morgans Group holds substantially all of our assets. We are the managing member of Morgans Group and held approximately 97% of its membership units at December 31, 2008, not including long-term incentive plan units, or LTIP Units, convertible into membership units issued as part of our employee compensation plans. We manage all aspects of Morgans Group, including the operation, development, sale and purchase of, and investments in, hotels primarily through our management company, Morgans Hotel Group Management LLC, or MHG Management Company. The remaining membership interests in Morgans Group are owned by Residual Hotel Interest, LLC or its affiliates and are exchangeable for our common stock.

We were incorporated in Delaware in October 2005 and completed our initial public offering of common stock, or IPO, on February 17, 2006. Our corporate offices are located at 475 Tenth Avenue, New York, New York 10018. Our telephone number is (212) 277-4100. We maintain a website that contains information about us at www.morganshotelgroup.com.

Corporate Strategy

Our corporate strategy has been to grow through our proven ability to replicate our model on an individualized but consistent basis across a growing portfolio and by leveraging our portfolio of brands for expansion in both new and existing markets. Although we believe our growth will be negatively impacted by the current global economic downturn and extreme disruptions in financial markets in the near-term, we intend to continue building on this corporate strategy in the long-term. We believe that our current management team and existing operating infrastructure provide us with the ability to successfully integrate assets into our portfolio as we grow and expand. Due to our proven corporate strategy and the plans we have implemented to weather the difficult economic environment we are now facing, we believe we are well positioned for the future.

Internal Growth. As a result of recently completed hotel renovations, we believe we will increase our appeal to potential guests and generate increased revenue at our properties in the future. During 2008, we completed extensive renovations of guest rooms, including technological upgrades, common areas and the restaurant and bars at Mondrian Los Angeles and Morgans. During 2006 and 2007, we completed renovations of guest rooms and common areas at Delano and Royalton. With the completion of these renovations and others, we believe our portfolio of Owned Hotels is well positioned and has no significant deferred capital expenditures or improvements in the near term.

Targeted Renovations and Expansions. We are pursuing a number of targeted projects throughout our portfolio that we believe will increase our appeal to potential guests and improve the revenue generation potential at our properties. We have also identified expansion projects at Hudson which will utilize space that is currently under-utilized and allow for the addition of amenities and revenue drivers, such as meeting space and an increase in the number of available rooms. We plan on pursuing this expansion opportunity once economic conditions improve and funding becomes available. At Hard Rock, we are in the middle of a large-scale expansion project that is expected to include the addition of approximately 875 guest rooms, including an all-suite tower with upgraded amenities, and the expansion and reconfiguration of public areas with the addition of amenities and revenue drivers, such as restaurants, bars, health clubs, banquet and meeting spaces and retail shops.

Operational and Infrastructure Initiatives. We strive to implement state-of-the-art operational systems and apply best practices to maximize synergies at the portfolio level. Within the past few years, we have launched a number of operational and technology initiatives that are designed to result in revenue growth, significant improvements in our operating costs and efficiencies, an improved guest experience and an enhanced ability to market to our customers’ specific lodging needs. Operationally, we have prepared for the current economic downturn by implementing restructuring efforts and developing a multiphase contingency plan which was rolled out beginning in early 2008. This contingency plan included targeted reductions in corporate-related costs as well as direct hotel expenses. We believe our experienced management team has allowed us to implement these cost cuts without impacting the overall quality of our guest experience.

External Growth. Once the economy and financial markets improve, we believe we are poised for external growth that will be driven by growth in major metropolitan markets and select resort locations as we extend our hotel, restaurant and bar brands. We intend to be flexible with respect to transaction structures and real estate requirements as we grow our business. During 2008, we expanded our hotel portfolio with the opening of a new hotel and condominium joint venture project, Mondrian South Beach, in December 2008. Additionally, we are expanding our hotel portfolio through the development of Boston Ames and Mondrian SoHo, both of which have identified financing. We expect to complete both projects in late 2009 or early 2010. Currently, we have development and expansion projects in Miami, Dubai, Palm Springs, and Las Vegas for which financing has not yet been identified by us, the joint venture or the project developer. Given the current economic environment, including the state of the credit markets, with many sources of financing not readily available, these and other projects may not be able to obtain adequate project financing in a timely manner or at all and we, the joint venture or the project developer may have less capital to invest in them. If adequate project financing is not obtained, external growth projects may need to be limited in scope, deferred or cancelled altogether.

5

Target Markets. We base our decisions to enter new markets on a number of criteria, with a focus on markets that attract affluent travelers who value a distinctive and sophisticated atmosphere and outstanding service. Specifically, we target key gateway destinations that attract both domestic and foreign business and leisure travelers, as well as select resort markets. We believe that Boston, where we are developing the Boston Ames hotel, and Dubai, where we plan to manage a third-party developed project as a Delano, are examples of such markets. Consistent with our prior expansion activities, we will continue to seek growth primarily in markets with multiple demand drivers and high barriers to entry, including major North American metropolitan markets with vibrant urban locations, select resort locations, key European destinations that we believe offer a similar customer base as our established United States and United Kingdom markets, and select locations in the Middle East, Asia and South America.

Brand Extensions. We believe that our existing brand portfolio has considerable development potential. Many of our brands, including hotel brands such as Delano, Mondrian and Sanderson, and restaurant and bar brands such as Asia de Cuba and Skybar, may be extended to other hotels, restaurants and bars in our existing and new markets. Similarly, we believe our brand portfolio improves our ability to secure joint ventures and management agreements with third parties. For example, in September 2008, we announced the development of Delano Dubai by a leading Middle Eastern real estate development firm, and in December 2008 we opened Mondrian South Beach and launched Asia de Cuba at the hotel. Additionally, we currently have a development project underway in SoHo, New York to expand our Mondrian brand.

Flexible Business Model. We intend to be flexible with respect to transaction structures and real estate requirements as we grow our business. We will pursue attractive management agreements, joint ventures, acquisition and other opportunities as they arise. As we pursue these opportunities, we will place significant emphasis on re-flag and pure management opportunities and, where equity investment is required, on securing long-term management agreements and a meaningful percentage of any equity growth or a significant total dollar return on investment. The acquisition and finance markets and the specifics of any particular deal will influence each transaction’s structure. We believe our flexibility should allow us greater access to strategically important hotels and other opportunities. Joint ventures with management agreements should provide us with enhanced return on investment through management and other fee income and access to strategically important hotels and other opportunities. For example, we have demonstrated our ability to partner effectively through, among others, our restaurant joint ventures with Jeffrey Chodorow and the joint venture structures through which we own our interests in St Martins Lane, Sanderson, Hard Rock and Mondrian South Beach.

Moreover, we believe our flexibility with respect to the physical configuration of buildings gives us more options to grow in any given market as compared to many of our competitors who require very particular specifications so that their hotels will all look the same. In addition, the destination nature of our hotels has enabled us in the past to acquire assets in locations that are less established and, therefore, more attractively priced, due to our ability to create a destination hotel rather than be located directly adjacent to existing popular destinations.

2008 Transactions and Developments

Mondrian Palm Springs. On January 14, 2008, we announced a new project with Re:Loft Partners Palm Springs, LLC to manage Mondrian Palm Springs in downtown Palm Springs, California. The resort plans call for a Mondrian hotel with approximately 200 rooms, as well as residences available for sale. We expect that upon completion of the hotel by the project developer, we will operate the hotel under a 10-year management contract with two five-year extension options. Given the current state of the credit markets, this project may not be able to obtain adequate project financing in a timely manner or at all. If adequate project financing is not obtained, the developer may seek additional equity investors to raise capital, limit the scope of the project, defer the project or cancel the project altogether.

Approval of Gaming License in Nevada. In January 2008, we received approval from the Nevada Gaming Commission to operate the casino at Hard Rock. We began operating the casino on March 1, 2008.

Global Settlement of Litigation and Insurance Proceeds Sharing Agreement. On April 4, 2008, we and certain of our subsidiaries entered into a global settlement agreement with various parties pursuant to which the Shore Club litigation, regarding the management of the Shore Club hotel, and the Century litigation, regarding the structuring transactions that were part of our IPO and the IPO itself, along with related litigations and an additional litigation in which we were not involved, were settled. We were not required to make any cash payments as part of the settlement. Under the relevant terms of the settlement, the management agreement pursuant to which MHG Management Company manages Shore Club was amended to provide for, among other things, a reduction beginning in 2009 in the management and chain services fees, a reduction beginning in 2012 in the termination payment to be made by the owner of Shore Club to MHG Management Company upon termination of the management agreement, and certain changes to operating procedures at Shore Club.

6

In addition, on January 18, 2008, we entered into an insurance proceeds sharing agreement with NorthStar Capital Investment Corp.(“NorthStar”) regarding insurance proceeds related to these litigations. The litigations have been submitted for coverage by NorthStar under certain primary and excess insurance policies issued to NorthStar under which certain subsidiaries of the company and certain individual defendants in the litigations, including Mr. Hamamoto, are also insured. The insurers have paid certain amounts to NorthStar in connection with the litigations under the insurance policies. David Hamamoto, the Chairman of the Board, and Marc Gordon, a member of the Board and the Company’s Chief Investment Officer and Executive Vice President of Capital Markets, are beneficial owners of equity interests in NorthStar and Mr. Hamamoto is the Co-Chairman of the Board of Directors and Co-Chief Executive Officer of NorthStar.

Boston Ames. In June 2008, we entered in a joint venture agreement with Normandy Real Estate Partners and Ames Hotel Partners as part of the development of the Ames hotel in Boston, Massachusetts, which represents a new addition to our brand portfolio. Upon completion, which is currently scheduled for late 2009 or early 2010, Boston Ames is expected to have approximately 115 guest rooms, a restaurant, bar and exercise facility.

Share Repurchase. On July 1, 2008, our Board of Directors authorized the repurchase of up to $30.0 million of our common stock, or approximately 9% of our outstanding shares based on the then current market price. As of October 9, 2008, we had completed this share repurchase program, having purchased an aggregate of 2,794,653 shares for approximately $30.0 million in open market transactions.

Expansion of our Board of Directors. On July 25, 2008, our Board of Directors increased its size from seven to ten members and appointed David J. Moore, Deepak Chopra and Marc Gordon, the Company’s Chief Investment Officer and Executive Vice President of Capital Markets, to fill the newly created directorships on the Board. There is no arrangement or understanding between either Messrs. Moore or Chopra and any other persons pursuant to which either of them was selected as director of the Company. Mr. Gordon was appointed to the Board of Directors, in part, in consideration of his Amended and Restated Employment Agreement, effective as of April 1, 2008, which provides that the Company shall recommend Mr. Gordon’s addition as a director upon the expansion of the Board to include additional independent Directors.

Additionally, on February 5, 2008, our Board of Directors appointed Michael D. Malone as a Director effective January 31, 2008. There is no arrangement or understanding between Mr. Malone and any other persons pursuant to which he was selected as a director of the Company. We also announced that Lance Armstrong resigned from the Board effective January 31, 2008.

Stockholder Protection Rights Agreement. Also on July 25, 2008, our Board of Directors amended our Stockholder Protection Rights Agreement, or the Rights Agreement, to extend the date on which the Rights Agreement will expire from October 9, 2008 to October 9, 2009 (assuming there is no earlier redemption or triggering of the rights). The Rights Agreement was not adopted in response to any specific effort to obtain control of the Company but rather to continue to deter abusive takeover tactics that otherwise could be used to deprive stockholders of the full value of their investment. The terms of the Rights Agreement provide that the Board of Directors may amend the agreement in any respect without shareholder approval at any time before a triggering event. The Rights Agreement was otherwise unchanged.

Hard Rock Land Sale and Joint Venture Amendment. On August 1, 2008, a subsidiary of our Hard Rock joint venture obtained a loan to finance $50.0 million of the $110.0 million necessary to purchase an 11-acre parcel of land located adjacent to the Hard Rock from another subsidiary of the joint venture. The loan becomes due and payable no later than the maturity date of August 9, 2009, subject to two six-month extension options, and is subject to acceleration upon the occurrence of specified events of default, as set forth in the loan agreement. NorthStar is a participant lender in the loan. In connection with the loan, Morgans Group LLC, together with affiliates of DLJ Merchant Banking Partners (the “DLJMB Parties”), as guarantors, entered into a non-recourse carve-out guaranty agreement, which is only triggered in the event of certain “bad boy” clauses, in favor of Column Financial, Inc.

The DLJMB Parties contributed an aggregate of approximately $74.0 million to the Hard Rock joint venture to fund the remaining portion of the $110.0 million of proceeds necessary to complete the intercompany land purchase and to pay for all costs and expenses in connection with its closing and related financing. The proceeds from the financing, together with the equity contribution from the DLJMB Parties, were used to fully satisfy the $110.0 million amortization payment under the joint venture’s commercial mortgage backed securities loan facility.

As a result of this and other equity contributions by the DLJMB Parties, our ownership interest in the joint venture has been reduced to approximately 20.1% as of December 31, 2008.

7

Also on August 1, 2008, we and the DLJMB Parties amended our joint venture agreement. Among other things, the amended joint venture agreement clarifies certain obligations of the parties in the event that capital contributions are required for additional costs and expenses relating to the 11-acre parcel. In general, any decision to call for such additional capital contributions will be in the discretion of the Hard Rock joint venture’s board of directors. Subject to certain terms and conditions, the DLJMB Parties could also cause the joint venture to fund such additional capital contributions from third parties. However, each member that is not in default under the joint venture agreement will be given an opportunity to participate in the funding. The amended joint venture agreement also clarifies certain provisions used to calculate each member’s percentage interest in the joint venture in the event that such additional capital contributions are funded.

Echelon Las Vegas. On August 1, 2008, Boyd Gaming Corporation, or Boyd, announced that it will delay the entire Echelon project due to current capital markets and economic conditions. On September 23, 2008, we amended our joint venture agreement with Boyd to, among other things, extend the deadline by which the joint venture must obtain construction financing for the development of Delano Las Vegas and Mondrian Las Vegas to December 31, 2009. The amended joint venture agreement also provided for the immediate return of the $30.0 million deposit we had provided for the project, plus interest, the elimination of our future funding obligations of approximately $41.0 million and the elimination of any obligation for us to provide a construction loan guaranty. The amended joint venture agreement also limits the amounts that we and Boyd are required to continue to fund for pre-development and related costs to approximately $0.4 million each. Each partner has the right to terminate the joint venture for any reason prior to December 31, 2009. Additionally, the terms of the management agreement, which provide for us to operate the joint venture hotels upon their completion, remain unchanged.

Delano Dubai. In September 2008, we announced the development of Delano Dubai by a leading Middle Eastern real estate development firm. The hotel is expected to have approximately 200 guest rooms and 100 branded residences, and to include a restaurant, bar and spa. We expect that upon completion, which is currently expected in 2012, we will operate the hotel under a 20-year management contract with two 10-year extension options. In addition to hotel management fees, we also realize fees from the developer’s sale of both branded and unbranded residences, of which we recognized $1.5 million during September 2008.

Extension of the Gale Promissory Note. On November 4, 2008, we extended the maturity of the $10.0 million interest only promissory note issued to purchase the Gale in South Beach for an additional year. As a result, this promissory note matures on January 24, 2010. As part of the extension terms, we paid the annual interest payment at 11.0% in full at the time of the extension.

Termination of Mondrian Chicago Joint Venture. In November 2008, we terminated our joint venture with M Development to lease and develop a Mondrian hotel in Chicago after the joint venture was unable to obtain financing to continue with the planned project.

Extension of Mondrian South Beach Debt and Additional Financing. On November 25, 2008, together with our joint venture partner, we amended and restated the mortgage loan and mezzanine loan agreements related to the Mondrian South Beach to provide for, among other things, four one-year extension options of the third-party financing totaling $107.1 million as of December 31, 2008. Under the amended agreements, the initial maturity date of August 1, 2009 can be extended to July 29, 2013, subject to certain conditions including an amortization payment of approximately $17.5 million on August 1, 2009 for the first such annual extension, repayment of the remainder of the A-Note, as defined in the loan agreements, by August 1, 2010 for the exercise of the second annual extension, achievement of defined debt service coverage ratios for the exercise of the third and fourth annual extensions, and achievement of a loan to value test for the fourth annual extension. A portion of the proceeds obtained from condominium sales may be used to pay down all or part of the approximately $17.5 million extension obligation due on August 1, 2009, although there can be no assurances that such sale proceeds will be sufficient to cover the obligation. Further, we and an affiliate of our joint venture partner have provided additional mezzanine financing of approximately $22.5 million to the joint venture to fund completion of the construction and renovations at Mondrian South Beach. Mondrian South Beach opened on December 1, 2008.

London Joint Venture Recapitalization. In December 2008, we received approximately $11.5 million in cash dividends from the recapitalization of our London joint venture with a subsidiary of Walton Street Capital, LLC that owns Sanderson and St Martins Lane, both in London. The recapitalization required the consent of the lender and allows for future dividends from profits subject to lender consent.

8

Management and Operations of Our Portfolio

Overview of Management

We manage and operate each of our hotels, which are staffed by our employees and the employees of our joint venture operating companies, with personnel dedicated to each of the properties, including a general manager, controller, director of sales and marketing, director of human resources and other employees. The personnel in each hotel report to the general manager of the hotel. Each general manager reports to our executive vice president of operations. The corporate office provides support directly to certain functions at the hotel such as sales and revenue management. This organizational structure allows for each property to operate in a responsive and dynamic fashion while ensuring integrity of our guest experience and core values. As we have expanded in our existing markets, we have begun to regionalize certain operational, finance and sales functions. Our management team is headquartered in New York City and coordinates our management and operations. The management team reviews business contracts, oversees the financial budgeting and forecasting for our hotels, performs internal accounting and audit functions, administers insurance plans and identifies new systems and procedures to employ within our hotels to improve efficiency and profitability. In addition, the management team is responsible for coordinating the sales and marketing activities at each of our hotels, designing sales training programs, tracking future business prospects and identifying, employing and monitoring marketing programs. The management team is also responsible for the design of our hotels and overall product and service quality levels.

Our Engaging Dynamic Guest Experience, or EDGE, service program, which we have recently updated in early 2009, has been implemented across our portfolio, with the exception of Hard Rock which was acquired in February 2007. This program is designed to enhance employee initiative and responsiveness which we believe results in high customer satisfaction. Our EDGE initiative further allows the sharing of best practices and expertise across our employee base, creating a culture that we believe is more service-oriented than many of our competitors. At Hard Rock, comparable service initiatives which incorporate the spirit of EDGE are in place and continuously assessed to ensure they meet our brand standards.

Restaurant Joint Ventures

As a central element of our operating strategy, we focus significant resources on identifying exciting and creative restaurant concepts. Consistent with this objective and to further enhance the dining experience offered by our hotels, we have established joint venture relationships with well-known restaurateur Jeffrey Chodorow to develop, own and operate restaurants and bars at certain of the hotels we operate. Currently, these joint ventures operate the restaurants (including in-room dining, banquet catering and other food and beverage operations) at Morgans, Hudson, with the exception of banqueting, Delano Miami, Mondrian Los Angeles, Clift, St Martins Lane, Sanderson, and Mondrian South Beach as well as the bars in Delano Miami, St Martins Lane and Sanderson. Additionally, the restaurant at Mondrian Scottsdale is owned by us but operated by Jeffrey Chodorow pursuant to license and management agreements.

Marketing, Sales and Public Relations

Strong direct sales has been an integral part of our success. As of December 31, 2008, we employed a sales force of greater than 100 people with multiple sales managers stationed in each of our markets. The sales force is responsible for sourcing new corporate accounts in the United States, Europe and Asia. We have also opened sales offices in other markets. These offices are deployed by industry focus and geography. In 2008, we derived approximately 36% of our business from corporate transient and group accounts. Our core corporate business comes from the technology, financial services, entertainment, advertising, fashion and consumer goods industries. Approximately 56% of our guests are traveling on business.

Unlike many hotel companies, our sales managers are trained to sell the experience, not simply the rate. By branding the “experience” we showcase the kind of creativity that happens inside our hotels and prove that our guests come to us for much more than just a room or a bed. Our objective is to create differentiation by selling an “experience” and “brand.”

While marketing initiatives are customized in order to account for local preferences and market conditions, consistent major campaign and branding concepts are utilized throughout all our marketing activities. These concepts are developed by our central sales and marketing teams, but a significant amount of discretion is left to the local sales managers who are often more able to promptly respond to local changes and market trends and to customize marketing concepts to meet each hotel’s specific needs.

We place significant emphasis on branded communication strategies that are multi-layered and non-traditional. Our public relations and blog outreach strategy is a highly cost-effective marketing tool for our Company. Through highly publicized events, prospective guests are more likely to be made aware of our hotels through word-of-mouth or magazine, newspaper articles or blog entries and high-profile events rather than direct advertising. This publicity is supplemented with focused marketing activities to our existing customers. Our in-house marketing and public relations team coordinates the efforts of third-party public relations firms to promote our properties through travel magazines and various local, national and international newspaper travel sections. We regularly host events that attract celebrity guests and journalists generating articles in newspapers and magazines around the world. Our marketing efforts also include hosting other special events which have included events for Art Basel Miami, The Academy Awards, The Grammy’s and Fashion Week in New York and London.

9

Integration and Centralization Efforts

We have centralized certain aspects of our operations in an effort to provide further revenue growth and reduce operating costs. Beginning in 2002, we embarked on a number of technological and process initiatives including the launch of a new website, www.morganshotelgroup.com, which during 2008 generated approximately 15.8% of our total bookings and approximately 20.1% of our total rooms revenue. In 2009, we launched an updated website which provides our guests with a unique and distinctive booking experience, while offering a lower cost to reserve rooms than previously offered. The new website, unlike any other hotel company’s website, offers a more immersive experience to its visitors through the use of film, lifestyle photography and updated localized content specific to each hotel.

In an effort to reduce expenses and to drive revenue growth, we employ what we believe to be the state-of-the-art systems available to the hospitality industry. These include our:

• Property Management System — Our property management system provides management solutions to improve operations and profitability for a global hotel organization. Our property management system is designed for comprehensive guest management by, among other things, allowing the user to track and retrieve information pertaining to guests, groups and company accounts. Additional features of this system allow the user to extract information on a customized basis from its customer database. We believe that this increases the possibility of maximizing revenue by allowing us to efficiently respond and cater to guest demands and trends and decreases expenses by centralizing the information database in an easy to use format.

• Central Reservations System — Our central reservations system and related distribution and reservations services provide hotel reservations-related services and technology.

• Central Reservations Office — Our central reservations office provides contact management solutions. It is managed by a third-party out of its facility in New Brunswick, Canada.

• Sales and Catering — Our sales and catering system is a strategic tool specifically designed to maximize the effectiveness of the sales process, increase revenues and efficiency, and reduce costs.

• Revenue Management — Our revenue management system is a proprietary system which provides hospitality focused pricing and revenue optimization solutions.

• Accounting and Reporting — Our accounting and reporting is performed under The Uniform System of Accounts for the Lodging Industry and utilizes a widely used international accounting system that allows for customizing and analyzing data while ensuring consistent controls.

• Customer Relationship Management — Our customer relationship management system is designed specifically for the hospitality industry and provides personalized guest recognition, high service quality, improved guest satisfaction and loyalty, which we believe results in increased revenues. This centralized database tracks guest sales history and guest preferences to provide our staff in our hotels and sales agents with a method of efficiently responding to and targeting guest needs.

Competition

We believe competition in the hospitality industry reflects a highly fragmented group of owners and operators offering a wide range of quality and service levels. Our hotels compete with other hotels in their respective locations that operate in the same segments of the hospitality market. These segments consist of traditional hotels in the luxury sector and boutique hotels in the same local area. Competitive factors include quality of service, convenience of location, quality of the property, pricing and range and quality of food services and amenities offered. We compete by providing a differentiated combination of location, design, amenities and service. We are constantly striving to enhance the experience and service we are providing for our guests and have a continuing focus on improving our customer experience.

10

Insurance

We bid out our insurance programs to obtain the most competitive coverage and pricing. We believe our programs provide coverage of the insurable risks facing our business that are consistent with or exceed industry standards.

We provide insurance coverage for our Owned Hotels and all of our operated properties, with the exception of The Shore Club and Hard Rock, both discussed below, including all-risk property, terrorism, commercial general liability, umbrella/excess liability, workers’ compensation and employers’ liability, pollution legal liability, blanket crime, and fiduciary liability policies for which we are the named insured. Our property insurance includes coverage for catastrophic perils of flood, earthquake and windstorm at limits exceeding probable maximum loss estimates. These policies also cover the restaurants and bars that operate in our hotels, with the exception of The Shore Club and Hard Rock, both discussed below. Employment practices liability insurance programs are in place for both Owned Hotels and operated properties, with the exception of The Shore Club and Hard Rock, both discussed below, as well as joint venture restaurants and bars.

The Shore Club is covered under our employee related insurance policies only, with all other lines of coverage being provided by the property owner.

Hard Rock has stand alone insurance policies for all lines of coverage, including property, general liability, excess liability, workers compensation and employment practices liability.

Separate insurance programs are in place for the Hard Rock expansion project and Boston Ames and Mondrian SoHo development projects, all of which protect us and our partners from risks associated with the development and construction of new properties.

Directors and officers liability insurance has been in place since our initial public offering in February 2006 at limits and retentions that we believe are consistent with public companies in our industry groups. Coverage includes protection for securities claims.

We believe that the premiums we pay for our insurance policies are reasonable and consistent with those paid by comparable businesses of our size and risk profile. Our insurance policies require annual renewal. Given current trends, our insurance expense may increase in the foreseeable future.

Employees

As of December 31, 2008, we employed approximately 4,000 individuals, approximately 14.3% of whom were represented by labor unions. In addition, our restaurant joint ventures employed approximately 1,300 individuals, approximately 32.9% of whom were represented by labor unions.

Relations with Labor Unions

New York. The terms of employment of our employees that are represented by the New York Hotel and Motel Trades Council, AFL-CIO, or Trades Council, at our New York City hotels are governed by a collective bargaining agreement. The term of the agreement is from July 1, 2006 through June 30, 2012 and generally incorporates by reference the industry-wide agreement between the Hotel Association of New York City, Inc., a multi-employer association composed of New York City hotel operators, and the Trades Council, or the IWA. The agreement governs wages, hours and terms and conditions of employment of employees at these hotels. It provides that there will be no strikes or lockouts during its term, and that all disputes arising under the agreement or concerning the relations of the parties shall be resolved through arbitration before a contract arbitrator — the Office of the Impartial Chairman of the Hotel Industry. The employees of certain of our bars and restaurants in certain New York City hotels are represented by the Trades Council and covered by a collective bargaining agreement which generally incorporates by reference the IWA. By operation of the collective bargaining agreement, the bars and restaurants are considered a joint employer with the hotels. Accordingly, if there is any breach of our labor agreement by the concessionaire, the hotels would be liable for such breach.

San Francisco. The majority of our Clift employees that are represented by labor unions are represented by UNITE/HERE Local 2. We adopted the industry-wide agreement between the union and the San Francisco Hotels Multi-Employer Group, a multi-employer association composed of San Francisco hotel operators, which expires August 14, 2009. The employees at the Asia de Cuba Restaurant in the Clift hotel are members of UNITE/HERE Local 2 and this restaurant joint venture is considered a joint employer with Clift. Accordingly, if there is any breach of our labor agreement by the concessionaire, Clift would be liable for such breach. Labor agreements with the unions representing the remaining Clift employees are either set to expire in 2009 or 2010 or expired in 2008, but are subject to a temporary extension while a new labor agreement is negotiated.

11

Government Regulation

Our businesses are subject to numerous laws, including those relating to the preparation and sale of food and beverages, such as health and liquor license laws. Our businesses are also subject to laws governing employees in our hotels in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees and work permits. Also, our ability to expand our existing properties may be dependent upon our obtaining necessary building permits or zoning variances from local authorities.

Under the Americans with Disabilities Act, or ADA, all public accommodations are required to meet federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been invested to ensure that our hotels comply with ADA requirements, a determination that our hotels 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. We believe that we are currently in compliance in all material respects with all statutory and administrative government regulations with respect to our business.

Our hotel properties expose us to possible environmental liabilities, including liabilities related to activities that predated our acquisition or operation of a property. Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up certain hazardous substances released at the property and may be held liable to a governmental entity or to third parties for property damages and for investigation and cleanup costs incurred by such parties in connection with the contamination. Environmental liability can be incurred by a current owner or operator of a property for environmental problems or violations that occurred on a property prior to acquisition or operation. These laws often impose liability whether or not the owner knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. The presence of contamination or the failure to remediate contamination may adversely affect the owner’s ability to sell or lease real estate or to borrow using the real estate as collateral. The owner or operator of a site may be liable under common law to third parties for damages and injuries resulting from environmental contamination emanating from the site.

All of our properties have been subject to environmental site assessments, or ESAs, prepared by independent third-party professionals. These ESAs were intended to evaluate the environmental conditions of these properties and included a site visit, a review of certain records and public information concerning the properties, the preparation of a written report and, in some cases, invasive sampling. We obtained the ESAs before we acquired our hotels to help us identify whether we might be responsible for cleanup costs or other environmental liabilities. The ESAs on our properties did not reveal any environmental conditions that are likely to have a material adverse effect on our business, assets, and results of operations or liquidity. However, ESAs do not always identify all potential problems or environmental liabilities. Consequently, we may have material environmental liabilities of which we are unaware. Moreover, it is possible that future laws, ordinances or regulations could impose material environmental liabilities, or that the current environmental condition of our properties could be adversely affected by third parties or by the condition of land or operations in the vicinity of our properties. We believe that we are currently in compliance with all applicable environmental regulations in all material aspects.

As a result of our February 2007 acquisition of the Hard Rock, we and its casino operations are subject to gaming industry regulations. The gaming industry is highly regulated, and we and the casino must maintain all necessary gaming licenses and the casino must pay all applicable gaming taxes to continue operations. We and the casino are subject to extensive regulation under the laws, rules and regulations of the jurisdiction in which the casino operates. These laws, rules and regulations generally concern the responsibility, financial stability and character of the owners, managers, and persons with financial interests in the gaming operations. Violations of laws could result in, among other things, disciplinary action.

Trademarks

Our trademarks include, without limitation, Morgans Hotel Group^®, Morgans^®, Agua Baby^®, Agua Bath House^®, Agua Home^®, Blue Door^®, Blue Door at Delano^® (and design), The Florida Room ^TM (and design), Clift Hotel^®, Delano^®, Mondrian^®, Skybar^®, Royalton^®, The Royalton^®, The Royalton Hotel^®, Bar 44^® (and design), Brasserie 44^® (and design) , Sanderson Hotel^®, St Martins^® and St Martins Lane Hotel^®. The majority of these trademarks are registered in the United States. Several of these trademarks are also registered in the European Community. Our trademarks are very important to the success of our business and we actively enforce, maintain and protect these marks.

12

All intellectual property rights related to the Hard Rock are held by our joint venture with DLJMB. The joint venture acquired the rights to the use of the “Hard Rock Hotel” and “Hard Rock Casino” trademarks in connection with our operations in Las Vegas and in connection with hotel casinos and casinos in the State of Illinois and all states and possessions of the United States which are located west of the Mississippi River, including the entire state of Louisiana, but excluding Texas, except for the Greater Houston Area, the nations of Australia, Brazil, Israel, and Venezuela, and the Greater Vancouver Area, British Columbia, Canada.

Materials Available On Our Website

We file annual, quarterly and periodic reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. You may obtain and copy any document we file with or furnish to the SEC at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, N.E., Washington, D.C. 20549. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file or furnish such information electronically with the SEC. Our SEC filings are accessible through the Internet at that website.

Copies of SEC filings including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as well as reports on Forms 3, 4, and 5 regarding officers, Directors or 10% beneficial owners of our Company, are available for download, free of charge, as soon as reasonably practicable after these reports are filed or furnished with the SEC, at our website at www.morganshotelgroup.com. Our website also contains copies of the following documents that can be downloaded free of charge:

• Corporate Governance Guidelines;

• Business Code of Conduct;

• Code of Ethics;

• Charter of the Audit Committee;

• Charter of the Compensation Committee; and

• Charter of the Corporate Governance and Nominating Committee.

In the event of any changes to these charters, codes or guidelines, changed copies will also be made available on our website. If we waive or amend any provision of our code of ethics, we will promptly disclose such waiver or amendment as required by SEC or Nasdaq rules.

The content of our website is not a part of this report. You may request a copy of any of the above documents, at no cost to you, by writing or telephoning us at: Morgans Hotel Group Co., 475 Tenth Avenue, New York, New York 10018, Attention: Investor Relations, telephone (212) 277-4100. We will not send exhibits to these reports, unless the exhibits are specifically requested and you pay a modest fee for duplication and delivery.

13

ITEM 1A. RISK FACTORS

Set forth below are risks that we believe are material to investors who purchase or own our securities. You should consider carefully the following risks, together with the other information contained in and incorporated by reference in this Annual Report on Form 10-K, and the descriptions included in our consolidated financial statements and accompanying notes.

Risks Related to Our Business

The current crisis in the financial markets and contraction of the economy has weakened, and could further weaken, demand for travel, hotels, dining and entertainment, which could have a material adverse effect on our business, results of operations and financial condition.

U.S. and global financial markets have been experiencing extreme disruptions, including, among other things, extreme volatility in securities prices, as well as severely diminished liquidity and credit availability. U.S. and global economies have also contracted significantly in recent months and will likely continue to contract for the foreseeable future, reducing the amounts people spend on travel, hotels, dining and entertainment. Lodging demand weakened significantly during the last quarter of 2008, and we believe it will continue to weaken in 2009 until current economic trends reverse course. If current economic conditions continue or worsen, they could have a material adverse effect on our business, results of operations, and financial condition.

We have incurred substantial losses and have a significant net deficit, and due to the current negative economic environment, may continue to incur losses in the future.

We reported pre-tax net losses of $30.8 million, $29.4 million, $3.0 million, $24.3 million, and $89.5 million for the years ended December 31, 2004, 2005, 2006, 2007 and 2008, respectively. Our net losses primarily reflect losses in equity of unconsolidated joint ventures due to our interest expense and depreciation and amortization charges, which we expect will continue to be significant. Further, stock compensation, a non-cash expense, which we began recognizing in 2006 when we went public, contributes to the net losses recorded during 2006, 2007 and 2008. There can be no assurance that we will attain profitability and generate net income for our stockholders in the near term or at all.

Boutique hotels such as ours may be more susceptible to an economic downturn than other segments of the hospitality industry, which could result in declines in our average daily room rates or occupancy, or both.

The performance of the hospitality industry, and the boutique hotel segment in particular, has traditionally been closely linked with the general economy. In the current economic downturn, boutique hotels such as ours may be more susceptible to a decrease in revenues, as compared to hotels in other segments that have lower room rates, because our hotels generally target business and high-end leisure travelers. In this period of economic difficulties, business and high-end leisure travelers may seek to reduce travel costs by limiting travel, choosing lower cost hotels or otherwise reducing the costs of their trips. These changes could result in further declines in average daily room rates or occupancy, or both. Profitability also may be negatively affected by the relatively high fixed costs of operating hotels such as ours, when compared to other segments of the hospitality industry.

We have substantial debt, and we may incur additional indebtedness, which may negatively affect our business and financial results.

As of December 31, 2008, we had $730.4 million of outstanding consolidated indebtedness, including capital lease obligations. Our share of indebtedness held by our joint venture entities, which is non-recourse to us, with the exception of certain standard carve-out guarantees, was approximately $383.6 million as of December 31, 2008. Our substantial debt may negatively affect our business and operations in several ways, including:

• requiring us to use a substantial portion of our funds from operations to make required payments on principal and interest, which will reduce funds available for operations and capital expenditures, future business opportunities and other purposes;

• making us more vulnerable to economic and industry downturns, such as the one we are currently experiencing, and reducing our flexibility in responding to changing business and economic conditions;

• limiting our ability to borrow more money for operations, capital or to finance development projects or acquisitions in the future; and

• requiring us to dispose of properties in order to make required payments of interest and principal.

14

We also will likely incur additional debt in connection with any future acquisitions. However, the tightening of the credit markets may negatively impact our ability to access additional financing. We may, therefore, in some instances, borrow under our revolving credit facility or borrow other funds to acquire properties. In addition, we may incur further mortgage debt by obtaining loans secured by the properties we acquire or our existing portfolio.

Our working capital and liquidity reserves may not be adequate to cover all of our cash needs and we may have to obtain additional debt financing. Sufficient financing may not be available or, if available, may not be available on terms acceptable to us. Additional borrowings for working capital purposes will increase our interest expense, and therefore may harm our business and operations.

Our organizational documents do not limit the amount of indebtedness that we may incur. If we increase our leverage, the resulting increase in debt service could adversely affect our ability to make payments on our indebtedness and harm our business and operations.

We anticipate that we will need to refinance our indebtedness from time to time to repay our debt, and our inability to refinance on favorable terms, or at all, could harm our business and operations.

Since we anticipate that our internally generated cash will be inadequate to repay our indebtedness prior to maturity, we expect that we will be required to repay debt from time to time through refinancings of our indebtedness and/or offerings of equity or debt. The amount of our existing indebtedness and the recent tightening of the credit markets may harm our ability to repay our debt through refinancings. If we are unable to refinance our indebtedness on acceptable terms, or at all, we might be forced to sell one or more of our properties on disadvantageous terms, which might result in losses to us. We have mortgages on several of our hotel properties to secure our indebtedness, including $40.0 million on Mondrian Scottsdale which matures on June 1, 2009. To the extent we cannot meet our debt service obligations, we risk losing some or all of those properties to foreclosures. If prevailing interest rates or other factors at the time of any refinancing result in higher interest rates on any refinancing, our interest expense would increase, which could harm our business and operations.

Our revolving credit facility and other debt instruments contain financial and other covenants that may limit our ability to borrow and restrict our operations, and if we fail to comply with such covenants, such failure could result in a default under one or more of our debt instruments.

Our revolving credit facility requires the maintenance of fixed charge coverage ratios and leverage ratios. Our trust preferred securities also require the maintenance of fixed charge coverage ratios. Our ability to borrow under our revolving credit facility is subject to compliance with these financial and other covenants, and our ability to comply with the covenants may be impacted by any deterioration in our operations brought on by the current economic downturn, potential further declines in our property values, and additional borrowings to maintain our liquidity and fund our capital and financing obligations. As of December 31, 2008, we are in compliance with the financial covenants set forth in our revolving credit facility, trust preferred securities and other agreements. However, if our business deteriorates, we may breach one or more of our financial covenants in the future. In the event we breach our financial covenants, we would be in default under the revolving credit facility, the trust preferred securities and/or certain other agreements, which could allow lenders to declare all amounts outstanding under the applicable agreements to become due and payable. Additionally, an acceleration event under one debt instrument could allow for acceleration under other debt instruments with cross-acceleration provisions. If this happens, there would be a material adverse effect on our financial position and results of operations.

The amount available for borrowings under the revolving credit facility is contingent upon the borrowing base, which is calculated by reference to the appraised value and implied debt service coverage value of certain collateral properties securing the revolving credit facility. As of December 31, 2008, the available borrowing base, before $15.3 million of outstanding letters of credit posted against the revolving credit facility, was approximately $68.7 million, with a potential increase to $177.2 million, before such posted letters of credit, at our option by increasing the amount of the borrowing capacity on Delano Miami through a mortgage filing and upon payment of the related additional recording tax. Our ability to borrow under the revolving credit facility and the amount of cash that may need to be retained from such borrowings also depends on our ability to maintain the revolving credit facility’s financial covenants. If current economic conditions continue, however, we expect that this borrowing base will be significantly reduced in the future. As a result, we cannot assure you of the future amount, if any, that will be available under our revolving credit facility.

15

In addition, both the revolving credit facility and trust preferred securities include limitations on our ability to sell all or substantially all of our assets and engage in mergers, consolidations and certain acquisitions. These covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders.

Some of our other existing indebtedness contain limitations on our ability to incur additional debt on specific properties, as well as financial covenants relating to the performance of those properties. If these covenants restrict us from engaging in activities that we believe would benefit those properties, our growth may be limited. If we fail to comply with these covenants, we will need to obtain consents or waivers from compliance with these covenants, which may take time, cause us to incur additional expenses, or may require us to prepay the debt containing the restrictive covenants.

A majority of our debt is secured by first deeds of trust on our properties. If we were to default on our secured debt, the loss of property securing the debt would harm our ability to satisfy other obligations. Using our properties as collateral increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure and ultimately our loss of the property that secures any loans for which we are in default. For tax purposes, a foreclosure on any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not receive any cash proceeds.

Disruptions in the financial markets could affect our ability to obtain financing for development of our properties and other purposes on reasonable terms.

U.S. and global stock and credit markets are experiencing significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing. Continued uncertainty in the stock and credit markets may prevent or negatively impact our ability to access additional financing or refinancing for development of our properties and other purposes at reasonable terms, which may cause us to suspend, abandon or delay development and other activities and otherwise negatively affect our business or our ability to refinance debt as it comes due. For example, in 2008, our Echelon Las Vegas project was delayed and our Mondrian Chicago project was canceled after the applicable joint ventures were unable to obtain necessary financings. The downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital through the issuance of our common stock or preferred stock.

Boutique hotels are a highly competitive segment of the hospitality industry. If we are unable to compete effectively, our business and operations will be adversely affected by declines in our average daily room rates or occupancy, or both.

We generally compete in the boutique hotel segment of the hospitality industry. We believe that this segment is highly competitive. Competition within the boutique hotel segment is also likely to increase in the future. Competitive factors in the hospitality industry include name recognition, quality of service, convenience of location, quality of the property, pricing and range and quality of food services and amenities offered. Market perception that we no longer provide innovative property concepts and designs would adversely affect our ability to compete effectively. If we are unable to compete effectively, we would lose market share, which could adversely affect our business and operations.

All of our properties are located in areas with numerous competitors, many of whom have substantially greater resources than us. In addition, new hotels may be constructed in the areas in which our properties are located, possibly without corresponding increases in demand for hotel rooms. New or existing competitors could offer significantly lower rates or more convenient locations, services or amenities or significantly expand, improve or introduce new service offerings in markets in which our hotels compete, thereby posing a greater competitive threat than at present. The resulting decrease in our revenues could adversely affect our business and operations.

16

Our success depends on the value of our name, image and brands, and if the demand for our hotels and their features decreases or the value of our name, image or brands diminishes, our business and operations would be adversely affected.

Our success depends, to a large extent, on our ability to shape and stimulate consumer tastes and demands by producing and maintaining innovative, attractive, and exciting properties and services, as well as our ability to remain competitive in the areas of design and quality. There can be no assurance that we will be successful in this regard or that we will be able to anticipate and react to changing consumer tastes and demands in a timely manner.

Furthermore, a high media profile is an integral part of our ability to shape and stimulate demand for our hotels with our target customers. A key aspect of our marketing strategy is to focus on attracting media coverage. If we fail to attract that media coverage, we may need to substantially increase our advertising and marketing costs, which would adversely affect our results of operations. In addition, other types of marketing tools, such as traditional advertising and marketing, may not be successful in attracting our target customers.

Our business would be adversely affected if our public image or reputation were to be diminished. Our brand names and trademarks are integral to our marketing efforts. If the value of our name, image or brands were diminished, our business and operations would be adversely affected.

Any failure to protect our trademarks could have a negative impact on the value of our brand names and adversely affect our business.

We believe that our trademarks are critical to our success. We rely on trademark laws to protect our proprietary rights. The success of our business depends in part upon our continued ability to use our trademarks to increase brand awareness and further develop our brand in both domestic and international markets. Monitoring the unauthorized use of our intellectual property is difficult. Litigation has been and may continue to be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources, may result in counterclaims or other claims against us and could significantly harm our results of operations. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States.

From time to time, we apply to have certain trademarks registered. There is no guarantee that such trademark registrations will be granted. We cannot assure you that all of the steps we have taken to protect our trademarks in the United States and foreign countries will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brands and their market acceptance, competitive advantages or goodwill, which could adversely affect our business.

Use of the “Hard Rock” brand name by entities other than us could damage the brand and our operations at the Hard Rock Hotel & Casino in Las Vegas and adversely affect our business and results of operations.

We believe that our Hard Rock Hotel & Casino property in Las Vegas benefits from the global name recognition and reputation generated by the Hard Rock Cafes that are operated or franchised in the United States and abroad by the Seminole Tribe of Florida. The Seminole Tribe of Florida is, however, under no obligation to continue to own, operate or franchise Hard Rock Cafes, and there can be no assurance that it will not sell, change the focus of, or manage, such restaurants in a manner that would adversely affect our Hard Rock Hotel & Casino property in Las Vegas.

In addition, although we have obtained the exclusive right to use and develop the “Hard Rock Hotel” and “Hard Rock Casino” trademarks in connection with our operations in Las Vegas, and in connection with hotel casinos and casinos in the State of Illinois and all states and possessions of the United States which are located west of the Mississippi River, including the entire state of Louisiana, but excluding Texas, except for the Greater Houston Area, the nations of Australia, Brazil, Israel and Venezuela, and the Greater Vancouver Area and British Columbia, Canada, the Seminole Tribe of Florida is the sole owner of the rights to the “Hard Rock Cafe,” “Hard Rock Hotel” and “Hard Rock Casino” trademarks. As a result, the Seminole Tribe of Florida, or its licensee, can exploit the “Hard Rock” name and logo, other than in connection with hotel casinos and casinos in our exclusive territory, including marketing “Hard Rock” merchandise anywhere in the world. For example, the Seminole Tribe of Florida has licensed the use of the “Hard Rock” name in connection with its Seminole Hard Rock Hotels in Hollywood and Tampa, Florida. There can be no assurance that our business and results of operations will not be adversely affected by the management or the enforcement of the “Hard Rock” brand name by parties outside of our control.

17

We may have disputes with, or be sued by, third parties for infringement or misappropriation of their proprietary rights, which could have a negative impact on our business.

Other parties may assert trademark, copyright or other intellectual property rights that have a negative impact on our business. We cannot assure you that others will not seek to block our use of certain marks or seek monetary damages or other remedies for the prior use of our brand names or other intellectual property or the sale of our products or services as a violation of their trademark, copyright or other proprietary rights. Defending any claims, even claims without merit, could divert our management’s attention, be time-consuming, result in costly settlements, litigation or restrictions on our business and damage our reputation.

In addition, there may be prior registrations or use of trademarks in the United States or foreign countries for similar or competing marks or other proprietary rights of which we are not aware. In all such countries it may be possible for any third-party owner of a national trademark registration or other proprietary right to enjoin or limit our expansion into those countries or to seek damages for our use of such intellectual property in such countries. In the event a claim against us were successful and we could not obtain a license to the relevant intellectual property or redesign or rename our products or operations to avoid infringement, our business, financial condition or results of operations could be harmed. Securing registrations does not fully insulate us against intellectual property claims, as another party may have rights superior to our registration or our registration may be vulnerable to attack on various grounds.

Our hotels are geographically concentrated in a limited number of cities and, accordingly, we could be disproportionately harmed by an economic downturn in these cities or a disaster, such as a hurricane or earthquake.

The concentration of our hotels in a limited number of cities exposes us to greater risk to local economic, business and other conditions than more geographically diversified hotel companies. Morgans, Royalton and Hudson, located in Manhattan, represented approximately 29.3% of our guest rooms and approximately $144.8 million, or 46.0%, of our combined revenues for the year ended December 31, 2008. Currently, the Manhattan hotel market is experiencing a significant decline related to the global economic downturn. A terrorist attack or similar disaster would also cause a decline in the Manhattan hotel market and adversely affect occupancy rates, the financial performance of our New York hotels and our overall results of operations. In addition, our operations in Las Vegas, including the Hard Rock Hotel & Casino and our possible development of a Delano Las Vegas and Mondrian Las Vegas, and the opening of Mondrian South Beach, our third hotel in Miami, have increased our geographic concentration in Las Vegas and Miami, respectively, making us susceptible to economic slowdowns and other factors in those markets, which could adversely affect our business and results of operations.

In addition, certain of our hotels are located in markets that are more susceptible to natural disasters than others, which could adversely affect those hotels, the local economies, or both. Specifically, the Miami area, where Delano Miami, Shore Club and Mondrian South Beach are located, is susceptible to hurricanes and California, where Mondrian Los Angeles and Clift are located, is susceptible to earthquakes. A variety of factors affecting the local markets in which our hotels operate, including such natural disasters, could have a material adverse affect on our business and operations.

Our operations in Las Vegas, including the Hard Rock Hotel & Casino and our possible development of a Delano Las Vegas and Mondrian Las Vegas, are subject to intense local competition that could impact our operations and adversely affect our business and results of operations.

Our operations in Las Vegas, including the Hard Rock Hotel & Casino and our possible development of a Delano Las Vegas and Mondrian Las Vegas, compete with other high-quality Las Vegas resorts, including those located on the Las Vegas Strip. We believe such competition is based on certain property-specific factors, including overall atmosphere, range of amenities, price, location, entertainment attractions, theme and size. Many of the competing properties have themes and attractions which draw a significant number of visitors and directly compete with our operations in Las Vegas. Some of these properties are operated by companies that may have greater name recognition and financial and marketing resources than we do and market to the same target demographic group as us. Furthermore, additional hotel casinos containing a significant number of rooms are expected to open in Las Vegas over the next several years, which could significantly increase competition. Currently, the Las Vegas hotel casino market is experiencing a significant decline related to the global economic downturn. There can be no assurance that the Las Vegas market will continue to grow at its historical pace or that hotel casino resorts will continue to be popular. The decline or leveling off of the growth or popularity of such properties would adversely affect our results of operations.

The Hard Rock Hotel & Casino in Las Vegas is subject to extensive state and local regulation, and licensing and gaming authorities in Nevada have significant control over our gaming operations at the Hard Rock Hotel & Casino in Las Vegas.

Our ability to operate the casino at the Hard Rock Hotel & Casino in Las Vegas is contingent upon our maintenance of all regulatory licenses, permits, approvals, registrations, findings of suitability, orders and authorizations. The laws, regulations and ordinances requiring these licenses, permits and other approvals generally relate to the responsibility, financial stability and character of the owners and managers of gaming operations, as well as persons financially interested or involved in gaming operations. The scope of the approvals required to open and operate a facility is extensive. Failure to obtain or maintain any of the required gaming approvals and licenses could impair our future financial position and results of operations.

18

The Nevada Gaming Commission may, in its discretion, require the holder of any securities we issue to file applications, be investigated and be found suitable to own our securities if it has reason to believe that such ownership would be inconsistent with the declared policies of the State of Nevada.

Nevada regulatory authorities have broad powers to request detailed financial and other information, to limit, condition, suspend or revoke a registration, gaming license or related approval and to approve changes in our operations. Such authorities may levy substantial fines or forfeiture of assets for violations of gaming laws or regulations. The suspension or revocation of any license that may be granted to us or the levy of substantial fines or forfeiture of assets could significantly harm our business, financial condition and results of operations. Furthermore, compliance costs associated with gaming laws, regulations and licenses are significant. Any change in the laws, regulations or licenses applicable to our business or a violation of any current or future laws or regulations applicable to our business or gaming license could require us to make substantial expenditures or could otherwise negatively affect our gaming operations.

The threat of terrorism has adversely affected the hospitality industry generally and these adverse effects may continue or worsen.

The threat of terrorism has caused, and may in the future cause, a significant decrease in hotel occupancy and average daily rate, or ADR, due to disruptions in business and leisure travel patterns and concerns about travel safety. Hotels in major metropolitan areas, such as New York and London that represented approximately 38.9% of our guest rooms for the year ended December 31, 2008, may be adversely affected due to concerns about travel safety and a significant overall decrease in the amount of air travel, particularly transient business travel, which includes the corporate and premium business segments that generally pay the highest average room rates. The possibility of future attacks may hamper business and leisure travel patterns and, accordingly, the performance of our business and our operations.

We are exposed to the risks of a global market, which could hinder our ability to maintain and expand our international operations.

We have properties in the United States and the United Kingdom and may expand to other international markets. The success and profitability of any future international operations are subject to numerous risks and uncertainties, many of which are outside of our control, such as:

• global economic conditions, such as the current economic downturn;

• political or economic instability;

• changes in governmental regulation;

• trade restrictions;

• foreign currency controls;

• difficulties and costs of staffing and managing operations in certain foreign countries;

• work stoppages or other changes in labor conditions;

• taxes;

• payments terms; and

• seasonal reductions in business activity in some parts of the world.

19

Furthermore, changes in policies and/or laws of the United States or foreign governments resulting in, among other things, higher taxation, currency conversion limitations or the expropriation of private enterprises could reduce the anticipated benefits of our international operations. Any actions by countries in which we conduct business to reverse policies that encourage foreign trade could adversely affect our business relationships and gross profit. In addition, we may be restricted in moving or repatriating funds attributable to our international properties without the approval of foreign governmental authorities or courts. For example, because of our historical net losses in our United Kingdom operations, funds repatriated from the United Kingdom may be considered a return of capital and may require court approval. These limitations could have a material adverse effect on our business and results of operations.

Establishing operations in any foreign country or region presents risks such as those described above, as well as risks specific to the particular country or region. We may not be able to maintain and expand our international operations successfully, and as a result, our business operations could be adversely affected.

The hotel business is capital intensive and requires capital improvements to remain competitive; the failure to timely fund such capital improvements, the rising cost of such improvements and increasing operating expenses could negatively impact our ability to compete, reduce our cash flow and adversely affect our financial performance.

Our hotel properties have an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time to time, of furniture, fixtures and equipment. To compete effectively, we will need to make capital expenditures to maintain our innovative property concepts and designs. In addition, we will need to make capital expenditures to comply with applicable laws and regulations. For the year ended December 31, 2008, we spent approximately $62.7 million for capital improvements and renovations to our hotels. If we are not able to fund capital improvements solely from cash provided from our operating activities, we will need to access debt or equity capital, which may not be available, particularly in the current financial markets. If we cannot access debt or equity capital, we may need to postpone or cancel such capital improvements, which could harm our ability to remain competitive.

In addition, renovations and other capital improvements to our hotels may be expensive and may require us to close all or a portion of the hotels to customers during such renovations, affecting occupancy and average daily rate. These capital improvements may give rise to the following additional risks, among others:

• construction cost overruns and delays;

• exposure under completion and related guarantees;

• uncertainties as to market demand or a loss of market demand after capital improvements have begun;

• disruption in service and room availability causing reduced demand, occupancy and rates; and

• possible environmental problems.

As a result, capital improvement projects may increase our expenses and reduce our cash flows and our revenues. If capital expenditures exceed our expectations, this excess would have an adverse effect on our available cash.

We have high fixed costs, including property taxes and insurance costs, which we may be unable to adjust in a timely manner in response to a reduction in revenues. In addition, our property taxes have increased in recent years and we expect those increases to continue.

The costs associated with owning and operating hotels are significant, some of which may not be altered in a timely manner in response to changes in demand for services; failure to adjust our expenses may adversely affect our business and operations. For example, pursuant to the terms of our agreements with the labor unions for our New York City and San Francisco hotels, we may not unilaterally reduce the wages of the employees subject to these agreements, and are restricted in the manner in which we may layoff and/or alter the schedule of employees.

Property taxes and insurance costs are a significant part of our operating expenses. In recent years, our real property taxes have increased and we expect those increases to continue. Our real property taxes may increase as property tax rates change and as the values of properties are assessed and reassessed by taxing authorities. In addition, our real property tax rates will increase as property tax abatements expire. For example, the property tax abatement applicable to Hudson began phasing out over a five-year period beginning in 2008. Our real estate taxes do not depend on our revenues, and generally we could not reduce them other than by disposing of our real estate assets.

20

Insurance premiums for the hospitality industry have increased significantly in recent years, and continued escalation may result in our inability to obtain adequate insurance at acceptable premium rates. A continuation of this trend would appreciably increase the operating expenses of our hotels. If we do not obtain adequate insurance, to the extent that any of the events not covered by an insurance policy materialize, our financial condition may be materially adversely affected.

In the future, our properties may be subject to increases in real estate and other tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses, as well as reductions in our revenues due to the current global economic downturn, which could reduce our cash flow and adversely affect our financial performance. Although we have instituted measures to actively manage costs by implementing certain cost-cutting contingency plans at each of our properties and cost reduction plans at our corporate office, we may not be successful in managing such cost reductions effectively to mitigate reductions in revenues without significantly impacting the customer experience. If our revenue continues to decline, as it has during recent months, and we are unable to reduce our expenses in a timely manner, our results of operations could be adversely affected.

Our strategy to acquire and develop or redevelop hotels creates timing, financing, operational and other risks that may adversely affect our business and operations.

We intend to acquire and develop, or redevelop through expansion, hotel properties as suitable opportunities arise. Acquisitions, development or redevelopment projects of hotel properties require significant capital expenditures, especially since these properties usually generate little or no cash flow until the project’s completion. We generally are not able to fund acquisitions and development or redevelopment projects solely from cash provided from our operating activities. Consequently, we rely upon the availability of debt or equity capital to fund hotel acquisitions and development or redevelopment. For example, we are currently developing a property in Boston — Boston Ames — and in New York — Mondrian SoHo — and redeveloping and expanding another property in Las Vegas. Additionally, we have other potential development opportunities, which have not yet been financed, including Las Vegas — Delano Las Vegas and Mondrian Las Vegas — and in South Beach — Gale — along with the possible conversion of some unused space at Hudson. Given the current state of the credit markets, however, we or the joint ventures may not be able to obtain adequate project financing in a timely manner or at all. If adequate project financing is not obtained, we or the joint ventures may seek additional investors to raise capital, limit the scope of the project, defer the project or cancel the project altogether. Our inability to complete a project or complete a project on time or within budget may adversely affect our operating results and financial performance.

Neither our charter nor our bylaws limits the amount of debt that we can incur. However, given the current economic environment, no assurances can be made that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable terms.

We may not be able to successfully compete for additional hotel properties.

We may not be successful in identifying or completing hotel projects that are consistent with our strategy. We compete with hotel operating companies, institutional pension funds, private equity investors, real estate investment trusts, owner-operators of hotels and others who are engaged in hotel operating or real estate investment activities for the operation, development, or acquisition of hotels. In addition, competition for suitable hotel management or development projects or investment properties is intense and may increase in the future. Some competitors may have substantially greater financial resources than we do, and as such, will be able to accept more risk than we can prudently manage. These competitors may limit the number of suitable hotel management or development projects or investment opportunities for us by driving up the price we must pay for such projects or opportunities. In addition, our potential hotel management or development projects or acquisition targets may find our competitors to be more attractive suitors because they may have greater resources, be willing to pay more, have a more compatible operating philosophy, or better relationships with hotel franchisors, sellers or lenders.

Even if we are able to successfully identify and acquire other hotel management or development projects or acquisitions, they may not yield the returns we expect and, if financed using our equity capital, may be dilutive. We also may incur significant costs and divert management attention in connection with evaluating and negotiating potential hotel management or development projects or acquisitions, including ones that we are subsequently unable to complete. We may underestimate the costs necessary to bring a hotel management agreement or development project or acquired property up to the standards established for its intended market position or the costs to integrate it with our existing operations. Significant costs of hotel management or development projects of acquisitions could materially impact our operating results, including costs of uncompleted hotel management or development projects or acquisitions as they would generally be expensed in the time period during which they are incurred.

21

Integration of new hotels may be difficult and may adversely affect our business and operations.

The success of any hotel management or development project or acquisition will depend, in part, on our ability to realize the anticipated benefits from integrating new hotels with our existing operations. For instance, we may manage, develop or acquire new hotels in geographic areas in which our management may have little or no operating experience and in which potential customers may not be familiar with our existing hotels, name, image or brands. These hotels may attract fewer customers than our existing hotels, while at the same time, we may incur substantial additional costs with these new hotel properties. As a result, the results of operations at new hotel properties may be inferior to those of our existing hotels. Until recently, none of our individual hotel brands were used for more than one hotel. Extension of our brands may jeopardize what we believe are the distinct reputations of our existing properties. Unanticipated expenses and insufficient demand at a new hotel property, therefore, could adversely affect our business. Our success in realizing anticipated benefits and the timing of this realization depend upon the successful integration of the operations of the new hotel. This integration is a complex, costly and time-consuming process. The difficulties of combining new hotel properties with our existing operations include, among others:

• coordinating sales, distribution and marketing functions;

• integrating information systems;

• preserving the important licensing, distribution, marketing, customer, labor, and other relationships of a new hotel;

• costs relating to the opening, operation and promotion of new hotel properties that are substantially greater than those incurred in other geographic areas; and

• converting hotels to our brand.

We may not accomplish the integration of new hotels smoothly or successfully. The diversion of the attention of our management from our existing operations to integration efforts and any difficulties encountered in combining operations could prevent us from realizing the anticipated benefits from the addition of the new hotel and could adversely affect our business and operations.

The use of joint ventures or other entities, over which we may not have full control, for hotel development projects or acquisitions could prevent us from achieving our objectives.

We have in the past and may in the future acquire, develop or redevelop hotel properties through joint ventures with third parties, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, joint venture or other entity. For example, we currently are party to a joint venture to develop a hotel in Boston and expand our Mondrian brand in New York’s SoHo neighborhood. We also own our St Martins Lane and Sanderson hotels in London through a 50/50 joint venture and the Hard Rock through a 20.1% interest in a joint venture.

To the extent we own properties through joint ventures or other entities, we may not be in a position to exercise sole decision-making authority regarding the property, joint venture or other entity. Investments in joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners might become bankrupt or fail to fund their share of required capital contributions. Likewise, partners may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of creating impasses on decisions if neither we nor our partner have full control over the joint venture or other entity. Disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent management from focusing their time and effort on our business. Consequently, actions by, or disputes with, our partners might result in subjecting properties owned by the joint venture to additional risk. In addition, we may, certain circumstances, be liable for the actions of our partners.

22

We have recently invested, and may continue to invest in the future, in select properties which have residential components and this strategy may not yield the returns we expect, may result in disruptions to our business or strain management resources.

As part of our growth strategy, we may seek to leverage awareness of our hotel brands by acquiring, developing and/or managing non-hotel properties, such as condominium developments and other residential projects, including condominiums or apartments. We may invest in these opportunities solely or with joint venture partners. For example, in August 2006, together with a 50/50 joint venture partner, we acquired an apartment building in the South Beach area of Miami, Florida, which we renovated and converted into a hotel and condominium project and re-branded as Mondrian South Beach. This strategy, however, may expose us to additional risks, including the following:

• we may be unable to obtain, or face delays in obtaining, necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations, which could result in increased development or re-development costs and/or lower than expected sales;

• the downturn in market conditions for residences, which has partially been the result of the reduction in credit availability and the worsening of pricing terms, may affect our ability to sell residential units at a profit or at the price levels originally anticipated;

• local residential real estate market conditions, such as the current oversupply and reduction in demand, may result in reduced or fluctuating sales;

• cost overruns, including development or re-development costs that exceed our original estimates, could make completion of the project uneconomical;

• land, insurance and development or re-development costs continue to increase and may continue to increase in the future and we may be unable to attract rents, or sales prices that compensate for these increases in costs;

• development or re-development of condominium properties usually generate little or no cash flow until the project’s completion and the sale of a significant number of condominium units and may experience operating deficits after the date of completion and until such condominium units are sold;

• failure to achieve expected occupancy and/or rent levels at residential apartment properties within the projected time frame, if at all; and

• we may abandon development or re-development opportunities that we have already begun to explore, and we may fail to recover expenses already incurred in connection with exploring any such opportunities.

If any of these problems occur, overall project costs may significantly exceed the costs that were estimated when the project was originally undertaken, which will result in reduced returns, or even losses, from our investment.

Our hedging strategies may not be successful in mitigating our risks associated with interest rates.

We use various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. When interest rates change, we may be required to record a gain or loss on those derivatives that we currently hold. Our hedging activities may include entering into interest rate swaps, caps and floors and options to purchase these items. We currently use interest rate caps to manage our interest rate risks related to our variable rate indebtedness; however, our actual hedging decisions will be determined in light of the facts and circumstances existing at the time and may differ from our currently anticipated hedging strategy. There can be no assurance that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses, and such losses could harm our results of operations, financial condition and business prospects.

Our operations are sensitive to currency exchange risks, and we cannot predict the impact of future exchange-rate fluctuations on our business and operating results.

Our operations are sensitive to currency exchange risks. Changes in exchange rates between foreign currencies and the U.S. dollar may adversely affect our operating results. For example, all else being equal, a weaker U.S. dollar will promote international tourism in our domestic markets. As foreign currencies appreciate against the U.S. dollar, it becomes less expensive, in terms of those appreciating foreign currencies, to pay for our U.S. hotel services. Conversely, all else being equal, an appreciating U.S. dollar could affect demand for our U.S. hotel services. We cannot predict the impact of future exchange-rate fluctuations on our business and operations.

23

If we fail to maintain effective internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act, it may have an adverse effect on our business and stock price.

We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX, and the applicable SEC rules and regulations that require our management to conduct an annual assessment and to report on the effectiveness of our internal controls over financial reporting. In addition, our independent registered public accounting firm must issue an attestation report addressing the operating effectiveness of our internal controls over financial reporting. While our internal controls over financial reporting currently meet all of the standards required by SOX, failure to maintain an effective internal control environment could have a material adverse effect on our business, financial condition and results of operations and the price of our common stock. We cannot be certain as to our ability to continue to comply with the requirements of SOX. If we are not able to continue to comply with the requirements of SOX in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, including the SEC or Financial Industry Regulatory Authority. In addition, should we identify a material weakness, there can be no assurance that we would be able to remediate such material weakness in a timely manner in future periods. Moreover, if we are unable to assert that our internal control over financial reporting is effective in any future period (or if our auditors are unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, and incur significant expenses to restructure our internal controls over financial reporting, which may have an a material adverse effect on our business and operations.

We depend on our senior management for the future success of our business, and the loss of one or more of our key personnel could have an adverse effect on our ability to manage our business and implement our growth strategies, or could be negatively perceived in the capital markets.

Our future success and our ability to manage future growth depend, in large part, upon the efforts and continued service of our senior management team which has substantial experience in the hospitality industry and which exercises substantial influence over our operational, financing, acquisition and disposition activity. It could be difficult for us to find replacements for our senior management, as competition for such personnel is intense. The loss of services of one or more members of our senior management team could have an adverse effect on our ability to manage our business and implement our growth strategies. Further, such a loss could be negatively perceived in the capital markets, which could reduce the market value of our securities.

We depend on Jeffrey Chodorow for the management of many of our restaurants and bars.

The restaurants in Morgans, Hudson, Delano Miami, Mondrian Los Angeles, Clift, Mondrian South Beach, Sanderson and St Martins Lane as well as the bars in Delano Miami, Sanderson and St Martins Lane are owned and managed through several joint venture operations with restaurateur Jeffrey Chodorow pursuant to a master agreement between our subsidiaries and Chodorow Ventures LLC. Our restaurant in Mondrian Scottsdale is owned by us and operated under license and management agreements with an entity related to Chodorow Ventures LLC. If any of the risks outlined below materialize, our results of operations may be adversely affected. The joint ventures involve risks not otherwise present in our business, including:

• the risk that Mr. Chodorow or Chodorow Ventures LLC has economic or other interests or goals that are inconsistent with our interests and goals and that he may not take, or may veto, actions which may be in our best interests;

• the risk that a joint venture entity or Chodorow Ventures LLC may default on its obligations under the agreement or the leases with our hotels, or not renew those leases when they expire, and therefore we may not continue to receive its services;

• the risk that disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or Directors from focusing their time and effort on our business;

• the risk that we may in certain circumstances be liable for the actions of our third party partners or co-venturers; and

• the risk that Chodorow Ventures LLC may become bankrupt and will be unable to continue to provide services to us.

24

Because land underlying Sanderson is subject to a 150-year ground lease, Clift is leased pursuant to a 99-year lease and a portion of Hudson is the lease of a condominium interest, we are subject to the risk that these leases could be terminated and could cause us to lose the ability to operate these hotels.

Our rights to use the land underlying Sanderson in London are based upon our interest under a 150-year ground lease. Our rights to operate Clift in San Francisco are based upon our interest under a 99-year lease. In addition, a portion of Hudson in New York is a condominium interest that is leased to us. Pursuant to the terms of the leases for these hotels, we are required to pay all rent due and comply with all other lessee obligations under the leases. Any transfer, including a pledge, of our interest in a lease may require the consent of the applicable lessor and its lenders. As a result, we may not be able to sell, assign, transfer or convey our lessee’s interest in any hotel subject to a lease in the future absent consent of such third parties even if such transactions may be in the best interest of our stockholders.

The lessor may require us, at the expiration or termination of the lease to surrender or remove any improvements, alterations or additions to the land or hotel at our own expense. The leases also generally require us to restore the premises following a casualty or taking and to apply in a specified manner any proceeds received in connection therewith. We may have to restore the premises if a material casualty, such as a fire or an act of God, occurs, the cost of which may exceed any available insurance proceeds. The termination of any of these leases could cause us to lose the ability to continue operating these hotels, which would materially affect our business and results of operations.

We are party to numerous contracts and operating agreements, certain of which limit our activities through restrictive covenants or consent rights. Violation of those covenants or failure to receive consents could lead to termination of those contracts or operating agreements.

We are party to numerous contracts and operating agreements, many of which are integral to our business operations. Certain of those contracts and operating agreements, including our joint venture agreements, generally require that we obtain the consent of the other party or parties before taking certain actions and/or contain restrictive covenants that could affect the manner in which we conduct our business. Our failure to comply with restrictive covenants or failure to obtain consents could provide the beneficiaries of those covenants or consents with the right to terminate the relevant contract or operating agreement or seek damages against us. If those claims relate to agreements that are integral to our operations, any termination could have a material adverse effect on our results of operations or financial condition.

Risks Related to the Hospitality Industry

A number of factors, many of which are common to the lodging industry and beyond our control, could affect our business, including those described elsewhere in this section as well as the following:

• increased competition from new supply or existing hotel properties in our markets, which would likely adversely affect occupancy and revenues at our hotels;

• dependence on business, commercial and leisure travelers and tourism;

• dependence on group and meeting/conference business;

• increases in energy costs, airline strikes or other factors that may affect travel patterns and reduce the number of business and commercial travelers and tourists;

• changes in laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; and

• risks generally associated with the ownership of hotel properties and real estate.

These factors could have an adverse effect on our financial condition and results of operations.

Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues.

The hospitality industry is seasonal in nature. This seasonality can be expected to cause quarterly fluctuations in our revenues. Our revenue is generally highest in the second and fourth quarters. Our quarterly earnings may also be adversely affected by factors outside our control, including weather conditions and poor economic conditions, such as the current economic downturn. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these fluctuations in revenues.

25

The industries in which we operate are heavily regulated and a failure to comply with regulatory requirements may result in an adverse effect on our business.

Any failure to comply with regulatory requirements may result in an adverse effect on our business. Our various properties are subject to numerous laws, including those relating to the preparation and sale of food and beverages, including alcohol. We are also subject to laws governing our relationship with our employees in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees and work permits. Also, our ability to remodel, refurbish or add to our existing properties may be dependent upon our obtaining necessary building permits from local authorities. The failure to obtain any of these permits could adversely affect our ability to increase revenues and net income through capital improvements of our properties. In addition, we are subject to the numerous rules and regulations relating to state and federal taxation. Compliance with these rules and regulations requires significant management attention. Any failure to comply with all such rules and regulations could subject us to fines or audits by the applicable taxation authority.

In addition, as a result of our acquisition of the Hard Rock Hotel & Casino, the casino operations at that property are subject to gaming industry regulations. The gaming industry is highly regulated, and the casino must maintain its licenses and pay gaming taxes to continue operations. The casino is subject to extensive regulation under the laws, rules and regulations of the jurisdiction in which it operates. These laws, rules and regulations generally concern the responsibility, financial stability and character of the owners, managers, and persons with financial interests in the gaming operations. Violations of laws could result in, among other things, disciplinary action.

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, our ability to promptly sell one or more of our 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.

Although we evaluate alternative uses throughout our portfolio, including residential conversion and other opportunities, hotel properties may not readily be converted to alternative uses. The conversion of a hotel to alternative uses would also generally require substantial capital expenditures and may not provide a more profitable return than the use of the hotel property prior to that conversion.

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. In acquiring a hotel, we may agree to lock-out provisions that materially restrict us from selling that hotel for a period of time or impose other restrictions on us. 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 and results of operations.

We are responsible for insuring our hotel properties as well as obtaining the appropriate insurance coverage to reasonably protect our interests in the ordinary course of business. Additionally, each of our leases and loans typically specifies that comprehensive insurance be maintained on each of our hotel properties, including liability, fire and extended coverage. There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts, which may be uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments. We will use our discretion in determining amounts, coverage limits, deductibility provisions of insurance and the appropriateness of self-insuring, with a view to maintaining appropriate insurance coverage on our investments at a reasonable cost and on suitable terms. Uninsured and underinsured losses could harm our financial condition and results of operations. We could incur liabilities resulting from loss or injury to our hotels or to persons at our hotels. Claims, whether or not they have merit, could harm the reputation of a hotel or cause us to incur expenses to the extent of insurance deductibles or losses in excess of policy limitations, which could harm our results of operations.

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, our deductible may be high and we may be required to pay for all such repairs 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 on the damaged or destroyed property.

26

Since September 11, 2001, it has generally become more difficult and expensive to obtain property and casualty insurance, including coverage for terrorism. When our current insurance policies expire, we may encounter difficulty in obtaining or renewing property or casualty insurance on our properties at the same levels of coverage and under similar terms. Such insurance may be more limited and for some catastrophic risks (e.g., earthquake, hurricane, flood and terrorism) may not be generally available at current levels. Even if we are able to renew our policies or to obtain new policies at levels and with limitations consistent with our current policies, we cannot be sure that we will be able to obtain such insurance at premium rates that are commercially reasonable. If we were unable to obtain adequate insurance on our properties for certain risks, it could cause us to be in default under specific covenants on certain of our indebtedness or other contractual commitments that require us to maintain adequate insurance on our properties to protect against the risk of loss. If this were to occur, or if we were unable to obtain adequate insurance and our properties experienced damage which would otherwise have been covered by insurance, it could materially adversely affect our financial condition and the operations of our properties.

In addition, insurance coverage for our hotel properties and for casualty losses does not customarily cover damages that are characterized as punitive or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings that result in damages that are characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial, our financial resources may be adversely affected.

Environmental and other governmental laws and regulations could increase our compliance costs and liabilities and adversely affect our financial condition and results of operations.

Our hotel properties are subject to various federal, state and local laws relating to the environment, fire and safety and access and use by disabled persons. Under these laws, courts and government agencies have the authority to require us, if we are the owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated. In addition to the costs of clean-up, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. Under such environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, to pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.

Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos while staying in or working at a hotel may seek to recover damages for injuries suffered. Additionally, some of these environmental laws restrict the use of a property or place conditions on various activities. For example, some laws require a business using chemicals (such as swimming pool chemicals at a hotel) to manage them carefully and to notify local officials that the chemicals are being used.

We could be responsible for the types of costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could reduce the funds available for distribution to our stockholders. Future laws or regulations may impose material environmental liabilities on us, or the current environmental condition of our hotel properties may be affected by the condition of the properties in the vicinity of our hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.

Our hotel properties are also subject to the Americans with Disabilities Act of 1990, or the ADA. Under the ADA, all public accommodations must meet various Federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers and non-compliance could result in the United States government imposing fines or in private litigants’ winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition and results of operations could be harmed. In addition, we are required to operate our hotel properties and laundry facilities in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and become applicable to our properties.

27

Our hotels may be faced with labor disputes or, upon expiration of a collective bargaining agreement, a strike, which would adversely affect the operation of our hotels.

We rely heavily on our employees providing high-quality personal service at our hotels and any labor dispute or stoppage caused by poor relations with a labor union or the hotels’ employees could adversely affect our ability to provide those services, which could reduce occupancy and room revenue, tarnish our reputation and hurt our results of operations. Most of our employees who work at Morgans, Royalton, Hudson and Clift are members of local labor unions. Our relationship with our employees or the union could deteriorate due to disputes relating to, among other things, wage or benefit levels or management responses to various economic and industry conditions. The collective bargaining agreement governing the terms of employment for employees working in our New York City hotels will not expire until June 30, 2012. The collective bargaining agreements with the unions representing the Clift employees are either set to expire in 2009 or 2010 or expired in 2008, but are subject to temporary extensions while new labor agreements are negotiated.

Risks Related to Our Organization and Corporate Structure

Morgans Hotel Group Co. is a holding company with no operations.

Morgans Hotel Group Co. is a holding company and we conduct all of our operations through our subsidiaries. We do not have, apart from our ownership of Morgans Group and a non-equity voting interest in Hard Rock Hotel Holdings, LLC, any independent operations. As a result and although we have no current plan to do so, we would rely on dividends and other payments or distributions from Morgans Group and our other subsidiaries to pay dividends on our common stock. We also rely on dividends and other payments or distributions from Morgans Group and our other subsidiaries to meet our debt service and other obligations, including our obligations in respect of the trust preferred notes. The ability of Morgans Group and our other subsidiaries to pay dividends or make other payments or distributions to us will depend on Morgans Group’s operating results.

In addition, because Morgans Hotel Group Co. is a holding company, claims of our stockholders will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our subsidiaries will be able to satisfy the claims of our stockholders only after all of our and our subsidiaries’ liabilities and obligations have been paid in full.

Substantially all of our businesses are held through our direct subsidiary, Morgans Group. Other than with respect to 954,065 membership units held by affiliates of NorthStar and LTIP units convertible into membership units issued as part of our employee compensation plans, we own all of the outstanding membership units of Morgans Group. We may, in connection with acquisitions or otherwise, issue additional membership units of Morgans Group in the future. Such issuances would reduce our ownership of Morgans Group. Because our stockholders do not directly own Morgans Group units, they do not have any voting rights with respect to any such issuances or other corporate level activities of Morgans Group.

Provisions in our charter documents, Delaware law and our rights plan could discourage potential acquisition proposals, could delay, deter or prevent a change in control and could limit the price certain investors might be willing to pay for our stock.

Certain provisions of our certificate of incorporation and bylaws may inhibit changes in control of our company not approved by our Board of Directors or changes in the composition of our Board of Directors, which could result in the entrenchment of current management. These provisions include:

• a prohibition on stockholder action through written consents;

• a requirement that special meetings of stockholders be called by the Board of Directors;

• advance notice requirements for stockholder proposals and director nominations;

• limitations on the ability of stockholders to amend, alter or repeal the bylaws; and

• the authority of the Board of Directors to issue, without stockholder approval, preferred stock with such terms as the Board of Directors may determine and additional shares of our common stock.

28

We are also afforded the protections of Section 203 of the Delaware General Corporation Law, which prevents us from engaging in a business combination with a person who becomes a 15% or greater stockholder for a period of three years from the date such person acquires such status unless certain Board of Directors or stockholder approvals are obtained. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock.

In addition, our Board of Directors adopted a stockholder rights plan which may deter certain takeover tactics. See “Item 1 — 2008 Transactions and Developments — Stockholder Protection Rights Agreement.”

We may experience conflicts of interest with certain of our directors and officers and significant stockholders as a result of their tax positions.

Mr. Hamamoto, our Chairman of the Board, and Mr. Marc Gordon, our Chief Investment Officer and Executive Vice President of Capital Markets and a member of the Board, may suffer adverse tax consequences upon our sale of certain properties and may therefore have different objectives regarding the appropriate pricing and timing of a particular property’s sale. Messrs. Hamamoto and Gordon may therefore influence us to not sell certain properties, even if such sale might be financially advantageous to our stockholders, or to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest, as they may wish to avoid realization of their share of the built-in gains in those properties.

In addition, at the completion of our IPO, an affiliate of NorthStar guaranteed approximately $225.0 million of the indebtedness of subsidiaries of Morgans Group and Messrs. Hamamoto and Gordon agreed to reimburse this guarantor for up to $98.3 million and $7.0 million of its guarantee obligation, respectively. These guarantees and reimbursement undertakings were provided so that Messrs. Hamamoto and Gordon did not realize taxable capital gains in connection with the formation and structuring transactions undertaken in connection with our IPO in the amount that each has agreed to reimburse. If our current debt were to be repaid, restructured or refinanced, Messrs. Hamamoto and Gordon would be adversely affected unless similar reimbursement or guarantees were put in place with respect to the new or existing debt of the Morgans Group subsidiaries.

Our basis in the hotels contributed to us is generally substantially less than their fair market value which will decrease the amount of our depreciation deductions and increase the amount of recognized gain upon sale.

Some of the hotels which were part of our formation and structuring transactions were contributed to us in tax-free transactions. Accordingly, our basis in the assets contributed was not adjusted in connection with our IPO and is generally substantially less than the fair market value of the contributed hotels as of the date of our IPO. We also intend to generally use the “traditional” method for making allocations under Section 704(c) of the Internal Revenue Code of 1986, as amended, as opposed to the “curative” or “remedial” method for making such allocations. Consequently, (i) our depreciation deductions with respect to our hotels will likely be substantially less than the depreciation deductions that would have been available to us had our tax basis been equal to the fair market value of the hotels as of the date of our IPO, (ii) we may recognize gain upon the sale of an asset that is attributable to appreciation in the value of the asset that accrued prior to the date of our IPO, and (iii) we may utilize available net operating losses against the potential gain from the sale of an asset.

Non-U.S. holders owning more than 5% of our common stock may be subject to United States federal income tax on gain recognized on the disposition of our common stock.

Because of our significant United States real estate holdings, we believe that we are a “United States real property holding corporation” as defined under Section 897 of the Internal Revenue Code. As a result, any “non-U.S. holder” (as defined under “Material U.S. Federal Income Tax Considerations for Non-U.S. Holders”) will be subject to United States federal income tax on gain recognized on a disposition of our common stock if such non-U.S. holder has held, directly or indirectly, 5% of our common stock at any time during the five-year period ending on the date of the disposition and such non-U.S. holder is not eligible for any treaty exemption.

29

Changes in market conditions or sales of our common stock could adversely affect the market price of our common stock.

The market price of our common stock depends on various financial and market conditions, which may change from time to time and which are outside of our control. Recently, U.S. and global financial markets have been experiencing extreme disruption, including extreme volatility in securities prices, which has adversely affected the price of our common stock.

Sales of a substantial number of additional shares of our common stock, or the perception that such sales could occur, also could adversely affect prevailing market prices for our common stock. In addition to the possibility that we may sell shares of our common stock in a public offering at any time, we also may issue shares of common stock in connection with grants of restricted stock or long term incentive plan units or upon exercise of stock options that we grant to our Directors, officers and employees. All of these shares will be available for sale in the public markets from time to time. As of December 31, 2008, there were:

• 2,082,943 shares of our common stock issuable upon exercise of outstanding options, of which options to purchase 1,189,294 shares were exercisable, at a weighted average exercise price of $19.65 per share. The stock price at December 31, 2008 was $4.66;

• 39,593 restricted stock units and 833,954 LTIP units outstanding exercisable for a total of 873,547 shares of our common stock;

• 833,835 restricted stock units and 726,834 LTIP units outstanding and subject to vesting requirements for a total of 1,560,669 shares of our common stock;

• 1,628,857 shares of our common stock available for future grants under our equity incentive plans; and

• 7,858,755 shares of common stock issuable upon conversion of the 2.375% Senior Subordinated Convertible Notes due 2014 at a conversion rate corresponding to the maximum conversion rate of 45.5580 shares per $1,000 principal amount of the Convertible Notes.

Most of the outstanding shares of our common stock are eligible for resale in the public market and certain holders of our shares have the right to require us to file a registration statement for purposes of registering their shares for resale. A significant portion of these shares is held by a small number of stockholders. If our stockholders sell substantial amounts of our common stock, the market price of our common stock could decline, which may make it more difficult for us to sell equity or equity related securities in the future at a time and price that we deem appropriate. We are unable to predict the effect that sales of our common stock may have on the prevailing market price of our common stock.

Transactions relating to our convertible note hedge and warrant transactions may affect the trading price of our common stock.

In connection with the issuance of the Notes, we have entered into convertible note hedge and warrant transactions with affiliates of certain of the initial purchasers, which we refer to as the counterparties. Pursuant to the convertible note hedge, we have purchased from the counterparties a call option on our common stock, and pursuant to the warrant transaction, we have sold to the counterparties a warrant for the purchase of shares of our common stock. The warrant has an exercise price that is 82.2% higher than the closing price of our common stock on the date of the pricing of the Notes. Together, the convertible note hedge and warrant transactions are expected to provide us with some protection against increases in our stock price over the conversion price per share and, accordingly, reduce our exposure to potential dilution upon the conversion of the Notes. We used an aggregate of approximately $21.0 million of the net proceeds of the offering of the Notes to fund the net cost of these hedging transactions. In connection with these transactions, the counterparties to these transactions:

• entered into various over-the-counter derivative transactions or purchased or sold our common stock in secondary market transactions at or about the time of the pricing of the Notes; and

• may enter into, or may unwind, various over-the-counter derivatives or purchase or sell our common stock in secondary market transactions following the pricing of the Notes, including during any conversion reference period with respect to a conversion of Notes.

30

These activities may have the effect of increasing, or preventing a decline in, the market price of our common stock. In addition, any hedging transactions by the counterparties following the pricing of the Notes, including during any conversion reference period, may have an adverse impact on the trading price of our common stock. The counterparties are likely to modify their hedge positions from time to time prior to conversion or maturity of the Notes by purchasing and selling shares of our common stock or other instruments, including over-the-counter derivative instruments, that they may wish to use in connection with such hedging. In particular, such hedging modifications may occur during a conversion reference period. In addition, we intend to exercise our purchased call option whenever Notes are converted, although we are not required to do so. In order to unwind any hedge positions with respect to our exercise of the purchased call option, the counterparties would expect to sell shares of common stock in secondary market transactions or unwind various over-the-counter derivative transactions with respect to the common stock during the conversion reference period for the converted Notes.

The effect, if any, of any of these transactions and activities on the market price of our common stock will depend in part on current market conditions and therefore cannot be ascertained at this time. However, any of these activities could adversely affect the trading price of our common stock.

Our stock price has been and continues to be volatile.

Our stock price has been extremely volatile recently, especially given current market conditions, and may continue to fluctuate as a result of various factors, such as:

• general industry and economic conditions, such as the current downturn in the global markets;

• general stock market volatility unrelated to our operating performance;

• announcements relating to significant corporate transactions;

• fluctuations in our quarterly and annual financial results;

• operating and stock price performance of companies that investors deem comparable to us;

• changes in government regulation or proposals relating thereto; and

• sales or the expectation of sales of a substantial number of shares of our common stock in the public market.

The stock markets have, in recent months, experienced extreme price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stock is traded. Market volatility, as well as the global economic downturn, have adversely affected, and will likely continue to adversely affect for the foreseeable future, the market price of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

31

ITEM 2. PROPERTIES

Our Hotel Properties

Set forth below is a summary of certain information related to our hotel properties as of December 31, 2008:

										Twelve Months
		Year		Interest			Number			Ended December 31, 2008									Restaurants
Hotel	City	Opened		Owned			of Rooms			ADR(1)			Occupancy(2)			RevPAR(3)			and Bars(4)
Morgans (8)	New York		1984		100	%		114		$	351			81.1	%	$	285		Asia de Cuba Morgans Bar
Royalton	New York		1988		100	%		168			390			88.0	%		343		Brasserie 44 Lobby Lounge Bar 44
Hudson	New York		2000		(5	)		807	(5)		283			90.7	%		257		Hudson Cafeteria Hudson Bar Private Park Library Bar Sky Terrace
Delano Miami	Miami		1995		100	%		194			540			79.3	%		428		Blue Door Blue Sea Rose Bar Pool Bar The Florida Room
Mondrian Los Angeles	Los Angeles		1996		100	%		237			348			52.0	%		181		Asia de Cuba Skybar ADCB
Clift	San Francisco		2001		(6	)		366			254			74.8	%		190		Asia de Cuba Redwood Room Living Room
Mondrian Scottsdale	Scottsdale		2006		100	%		189			194			50.8	%		99		Asia de Cuba Skybar Red Bar
St Martins Lane	London		1999		50	%		204			420	(7)		75.0	%		315	(7)	Asia de Cuba Light Bar Rum Bar Bungalow 8
Sanderson	London		2000		50	%		150			483	(7)		74.1	%		358	(7)	Suka Long Bar Purple Bar
Shore Club	Miami		2001		7	%		309			388			64.2	%		249		Nobu Ago Skybar Redroom Rumbar Sandbar
Hard Rock Hotel & Casino	Las Vegas		2007		20.1	%		646			186			91.7	%		171		Nobu Ago AJs Steakhouse Pink Taco Center Bar Beach Bar
Mondrian South Beach (9)	Miami		2008		50	%		328			289			55.0	%		159		Asia de Cuba
Total/Weighted Average								3,712		$	308			76.9	%	$	234

32

(1)	Average daily rate, or ADR.
(2)	Average daily occupancy.
(3)	Revenue per available room, or RevPAR, is the product of ADR and average daily occupancy. RevPAR does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services.
(4)	We operate the restaurants in Morgans, Hudson, Delano Miami, Mondrian Los Angeles, Clift, Sanderson and St Martins Lane as well as the bars in Delano Miami, Sanderson and St Martins Lane through a joint venture arrangement with Chodorow Ventures LLC in which we own a 50% ownership interest. We own the restaurants at Mondrian Scottsdale and Mondrian South Beach and an affiliate of Chodorow Ventures LLC operates the restaurant through license and management agreements.
(5)	We own 100% of Hudson, which is part of a property that is structured as a condominium, in which Hudson constitutes 96% of the square footage of the entire building. Hudson has a total of 920 rooms, including 115 single room occupancies (SROs), of which 31 are vacant. SROs are single room dwelling units. Each SRO is for occupancy by a single eligible individual. The unit need not, but may, contain food preparation or sanitary facilities, or both. SROs remain from the prior ownership of the building and we are by statute required to maintain these long-term tenants, unless we get their consent, as long as they pay us their rent.
(6)	Clift is operated under a long-term lease, which is accounted for as a financing.
(7)	The currency translation is based on an exchange rate of 1 British pound = 1.86 U.S. dollars, which is an average monthly exchange rate provided by www.oanda.com for the last twelve months ending December 31, 2008.
(8)	Morgans was closed for a portion of the year for renovation and all selected operating data presented is for the months the hotel was open.
(9)	Mondrian South Beach opened in December 2008 and all selected operating data presented is for the month the hotel was open.

At December 31, 2008, we owned or partially owned and managed a portfolio of twelve luxury hotel properties primarily in gateway cities and select resort markets in the United States and Europe. We believe each of our hotels are positioned in its respective market as a gathering place or destination hotel offering outstanding personalized service with renowned restaurants and bars.

Individual Property Information

We believe each of our hotel properties reflects the strength of our operating platform and our ability to create branded destination hotels. The tables below reflect the results of operations of our individual properties before any third-party ownership interests in the hotels or restaurants.

Morgans

Overview

Opened in 1984, Morgans was the first Morgans Group hotel. It was named after the nearby Morgan Library located on Madison Avenue on the site of the former home of J. Pierpont Morgan. Initially conceived by French designer Andrée Putman, and renovated in 2008, Morgans remains a modern classic. The renovation, completed in September 2008 after closing the hotel for over three months, included upgrades to the hotel’s furniture, fixtures and equipment, certain technology upgrades and an upgrade to the lobby. Morgans has 114 rooms, including 30 suites, and is situated in midtown Manhattan’s fashionable East Side, offering guests a residential neighborhood within midtown Manhattan and walking distance of the midtown business district, Fifth Avenue shopping and Times Square. Morgans features Asia de Cuba restaurant, Living Room, and the Penthouse, a duplex that is also used for special functions.

Property highlights include:

Location	•     237 Madison Avenue, New York, New York
Guest Rooms	•     114, including 30 suites
Food and Beverage	•     Asia de Cuba Restaurant with seating for 210
Meetings Space	•     Multi-service meeting facility consisting of one suite with capacity for 100
Other Amenities	•     Living Room — a guest lounge that includes a television, computer, magazines and books in one of the suites
	•     24-hour concierge service

33

We own a fee simple interest in Morgans.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Morgans:

	Year Ended December 31,
	2008			2007			2006			2005			2004
Selected Operating Information:
Occupancy		81.1	%		86.4	%		85.0	%		83.4	%		82.0	%
ADR	$	351		$	342		$	312		$	295		$	254
RevPAR	$	285		$	296		$	265		$	246		$	208
Selected Financial Information (in thousands):
Room Revenue (1)	$	8,813		$	12,190		$	10,931		$	10,161		$	8,605
Total Revenue (1)		19,109			24,124			22,219			21,805			20,107
Depreciation (1)		1,481			1,201			1,354			1,485			1,909
Operating Income (1)		2,010			5,671			4,851			4,398			3,122

(1) Morgans was closed for renovation for over three months during 2008.

Royalton

Overview

Opened in 1988, Royalton is located in the heart of midtown Manhattan, steps away from Times Square, Fifth Avenue shopping and the Broadway Theater District. Royalton was renovated during 2007 and has 168 rooms and suites, 37 of which feature working fireplaces. Recently redesigned by noted New York-based design firm Roman & Williams, the hotel is widely regarded for its distinctive lobby which spans a full city block. Royalton features a new restaurant and bar, Brasserie 44 and Bar 44, both updated by acclaimed restaurateur John McDonald, and three unique penthouses with terraces offering views of midtown Manhattan.

Property highlights include:

Location	•     44 West 44th Street, New York, New York
Guest Rooms	•     168, including 27 suites
Food and Beverage	•     Brasserie 44 Restaurant with seating for 100
	•     Bar 44 with capacity for 100
	•     Lobby Lounge with capacity for 98
Meetings Space	•     Multi-service meeting facilities consisting of three suites with total capacity for 150
Other Amenities	•     37 working fireplaces and five foot round tubs in 41 guest rooms
	•     24-hour concierge service

We own a fee simple interest in Royalton.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Royalton:

	Year Ended December 31,
	2008			2007			2006			2005			2004
Selected Operating Information:
Occupancy		88.0	%		84.7	%		87.4	%		86.2	%		82.3	%
ADR	$	390		$	384		$	339		$	316		$	280
RevPAR	$	343		$	326		$	297		$	272		$	230
Selected Financial Information (in thousands):
Room Revenue(1)	$	21,090		$	13,840		$	18,307		$	16,793		$	14,149
Total Revenue(1)		27,891			18,290			24,211			22,239			19,641
Depreciation(1)		4,095			2,328			1,813			2,097			1,968
Operating Income(1)		2,464			1,383			5,726			4,595			2,636

(1) Royalton was closed for renovation for four months during 2007.

34

Hudson

Overview

Opened in 2000, Hudson is our largest New York City hotel, with 807 guest rooms and suites, including two ultra-luxurious accommodations — a 3,355 square foot penthouse with a landscaped terrace and an apartment with a 2,500 square foot tented terrace. Hudson occupies the former clubhouse of the American Women’s Association, which was originally constructed in 1929 by J.P. Morgan’s daughter. The hotel, which is only a few blocks away from Columbus Circle, Time Warner Center and Central Park, was designed by Philippe Starck to offer guests affordable luxury and style. Hudson’s notable design includes a 40-foot high ivy-covered lobby and a lobby ceiling fresco by renowned artist Francesco Clemente. The hotel’s food and beverage offerings include Private Park, a restaurant and bar in the indoor/outdoor lobby garden, Hudson Cafeteria restaurant, Hudson Bar and the Library Bar and Sky Terrace, a private landscaped terrace on the 15th floor.

Property highlights include:

Location	•     356 West 58th Street, New York, New York
Guest Rooms	•     807, including 43 suites
Food and Beverage	•     Hudson Cafeteria restaurant with seating for 200
	•     Hudson Bar with capacity for 334
	•     Library Bar with capacity for 170
Meeting Space	•     Multi-service meeting facilities, consisting of three executive board rooms, two suites and other facilities, with total capacity for 1,260
Other Amenities	•     24-hour concierge service and business center
	•     Indoor/outdoor private park
	•     Library with antique billiard tables and books
	•     Sky Terrace, a private landscaped terrace and solarium
	•     Fitness center

We are currently exploring alternatives for an expansion project at Hudson, including the possibility of building out approximately 27,000 square feet of the basement to be used as event and meeting space. Additionally, we have the ability to develop approximately 30 guest rooms from rooms that were formerly single-room occupancy units (“SROs”) which we are planning on pursuing once the current economic conditions improve.

We own 100% of Hudson, which is part of a property that is structured as a condominium, in which Hudson constitutes 96% of the square footage of the entire building. Hudson has a total of 920 rooms, including 115 SROs, of which 31 are vacant. SROs are single room dwelling units. Each SRO is for occupancy by a single eligible individual. The unit need not, but may, contain food preparation or sanitary facilities, or both. SROs remain from the prior ownership of the building and we are by statute required to maintain these long-term tenants, unless we get their consent to terminate the lease, as long as they pay us their rent. Over time, we intend to develop new guest rooms from rooms that were formerly SRO units. The hotel is subject to mortgage indebtedness.

We own a fee simple interest in Hudson. The hotel is subject to mortgage indebtedness as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Selected Financial and Operating Information

The following table shows selected financial and operating information for Hudson:

	Year Ended December 31,
	2008			2007			2006			2005			2004
Selected Operating Information:
Occupancy		90.7	%		91.8	%		87.6	%		85.3	%		80.0	%
ADR	$	283		$	284		$	265		$	247		$	211
RevPAR	$	257		$	261		$	232		$	211		$	168
Selected Financial Information (in thousands):
Room Revenue	$	75,722		$	76,610		$	68,106		$	61,673		$	49,431
Total Revenue		97,789			101,271			88,083			80,893			65,312
Depreciation		6,399			6,275			5,092			9,415			10,185
Operating Income		32,885			36,800			33,807			24,756			14,644

35

Delano Miami

Overview

Opened in 1995, Delano Miami has 194 guest rooms, suites and lofts and is located in the heart of Miami Beach’s fashionable South Beach Art Deco district. Room renovations began in 2006, including technology upgrades and upgrading of suites and bungalows, and was completed in October 2007. Formerly a 1947 landmark hotel, Delano Miami is noted for its simple white Art Deco décor. The hotel features an “indoor/outdoor” lobby, the Water Salon and Orchard (which is Delano Miami’s landscaped orchard and 100-foot long pool) and beach facilities. The hotel’s accommodations also include eight poolside bungalows and a penthouse and apartment. Delano Miami’s restaurant and bar offerings include Blue Door and Blue Sea restaurants, a poolside bistro, the Rose Bar and a new lounge, The Florida Room, designed by Kravitz Design, which opened in December 2007. The hotel also features Agua Spa, a full-service spa facility, renovated and expanded in late 2007.

Property highlights include:

Location	•    1685 Collins Avenue, Miami Beach, Florida
Guest Rooms	•    194, including a penthouse, apartment, nine suites, three lofts and eight poolside bungalows and nine cabanas
Food and Beverage	•    Blue Door Restaurant with seating for 210
	•    Blue Sea Restaurant with seating for 18
	•    Rose Bar and lobby lounge with capacity for 334
	•    Pool Bar with capacity for 40
	•    The Florida Room lounge with capacity for 210
Meeting Space	•    Multi-service meeting facilities, consisting of one executive boardroom and other facilities, with total capacity for 24
Other Amenities	•    Swimming pool and water salon
	•    Agua Spa and solarium
	•    Billiards area
	•    24-hour concierge service

We own a fee simple interest in Delano Miami.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Delano Miami:

	Year Ended December 31,
	2008			2007			2006			2005			2004
Selected Operating Information:
Occupancy		79.3	%		73.0	%		67.1	%		72.1	%		66.2	%
ADR	$	540		$	557		$	505		$	474		$	473
RevPAR	$	428		$	407		$	338		$	342		$	313
Selected Financial Information (in thousands):
Room Revenue	$	30,417		$	28,923		$	23,961		$	24,276		$	22,362
Total Revenue		62,115			56,603			50,433			49,685			46,121
Depreciation		5,776			3,858			2,203			3,272			3,288
Operating Income		18,917			17,852			16,100			15,877			14,683

36

Mondrian Los Angeles

Overview

Acquired in 1996 and renovated in 2008, Mondrian Los Angeles has 237 guest rooms, studios and suites. The renovation, which was completed in October 2008 and designed by international designer Benjamin Noriega-Ortiz, included lobby renovations, room renovations, including the replacement of bathrooms, and technology upgrades. The hotel is located on Sunset Boulevard in close proximity to Beverly Hills, Hollywood and the downtown Los Angeles business district. Mondrian Los Angeles’ accommodations also feature a two bedroom, 2,025 square foot penthouse and an apartment, each of which has an expansive terrace affording city-wide views. The hotel features Asia de Cuba and ADCB restaurants, Skybar, and Outdoor Living Room and Agua Spa.

Property highlights include:

Location	•     8440 West Sunset Boulevard, Los Angeles, California
Guest Rooms	•     237, including 183 suites
Food and Beverage	•     Asia de Cuba Restaurant with seating for 225
	•     ADCB lounge with seating for 32
	•     Skybar with capacity for 491
Meeting Space	•     Multi-service meeting facilities, consisting of two executive boardrooms and one suite, with total capacity for 165
Other Amenities	•     Indoor/outdoor lobby
	•     Agua Spa
	•     Heated swimming pool
	•     Outdoor living room
	•     24-hour concierge service
	•     Full service business center
	•     24-hour fitness center

We own a fee simple interest in Mondrian Los Angeles. The hotel is subject to mortgage indebtedness as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Selected Financial and Operating Information

The following table shows selected financial and operating information for Mondrian Los Angeles:

	Year Ended December 31,
	2008			2007			2006			2005			2004
Selected Operating Information:
Occupancy		52.0	%		76.5	%		79.1	%		79.5	%		75.3	%
ADR	$	348		$	327		$	315		$	301		$	278
RevPAR	$	181		$	250		$	249		$	239		$	209
Selected Financial Information (in thousands):
Room Revenue (1)	$	15,715		$	21,623		$	21,579		$	20,674		$	18,153
Total Revenue (1)		33,408			44,443			43,978			43,494			37,112
Depreciation (1)		3,373			2,182			1,727			2,238			2,116
Operating Income (1)		4,920			14,429			15,873			14,925			12,502

(1) Mondrian Los Angeles was under renovation for the majority of 2008.

37

Clift

Overview

Acquired in 1999 and reopened after an extensive renovation in 2001, Clift has 366 guestrooms and suites designed by Philippe Starck. Built in 1915, Clift is located in the heart of San Francisco’s Union Square district, within walking distance of San Francisco’s central retail, dining, cultural and business activities. The hotel features Asia de Cuba Restaurant; the Redwood Room Bar, a paneled San Francisco landmark; and the Living Room, which is available for private events.

Property highlights include:

Location	•     495 Geary Street, San Francisco, California
Guest Rooms	•     366, including 25 suites
Food and Beverage	•     Asia de Cuba restaurant with seating for 139
	•     Redwood Room bar with capacity for 124
	•     Living Room with capacity for 46
Meeting Space	•     Multi-service meeting facilities, consisting of two executive boardrooms, one suite and other facilities, with total capacity for 403
Other Amenities	•     24-hour concierge service
	•     24-hour business center
	•     24-hour fitness center

We operate Clift under a 99-year lease.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Clift:

	Year Ended December 31,
	2008			2007			2006			2005			2004
Selected Operating Information:
Occupancy		74.8	%		74.3	%		70.6	%		68.7	%		66.5	%
ADR	$	254		$	259		$	239		$	221		$	211
RevPAR	$	190		$	192		$	169		$	152		$	141
Selected Financial Information (in thousands):
Room Revenue	$	25,297		$	25,497		$	22,370		$	20,098		$	18,666
Total Revenue		42,066			43,337			38,686			35,565			34,139
Depreciation		2,602			2,372			5,487			7,245			7,200
Operating income (loss)		5,041			4,383			(12	)		(2,616	)		(2,669	)

Mondrian Scottsdale

Overview

Acquired in 2006, Mondrian Scottsdale has 189 guestrooms, including 15 suites and two apartments. Mondrian Scottsdale is located in the heart of Old Town Scottsdale overlooking the Scottsdale Mall gardens. Ground floor rooms have patio terraces and the upper floors have private balconies. Two swimming pools, a 24-hour gym, state-of-the-art technology and business facilities, and Morgans Hotel Group’s signature spa, Agua, highlight the impressive list of amenities. During 2006, the hotel underwent a complete renovation of all guest rooms, common areas, bars and restaurant space. The newly renovated hotel was designed by international designer Benjamin Noriega-Ortiz, who drew his inspiration from the Garden of Eden. Completed in January 2007, the hotel features an Asia de Cuba Restaurant, Skybar and the Red Bar.

38

Property highlights include:

Location	•     7353 East Indian School Road, Scottsdale, Arizona
Guest Rooms	•     189, including 15 suites and 2 apartments
Food and Beverage	•     Asia de Cuba restaurant with seating, both indoors and outdoors, for 190
	•     Skybar with capacity for 250
	•     Red Bar with capacity for 125
Meeting Space	•     Multi-service meeting facilities, consisting of eight function rooms and a private reception area, with total capacity for 500
Other Amenities	•     Agua Spa
	•     Two swimming pools
	•     24-hour business center
	•     24-hour fitness center

We own a fee simple interest in Mondrian Scottsdale. The hotel is subject to mortgage indebtedness as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Selected Financial and Operating Information

The following table shows selected financial and operating information for Mondrian Scottsdale for the years ended December 31, 2008 and 2007 and for the period of our ownership during 2006. The Mondrian Scottsdale was under renovation for the majority of 2006.

	Year Ended			Year Ended			May 5, 2006 -
	December 31,			December 31,			December 31,
	2008			2007			2006
Selected Operating Information:
Occupancy		50.8	%		56.0	%		44.0	%
ADR	$	194		$	203		$	162
RevPAR	$	99		$	114		$	71
Selected Financial Information (in thousands):
Room Revenue	$	7,004		$	8,069		$	3,317
Total Revenue		13,788			16,736			5,503
Depreciation		2,821			2,945			967
Operating Loss		(2,603	)		(3,468	)		(3,210	)

St Martins Lane

Overview

Opened in 1999, St Martins Lane has 204 guestrooms and suites, including 16 rooms with private patio gardens, and a loft-style luxury penthouse and apartment with expansive views of London. The renovated 1960s building that previously housed the Mickey Mouse Club and the Lumiere Cinema is located in the hub of Covent Garden and the West End theatre district, within walking distance of Trafalgar Square, Leicester Square and the London business district. Designed by Philippe Starck, the hotel’s meeting and special event space includes the Back Room, Studios, and an executive boardroom. St Martins Lane features Asia de Cuba Restaurant; The Rum Bar, which is a modern twist on the classic English pub; and the Light Bar, an exclusive destination which has attracted significant celebrity patronage and received frequent media coverage. During 2007, we undertook an expansion project at St Martins Lane to add a new members-only bar, Bungalow 8, which opened in September 2007. Additionally, in the first quarter of 2007, a new, state-of-the-art gym, Gymbox, opened in the hotel and is operated by a third party under a lease agreement.

39

Property highlights include:

Location	•     45 St Martins Lane, London, United Kingdom
Guest Rooms	•     204, including 16 rooms with private patio gardens and a luxury penthouse and apartment
Food and Beverage	•     Asia de Cuba restaurant with seating for 180
	•     Rum Bar with capacity for 30
	•     Light Bar with capacity for 150
	•     Bungalow 8 private club with capacity for 200
Meeting Space	•     Multi-service meeting facilities, consisting of one executive boardroom, three suites, including some outdoor function space, and other facilities, with total capacity for 450
Other Amenities	•     24-hour concierge service
	•     Full service business center
	•     24-hour fitness center

We operate St Martins Lane through Morgans Hotels Group Europe Limited, a 50/50 joint venture with an affiliate of Walton Street Capital LLC.

Selected Financial and Operating Information

The following table shows selected financial and operating information for St Martins Lane:

	Year Ended December 31,
	2008			2007			2006			2005			2004
Selected Operating Information:
Occupancy		75.0	%		77.1	%		78.2	%		73.6	%		75.4	%
ADR(1)	$	420		$	467		$	399		$	364		$	352
RevPAR(1)	$	315		$	360		$	312		$	267		$	265
Selected Financial Information (in thousands):(1)
Room Revenue	$	23,576		$	24,926		$	23,456		$	20,101		$	19,937
Total Revenue		48,093			49,341			46,775			41,539			40,886
Depreciation		4,824			4,077			3,792			4,710			4,176
Operating Income		10,390			13,146			11,225			7,009			7,548

(1) The currency translation is based on an exchange rate of 1 British pound 1.86 U.S. dollars, which is an average monthly exchange rate provided by www.oanda.com for the last 12 months ending December 31, 2008.

Sanderson

Overview

Opened in 2000, Sanderson has 150 guestrooms and suites, seven with private terraces and 18 suites, including a luxury penthouse and apartment. The hotel is located in London’s Soho district, within walking distance of Trafalgar Square, Leicester Square and the West End business district. Sanderson’s structure is considered a model of 1950s British architecture and the hotel has been designated as a landmark building. Designed by Philippe Starck, the guestrooms do not have interior walls (the dressing room and bathroom are encased in a glass box that is wrapped in layers of sheer curtains). Dining and bar offerings include Suka restaurant, Long Bar and the Purple Bar. Other amenities include the Courtyard Garden, the Billiard Room, and Agua Spa. Like the Light Bar at St Martins Lane, the Long Bar is a popular destination that has consistently attracted a high-profile celebrity clientele and has generated significant media coverage.

40

Property highlights include:

Location	•     50 Berners Street, London, United Kingdom
Guest Rooms	•     150, including seven with private terraces and 18 suites, including a penthouse and apartment
Food and Beverage	•     Suka Restaurant with seating for 120
	•     Long Bar and courtyard garden with capacity for 290
	•     Purple Bar with capacity for 45
Meeting Space	•     Multi-service facilities, consisting of a penthouse boardroom and suites with total capacity for 80
Other Amenities	•     Courtyard Garden
	•     Billiard Room
	•     Agua Spa
	•     24-hour concierge service
	•     24-hour business center
	•     24-hour fitness center

We operate Sanderson through Morgans Europe, a 50/50 joint venture with an affiliate of Walton Street Capital LLC. Through Morgans Europe, we operate Sanderson under a 150-year lease.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Sanderson:

	Year Ended December 31,
	2008			2007			2006			2005			2004
Selected Operating Information:
Occupancy		74.1	%		77.8	%		77.5	%		69.6	%		73.0	%
ADR(1)	$	483		$	539		$	475		$	443		$	413
RevPAR(1)	$	358		$	419		$	368		$	308		$	301
Selected Financial Information (in thousands):(1)
Room Revenue	$	19,684		$	21,331		$	20,356		$	17,043		$	16,701
Total Revenue		37,373			40,114			39,461			34,609			34,845
Depreciation		2,791			3,149			4,352			5,212			4,659
Operating Income		6,605			7,655			5,901			1,943			3,573

(1) The currency translation is based on an exchange rate of 1 British pound to 1.86 U.S. dollars, which is an average monthly exchange rate provided by www.oanda.com for the last 12 months ending December 31, 2008.

Shore Club

Overview

Opened in 2001, Shore Club has 309 rooms including 67 suites, seven duplex bungalows with private outdoor showers and dining areas, executive suites, an expansive penthouse suite encompassing 6,000 square feet and spanning three floors with a private elevator and private terrace, pool and panoramic views of Miami. Located on one of Miami’s main streets, Collins Avenue, Shore Club was designed by David Chipperfield. Some notable design elements of Shore Club include an Art Deco Lobby with a polished terrazzo floor and lit metal wall mural as well as custom silver and glass lanterns. Shore Club offers on-site access to restaurants and bars such as Nobu, Ago and Skybar (which is made up of the Red Room, Red Room Garden, Rum Bar and Sand Bar), shopping venues such as Scoop and Me & Ro and Pipino Salon, a hair care and accessories salon.

41

Property highlights include:

Location	•     1901 Collins Avenue, Miami Beach, Florida
Guest Rooms	•     309, including 67 suites and 7 bungalows
Food and Beverage	•     Nobu Restaurant with seating for 120
	•     Nobu Lounge with capacity for 140
	•     Ago Restaurant with seating for 275
	•     Skybar
	•     Red Room with seating for 144
	•     Red Room Garden with capacity for 250
	•     Rum Bar with capacity for 415
	•     Sand Bar with capacity for 75
Meeting Space	•     Multi-service meeting facilities, consisting of a 1,200 square foot ocean front meeting room, six executive boardrooms, one loft boardroom, and other facilities, with total capacity for 550
Other Amenities	•     Two elevated infinity edge pools (one Olympic size and one lap pool with hot tub)
	•     Spa @ Shore Club
	•     Salon, jewelry shop, clothing shop and gift shop
	•     Concierge service

We operate Shore Club under a management contract and owned a minority ownership interest of approximately 7% at December 31, 2008.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Shore Club:

	Year Ended December 31,
	2008			2007			2006			2005			2004
Selected Operating Information:
Occupancy		64.2	%		65.1	%		65.7	%		63.6	%		61.6	%
ADR	$	388		$	436		$	373		$	349		$	327
RevPAR	$	249		$	284		$	245		$	222		$	201
Selected Financial Information (in thousands):
Room Revenue	$	28,181		$	32,006		$	27,467		$	24,922		$	23,668
Total Revenue		43,291			48,759			42,423			39,726			37,539
Depreciation		4,562			4,877			9,662			8,824			9,326
Operating Income		8,305			8,386			1,102			2,004			520

Hard Rock Hotel & Casino Las Vegas

Overview

On February 2, 2007, the Company along with its joint venture partner, DLJMB, acquired the Hard Rock. The hotel’s eleven-story tower houses 646 spacious hotel rooms, including 62 suites and one 4,500 square-foot “mega suite.” Consistent with the hotel’s distinctive decor, the hotel rooms are stylishly furnished with modern furniture, stainless steel bathroom sinks, pedestal beds with leather headboards and black-and-white photos of famous rock musicians.

Additionally, the innovative, distinctive style of the approximately 30,000 square-foot circular casino is a major attraction for both Las Vegas visitors and local residents. The casino is designed with an innovative circular layout around the elevated Center Bar, which allows the casino’s patrons to see and be seen from nearly every area of the casino. Rock music is played continuously to provide the casino with an energetic and entertaining, club-like atmosphere. From February 2, 2007 through February 29, 2008, the casino, and all gaming related activities of Hard Rock, was operated by Golden Gaming under a definitive lease agreement. As of March 1, 2008, after receiving our gaming license in the state of Nevada, we began operating the casino and gaming operations.

Hard Rock also hosts a 3,600 square-foot retail store, jewelry store and a lingerie store; the 8,500 square foot Body English nightclub — featuring popular and innovative DJs from all around the country to provide the proper entertainment to attract our target clientele; a 6,000 square-foot banquet facility; a premier live music concert hall called The Joint which successfully draws audiences from Las Vegas visitors, as well as the local Las Vegas population; a rock n’ roll bar, called Wasted Space; a high-end Poker Lounge with 18 tables; a beach club which features a 300-foot long sand-bottomed tropical themed pool with a water slide, a water fall, a running stream and underwater rock music; and the Rock Spa, which features a state-of-the-art health club and spa facilities. The hotel offers its patrons a selection of high-quality food and beverages at multiple price points. The food and beverage operations include five restaurants (Nobu, Ago, AJ’s Steakhouse, Pink Taco and Mr. Lucky’s) and three cocktail lounges, including an elevated Center Bar surrounded by the gaming floor.

42

In March 2007, we announced a large-scale expansion project at the Hard Rock. The expansion is expected to include the addition of approximately 875 guest rooms, including an all-suite tower with upgraded amenities, approximately 60,000 square feet of meeting and convention space, and approximately 30,000 square feet of casino space. The project also includes an expansion of the hotel’s pool, several new food and beverage outlets, a new and larger The Joint live entertainment venue, a new spa and exercise facility and additional retail space. This exciting project is largely under way with the openings in 2008 of the Italian restaurant Ago, the authentic rock lounge Wasted Space, and the highly regarded Poker Lounge. Two new ballrooms are expected to be completed in the spring of 2009 with the new Joint following close behind. The first new tower of guestrooms is expected to be ready for occupancy late summer of 2009 with the remaining all-suite tower expected in late 2009 or early 2010. The new Joint will double the size of the existing legendary concert venue with a seated capacity of 3,100 and general admission of 4,000. The new venue will retain the same look and feel as the original and will be outfitted with a state-of-the-art house audio system, luxurious dressing rooms, massive lighting capabilities, and three levels of seating. Renovations to the existing property began during 2007 and included upgrades to existing suites, restaurants and bars, retail shops, and common areas, and a new ultra lounge and poker room. These renovations were completed in 2008.

Property highlights include:

Location	•     4455 Paradise Road, Las Vegas
Guest Rooms	•     646, including 62 suites and one mega suite
Food and Beverage	•     Nobu with seating for 200
	•     AJ’s Steakhouse with seating for 100
	•     Pink Taco with seating for 260
	•     Mr. Lucky’s with seating for 200
	•     Ago with seating for 190
	•     Center Bar, 2,000 square feet
Meeting Space	•     Multi-service banquet and conference facilities, with total capacity for 390
Other Amenities	•     Circular casino, approximately 30,000 square feet
	•     Body English nightclub, which capacity for 1,100
	•     The Joint live music concert hall, with capacity for 2,050
	•     Poker Lounge with 18 tables and a 1,000 square-foot bar
	•     Wasted Space rock n’ roll bar, with capacity for 500
	•     Rock Spa salon, fitness center and spa
	•     24-hour concierge service
	•     24-hour room service

We operate the Hard Rock under a management agreement and owned a 20.1% equity interest in the joint venture at December 31, 2008.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Hard Rock:

				For the Period from
	For the Year Ended			February 2, 2007 to
	December 31, 2008			December 31, 2007
Selected Operating Information:
Occupancy		91.7	%		94.6	%
ADR	$	186		$	207
RevPAR	$	171		$	196
Selected Financial Information (in thousands):
Room Revenue	$	39,008		$	42,220
Total Revenue		164,345			173,655
Depreciation		23,454			17,413
Operating (loss) income		(202,895	)		19,626

43

Mondrian South Beach

Overview

In December 2008, the Company along with its joint venture partner, an affiliate of Crescent Heights, opened Mondrian South Beach, the Company’s first hotel and condominium project. The hotel has 328 hotel residences consisting of studios, one-and two-bedroom apartments, and four tower suites. Located on newly-fashionable West Avenue, Mondrian South Beach is a quiet enclave just minutes from the bustling center of South Beach with spectacular views of the Atlantic Ocean, Biscayne Bay and downtown Miami. Designed by award-winning Dutch designer Marcel Wanders as “Sleeping Beauty’s castle”, Mondrian South Beach is pioneering revolutionary, world-class design for a new generation of style-conscious travelers. The hotel features an Asia de Cuba restaurant and Sunset Lounge and a 4,000 square feet spa.

The joint venture is in the process of selling units as condominiums, subject to market conditions, and unit buyers will have the opportunity to place their units into the hotel’s rental program. In addition to hotel management fees, the Company could also realize fees from the sale of condominium units.

Property highlights include:

Location	•     1100 West Avenue, Miami Beach, Florida
Guest Rooms	•     335, including studios, one-and two-bedroom apartments, and four tower suites
Food and Beverage	•     Asia de Cuba restaurant with seating for 265
	•     Sunset Lounge with capacity for 315
Meeting Space	•     Multi-service meeting facilities, consisting of two studios, both with outdoor terraces, with total capacity for over 700
Other Amenities	•     Bayside swimming pool surrounded by lounge pillows
	•     Lush gardens and landscaped labyrinthine trails
	•     24-hour concierge service
	•     24-hour business center
	•     24-hour fitness center

We operate the Mondrian South Beach under a management agreement and own a 50.0% equity interest in the joint venture.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Mondrian South Beach for the period from December 1, 2008 to December 31, 2008:

	For the period from
	Dec. 1, 2008 - Dec. 31, 2008
Selected Operating Information:
Occupancy		55.0	%
ADR	$	289
Rev PAR	$	159
Selected Financial Information (in thousands):
Room Revenue	$	1,020
Total Revenue (primarily sales of condos)		69,105
Depreciation		53
Operating Loss		(6,417	)

44

ITEM 3. LEGAL PROCEEDINGS

Litigation

Potential Litigation

We understand that Mr. Philippe Starck has initiated arbitration proceedings in the London Court of International Arbitration regarding an exclusive service agreement that he entered into with Residual Hotel Interest LLC (formerly known as Morgans Hotel Group LLC) in February 1998 regarding the design of certain hotels now owned by us. We are not a party to these proceedings at this time. See Note 6 of the Consolidated Financial Statements.

Hard Rock Financial Advisory Agreement

In July 2008, the Company received an invoice from Credit Suisse Securities (USA) LLC (“Credit Suisse”) for $9.4 million related to the Financial Advisory Agreement the Company entered into with Credit Suisse in July 2006. Under the terms of the financial advisory agreement, Credit Suisse received a transaction fee for placing DLJMB, an affiliate of Credit Suisse, in the Hard Rock joint venture. The transaction fee, which was paid by the Hard Rock joint venture at the closing of the acquisition of the Hard Rock and related assets in February 2007, was based upon an agreed upon percentage of the initial equity contribution made by DLJMB in entering into the joint venture. The invoice received in July 2008 alleges that as a result of events subsequent to the closing of the Hard Rock acquisition transactions, Credit Suisse is due additional transaction fees. The Company believes this invoice is invalid, and would otherwise be a Hard Rock joint venture liability.

Other Litigation

We are involved in various lawsuits and administrative actions in the normal course of business. In management’s opinion, disposition of these lawsuits is not expected to have a material adverse effect on our financial position, results of operations or liquidity.

45

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

No matters were submitted to a vote of our 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

Market Information

Our common stock has been listed on the Nasdaq Global Market under the symbol “MHGC” since the completion of our IPO in February 2006. The following table sets forth the high and low sales prices for our common stock, as reported on the Nasdaq Global Market, for each of the periods listed. No dividends were declared or paid during the periods listed.

Period	High		Low
First Quarter 2007	$	21.74	$	15.20
Second Quarter 2007	$	25.86	$	19.97
Third Quarter 2007	$	25.93	$	17.30
Fourth Quarter 2007	$	23.29	$	16.82
First Quarter 2008	$	19.75	$	12.67
Second Quarter 2008	$	15.56	$	10.30
Third Quarter 2008	$	17.88	$	10.00
Fourth Quarter 2008	$	10.73	$	2.60

On March 12, 2009, the closing sale price for our common stock, as reported as on the Nasdaq Global Market was $2.91. As of March 12, 2009, there were 48 record holders of our common stock although there is a much larger number of beneficial owners.

Dividend Policy

We have never declared or paid any cash dividends on our common stock and we do not currently intend to pay any cash dividends on our common stock. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends on our common stock will be, subject to applicable law, at the discretion of our Board of Directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions. Our revolving credit agreement prohibits us from paying cash dividends on our common stock.

2008 Stock Repurchases

The following table provides information about the Company’s purchases of its common stock during the quarter ended December 31, 2008.

							Approximate Dollar
					Total Number of		Value of
					Common Shares		Common Shares that
	Total Number of		Average Price		Purchased as Part of		May Yet Be Purchased
	Common Shares		Paid per		Publicly Announced		Under the Plans or
Period	Purchased		Common Share		Plans or Programs		Programs
							(In thousands)
October 1, 2008 – October 31, 2008(1)		1,502,953	$	10.30		1,502,953	$	—
November 1, 2008 – November 31, 2008		—		—		—	$	—
December 1, 2008 – December 31, 2008		—		—		—	$	—
Total		1,502,953	$	10.30		1,502,953	$	—

(1) All shares were repurchased under our 2008 stock repurchase program. Our 2008 stock repurchase program was authorized by our Board of Directors and announced by the Company on July 1, 2008. Under the 2008 stock repurchase program, we were authorized to repurchase up to $30.0 million of our common stock through the open market or in privately negotiated transactions from time to time on or before July 1, 2009. The timing and actual number of shares repurchased depended on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. As of October 9, 2008, the Company has completed this share repurchase program and purchased 2,794,653 shares for approximately $30.0 million.

46

Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate Securities and Exchange Commission filings, in whole or in part, the following performance graph will not be incorporated by reference into any such filings.

Performance Graph

The following graph below shows the cumulative total stockholder return of our common stock from our IPO date of February 17, 2006 through December 31, 2008 compared to the S&P 500 Stock Index and the S&P 500 Hotels. The graph assumes that the value of the investment in our common stock and each index was $100 at February 17, 2006. The Company has declared no dividends during this period. The stockholder return on the graph below is not indicative of future performance.

Comparison of Cumulative Total Return of the Company, S&P 500 Stock Index
and S&P 500 Hotels Index From February 17, 2006 through December 31, 2008

	2/17/2006		12/31/2006		12/31/2007		12/31/2008
Morgans Hotel Group Co.	$	100.00	$	84.65	$	96.40	$	23.30
S&P 500 Stock Index		100.00		110.18		114.07		70.17
S&P 500 Hotels Index		100.00		112.27		96.72		48.27

47

ITEM 6. SELECTED FINANCIAL INFORMATION

The following selected historical financial and operating data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K.

The following table contains selected consolidated financial data for the years ended December 31, 2008 and 2007 and consolidated financial data derived from our predecessor’s audited combined financial statements for the period from January 1, 2006 to February 16, 2006 and the years ended December 31, 2005 and 2004. Information included for the period from February 17, 2006 to December 31, 2006 and the years ended December 31, 2008 and 2007 is derived from the Company’s audited Consolidated Financial Statements. The historical results do not necessarily indicate results expected for any future period.

	Year Ended December 31,
	2008			2007			2006			2005			2004
	(In thousands, except operating data)
Statement of Operations Data:
Total hotel revenues	$	296,167		$	304,804		$	273,114		$	253,683		$	228,508
Total revenues		314,467			322,985			281,883			263,162			237,339
Total hotel operating costs		205,985			206,595			180,922			165,996			156,902
Corporate expenses, including stock compensation		41,889			44,744			27,306			17,982			15,375
Depreciation and amortization		27,733			21,719			19,112			26,215			27,348
Total operating costs and expenses		299,862			276,286			228,957			210,193			200,566
Operating income		14,605			46,699			52,926			52,969			36,773
Interest expense, net		43,164			41,338			51,564			72,257			67,173
Net (loss)		(55,349	)		(14,796	)		(13,925	)		(30,216	)		(31,595	)
Selected Operating Data:(1)
Occupancy %		76.9	%		81.8	%		77.0	%		76.9	%		73.7	%
Average daily rate (ADR)	$	308.12		$	323.67		$	319.04		$	301.60		$	277.42
Revenue per Available Room (RevPAR)	$	234.16		$	259.80		$	245.76		$	231.80		$	204.53
Number of rooms available at year end		3,712			3,383			2,736			2,541			2,539
Other Financial Data:
EBITDA(2)	$	24,236		$	85,302		$	78,621		$	85,655		$	76,591
Adjusted EBITDA(3)		92,735			110,141			85,084			79,452			67,994
Capital expenditures, excluding acquisitions		19,851			23,838			26,010			5,603			5,236
Basic and diluted loss per share(4)		(1.76	)		(0.45	)		(0.30	)
Cash Flow Data:
Net cash provided by (used in):
Operating activities	$	25,650		$	49,857		$	36,797		$	19,870		$	(22,820	)
Investing activities		(46,339	)		(105,552	)		(143,658	)		(20,251	)		(12,630	)
Financing activities		(52,873	)		150,858			112,575			9,301			44,637

	As of December 31,
	2008		2007		2006		2005			2004
	(In thousands)
Balance Sheet Data:
Cash and cash equivalents	$	49,150	$	122,712	$	27,549	$	21,833		$	12,915
Restricted cash		21,484		28,604		24,368		32,754			19,269
Property and equipment, net		555,645		535,609		494,537		426,927			446,811
Total assets		861,265		943,578		758,006		606,275			612,683
Mortgage notes payable		420,000		420,000		417,327		577,968			473,000
Financing and capital lease obligations		310,365		309,199		135,870		81,664			77,951
Long term debt and capital lease obligations		730,365		729,199		553,197		659,632			550,951
Total stockholders’ equity (deficit)		35,954		129,986		122,446		(110,573	)		4,165

48

(1)	Includes information for all managed hotels during the period, both consolidated and unconsolidated.
(2)	We believe that earnings before interest, income taxes, depreciation and amortization (EBITDA) is a useful financial metric to assess our operating performance before the impact of investing and financing transactions and income taxes. It also facilitates comparison between us and our competitors. Given the significant investments that we have made in the past in property, plant and equipment, depreciation and amortization expense comprises a meaningful portion of our cost structure. We believe that EBITDA will provide investors with a useful tool for assessing the comparability between periods because it eliminates depreciation and amortization expense attributable to capital expenditures.
	The use of EBITDA and Adjusted EBITDA, as defined below, has certain limitations. Our presentation of EBITDA and Adjusted EBITDA may be different from the presentation used by other companies and therefore comparability may be limited. Depreciation expense for various long-term assets, interest expense, income taxes and other items have been and will be incurred and are not reflected in the presentation of EBITDA or Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, EBITDA and Adjusted EBITDA do not consider capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our depreciation, interest and income tax expense, capital expenditures and other items both in our reconciliations to the GAAP financial measures and in our consolidated financial statements, all of which should be considered when evaluating our performance. The term EBITDA is not defined under accounting principles generally accepted in the United States, or U.S. GAAP, and EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. In addition, EBITDA is impacted by reorganization of businesses and other restructuring-related charges. When assessing our operating performance, you should not consider this data in isolation, or as a substitute for, our net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, our EBITDA may not be comparable to EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate EBITDA in the same manner as we do. A reconciliation of net income (loss), the most directly comparable U.S. GAAP measure, to EBITDA and Adjusted EBITDA for each of the respective periods indicated is as follows:

49

	Year Ended December 31,
	2008			2007			2006			2005			2004
	(In thousands)
Net (loss)	$	(55,349	)	$	(14,796	)	$	(13,925	)	$	(30,216	)	$	(31,595	)
Interest expense, net		43,164			41,338			51,564			72,257			67,173
Income tax (benefit) expense		(32,400	)		(9,060	)		11,204			822			827
Depreciation and amortization expense		27,733			21,719			19,112			26,215			27,348
Proportionate share of interest expense from unconsolidated joint ventures		32,899			36,908			6,030			10,669			7,694
Proportionate share of depreciation expense from unconsolidated joint ventures		10,347			10,150			5,427			6,390			5,754
Proportionate share of depreciation expense of minority interests in consolidated joint ventures		(409	)		(497	)		(491	)		(482	)		(610	)
Minority Interest		(1,749	)		(460	)		(300	)		—			—
EBITDA	$	24,236		$	85,302		$	78,621		$	85,655		$	76,591
Other non-operating expense (income)		464			1,531			1,845			(1,574	)		(6,424	)
Restructuring, development and disposal costs		10,825			3,228			1,617			—			942
Impairment loss		13,430			—			—			—			—
Other non-operating expense (income) from unconsolidated joint ventures		35,490			7,310			537			—			—
Less: EBITDA from leased hotels		(7,643	)		(6,755	)		(5,475	)		(4,629	)		(3,115	)
Add: Stock-based compensation		15,933			19,525			7,939			—			—
Adjusted EBITDA	$	92,735		$	110,141		$	85,084		$	79,452		$	67,994

(3)	We disclose Adjusted EBITDA because we believe it provides a meaningful comparison to our EBITDA as it excludes other non-operating (income) expenses that do not relate to the on-going performance of our assets and excludes the operating performance of assets in which we do not have a fee simple ownership interest.
	We exclude from Adjusted EBITDA the following:

• other non-operating expenses (income) such as executive terminations not related to restructuring initiatives discussed below, costs of financings and litigation and settlement costs and other items that relate to the financing and investing activities of our assets and do not relate to the on-going operating performance of our assets, both consolidated and unconsolidated;

• losses on asset dispositions, costs of abandoned development projects, and restructuring costs. These costs do not relate to the on-going operating performance of our assets, both consolidated and unconsolidated;

• non-cash impairment charges related to long-lived assets;

• the EBITDA related to leased hotels to more accurately reflect the operating performance of assets in which we have a fee simple ownership interest; and

• the stock-based compensation expense recognized, as this is not necessarily an indication of the operating performance of our assets.

(4) Basic and diluted loss per share for 2006 represents the Company’s earnings per share from February 17, 2006 to December 31, 2006.

50

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Historical Financial and Operating Data” and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to, those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview

We are a fully integrated hospitality company that operates, owns, acquires, develops and redevelops boutique hotels primarily in gateway cities and select resort markets in the United States and Europe. Over our 25-year history, we have gained experience operating in a variety of market conditions.

The historical financial data presented herein is the historical financial data for:

• our Owned Hotels, consisting of Morgans, Royalton and Hudson in New York, Delano Miami in Miami, Mondrian Los Angeles in Los Angeles, Clift in San Francisco, and Mondrian Scottsdale in Scottsdale;

• our Joint Venture Hotels, consisting of the London hotels (Sanderson and St Martins Lane), Shore Club, Hard Rock, and Mondrian South Beach;

• our investments in hotels under construction, such as Mondrian SoHo and Boston Ames, and our investment in other proposed properties;

• our investment in certain joint ventures food and beverage operations at our Owned Hotels and Joint Venture Hotels, discussed further below;

• our management company subsidiary, MHG Management Company; and

• the rights and obligations contributed to Morgans Group LLC in the formation and structuring transactions described in Note 1 to the Consolidated Financial Statements, included elsewhere in this report.

We consolidate the results of operations for all of our Owned Hotels and certain food and beverage operations at five of our Owned Hotels, which are operated under 50/50 joint ventures with restaurateur Jeffrey Chodorow. We consolidate the food and beverage joint ventures as we believe that we are the primary beneficiary of these entities. Our partner’s share of the results of operations of these food and beverage joint ventures are recorded as minority interest in the accompanying consolidated financial statements. This minority interest is based upon 50% of the income of the applicable entity after giving effect to rent and other administrative charges payable to the hotel. The Asia de Cuba restaurant at Mondrian Scottsdale is operated under license and management agreements with China Grill Management, a company controlled by Jeffrey Chodorow.

We own partial interests in the Joint Venture Hotels and certain food and beverage operations at three of the Joint Venture Hotels, Sanderson, St Martins Lane and Mondrian South Beach. We account for these investments using the equity method as we believe we do not exercise control over significant asset decisions such as buying, selling or financing nor are we the primary beneficiary of the entities. Under the equity method, we increase our investment in unconsolidated joint ventures for our proportionate share of net income and contributions and decrease our investment balance for our proportionate share of net losses and distributions.

On February 2, 2007, we began managing the hotel operations at the Hard Rock. We also have signed agreements to manage Mondrian SoHo and Boston Ames once development is complete. We have signed agreements to manage Mondrian Las Vegas, Delano Las Vegas, and Mondrian Palm Springs, but we are unsure of the future of the development of these hotels as financing has not yet been obtained. Additionally, in September 2008, we signed an agreement to manage Delano Dubai. As of December 31, 2008, we operated the following Joint Venture Hotels under management agreements which expire as follows:

• Sanderson — June 2018 (with one 10-year extension at our option);

• St Martins Lane — June 2018 (with one 10-year extension at our option);

51

• Shore Club — July 2022;

• Hard Rock — February 2027 (with two 10-year extensions); and

• Mondrian South Beach — August 2026.

These agreements are subject to early termination in specified circumstances. For instance, beginning 12 months following completion of the expansion of the Hard Rock, our Hard Rock management agreement may be terminated if the Hard Rock fails to achieve an EBITDA hurdle, as defined in the management agreement. There can be no assurances that we will satisfy this or other performance tests in our management agreements, many of which may be beyond our control, or that our management agreements will not be subject to early termination. Several of our hotels are also subject to substantial mortgage and mezzanine debt, and in some instances our management fee is subordinated to the debt and our management agreements may be terminated by the lenders on foreclosure.

We generated net losses for the periods ended December 31, 2008, 2007 and 2006. Total revenues decreased by $8.5 million in 2008 compared to 2007 and increased by $41.1 million in 2007 compared to 2006. A significant portion of the loss recognized for the year ended December 31, 2008 was due to the $13.4 million impairment charge recognized on Mondrian Scottsdale. Additionally, a portion of the losses for the years ended December 31, 2008, 2007 and 2006 are due to non-cash charges related to stock compensation and the recognition of our share of losses of unconsolidated subsidiaries. Stock compensation was introduced in February 2006 when we completed our IPO. The stock compensation expense was $16.0 million, $19.5 million, and $7.9 million in 2008, 2007 and 2006, respectively. Further, we purchased the Hard Rock through a joint venture in 2007. Our proportionate share of Hard Rock’s loss for the years ended 2008 and 2007 was $48.0 million and $22.1 million, respectively. We did not own any interest in Hard Rock in 2006.

Factors Affecting Our Results of Operations

Revenues. Changes in our revenues are most easily explained by three performance indicators that are commonly used in the hospitality industry:

• occupancy;

• ADR; and

• RevPAR, which is the product of ADR and average daily occupancy; but does not include food and beverage revenue, other hotel operating revenue such as telephone, parking and other guest services, or management fee revenue.

Substantially all of our revenue is derived from the operation of our hotels. Specifically, our revenue consists of:

• Rooms revenue. Occupancy and ADR are the major drivers of rooms revenue.

• Food and beverage revenue. Most of our food and beverage revenue is earned by our 50/50 restaurant joint ventures and is driven by occupancy of our hotels and the popularity of our bars and restaurants with our local customers.

• Other hotel revenue. Other hotel revenue, which consists of ancillary revenue such as telephone, parking, spa, entertainment and other guest services, is principally driven by hotel occupancy.

• Management fee — related parties revenue and other income. We earn fees under our management agreements. These fees may include management fees as well as reimbursement for allocated chain services. Additionally, we earn branding fees related to the use of our Delano brand in connection with sales by our joint venture partner in our Delano Dubai development project of condominium units associated with the project.

Fluctuations in revenues, which tend to correlate with changes in gross domestic product, are driven largely by general economic and local market conditions but can also be impacted by major events, such as terrorist attacks or natural disasters, which in turn affect levels of business and leisure travel.

52

The seasonal nature of the hospitality business can also impact revenues. We experience some seasonality in our business. For example, our Miami hotels are generally strongest in the first quarter, whereas our New York hotels are generally strongest in the fourth quarter.

In addition to economic conditions, supply is another important factor that can affect revenues. Room rates and occupancy tend to fall when supply increases, unless the supply growth is offset by an equal or greater increase in demand. One reason why we focus on boutique hotels in key gateway cities is because these markets have significant barriers to entry for new competitive supply, including scarcity of available land for new development and extensive regulatory requirements resulting in a longer development lead time and additional expense for new competitors.

Finally, competition within the hospitality industry can affect revenues. Competitive factors in the hospitality industry include name recognition, quality of service, convenience of location, quality of the property, pricing, and range and quality of food services and amenities offered. In addition, all of our hotels, restaurants and bars are located in areas where there are numerous competitors, many of whom have substantially greater resources than us. New or existing competitors could offer significantly lower rates or more convenient locations, services or amenities or significantly expand, improve or introduce new service offerings in markets in which our hotels compete, thereby posing a greater competitive threat than at present. If we are unable to compete effectively, we would lose market share, which could adversely affect our revenues.

Operating Costs and Expenses. Our operating costs and expenses consist of the costs to provide hotel services, costs to operate our management company, and costs associated with the ownership of our assets, including:

• Rooms expense. Rooms expense includes the payroll and benefits for the front office, housekeeping, concierge and reservations departments and related expenses, such as laundry, rooms supplies, travel agent commissions and reservation expense. Like rooms revenue, occupancy is a major driver of rooms expense, which has a significant correlation with rooms revenue.

• Food and beverage expense. Similar to food and beverage revenue, occupancy of our hotels and the popularity of our restaurants and bars are the major drivers of food and beverage expense, which has a significant correlation with food and beverage revenue.

• Other departmental expense. Occupancy is the major driver of other departmental expense, which includes telephone and other expenses related to the generation of other hotel revenue.

• Hotel selling, general and administrative expense. Hotel selling, general and administrative expense consist of administrative and general expenses, such as payroll and related costs, travel expenses and office rent, advertising and promotion expenses, comprising the payroll of the hotel sales teams, the global sales team and advertising, marketing and promotion expenses for our hotel properties, utility expense and repairs and maintenance expenses, comprising the ongoing costs to repair and maintain our hotel properties.

• Property taxes, insurance and other. Property taxes, insurance and other consist primarily of insurance costs and property taxes.

• Corporate expenses, including stock compensation. Corporate expenses consist of the cost of our corporate office, net of any cost recoveries, which consists primarily of payroll and related costs, stock-based compensation expenses, office rent and legal and professional fees and costs associated with being a public company.

• Depreciation and amortization expense. Hotel properties are depreciated using the straight-line method over estimated useful lives of 39.5 years for buildings and five years for furniture, fixtures and equipment.

• Restructuring, development and disposal costs include costs incurred related to our restructuring initiatives implemented in 2008, costs of abandoned development projects and disposal of assets typically as a result of renovations. These items do not relate to the ongoing operating performance of our assets.

• Impairment loss. When certain triggering events occur, we periodically review each property for possible impairment. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated discounted future cash flows of the assets to estimate the fair value of the asset taking into account each property’s expected cash flow from operations, holding period and net proceeds from the dispositions of the property. For the year ended December 31, 2008, management concluded, based on the discounted cash flow method, that Mondrian Scottsdale was impaired. This impairment charge of $13.4 million is reflected in our consolidated financial statements for the year ended December 31, 2008.

53

Other Items

• Interest expense, net. Interest expense, net includes interest on our debt and amortization of financing costs and is presented net of interest income and interest capitalized.

• Equity in (income) loss of unconsolidated joint ventures. Equity in (income) loss of unconsolidated joint ventures constitutes our share of the net profits and losses of our Joint Venture Hotels and our investments in hotels under development.

• Minority interest. Minority interest expense constitutes the third-party food and beverage joint venture partner’s interest in the profits of the restaurant ventures at certain of our hotels.

• Other non-operating (income) expenses include gains and losses on sale of assets and asset restructurings, costs of financings, certain litigation costs, gain on early extinguishment of debt and other items that do not relate to the ongoing operating performance of our assets.

• Income tax (benefit) expense. One of our foreign subsidiaries is subject to United Kingdom corporate income taxes. Income tax expense is reported at the applicable rate for the periods presented. The Company is subject to Federal and state income taxes. Income taxes for the years ended December 31, 2008 and 2007 and for the period from February 17, 2006 to December 31, 2006 were computed using our calculated effective tax rate. We also recorded net deferred taxes related to cumulative differences in the basis recorded for certain assets and liabilities.

The United States entities included in the combined financial statements of our Predecessor (defined below) are either partnerships or limited liability companies, which are treated similarly to partnerships for tax reporting purposes. Accordingly, Federal and state income taxes have not been provided for in the accompanying combined financial statements for the period from January 1, 2006 to February 16, 2006, as the partners or members are responsible for reporting their allocable share of our Predecessor’s income, gains, deductions, losses and credits on their individual income tax returns.

Most categories of variable operating expenses, such as operating supplies and certain labor such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to increases in occupancy are accompanied by increases in most categories of variable operating costs and expenses. Increases in RevPAR attributable to improvements in ADR typically only result in increases in limited categories of operating costs and expenses, primarily credit card and travel agent commissions. Thus, improvements in ADR have a more significant impact on improving our operating margins than occupancy.

Notwithstanding our efforts to reduce variable costs, there are limits to how much we can accomplish because we have significant costs that are relatively fixed costs, such as depreciation and amortization, labor costs and employee benefits, insurance, real estate taxes and other expenses associated with owning hotels that do not necessarily decrease when circumstances such as market factors cause a reduction in our hotel revenues.

Recent Trends and Developments

Recent Trends. During the year ended December 31, 2008, the weakening U.S. and global economy resulted in considerable negative pressure on both consumer and business spending. As a result, lodging demand, which is primarily driven by growth in GDP, business investment and employment growth, continued to weaken during 2008 and we believe these trends will continue into 2009. We anticipate that lodging demand will not improve, and will likely weaken further, until the current economic trends, particularly the expected weakness in the overall economy and the lack of liquidity in the credit markets, reverse course.

To help mitigate the effects of these trends, we are actively managing costs and each of our properties has implemented certain cost reduction plans. Further, during October 2008, we implemented certain cost reduction plans at our corporate office. Additionally, given the continuing declines in the market since December 2008, we have implemented additional cost reduction plans in early 2009 and we remain prepared to institute further cost reductions if necessary. We believe that these cost reduction plans will result in significant savings in 2009 and that our experienced management team has allowed us to implement these cost cuts without impacting the overall quality of our guest experience.

54

Demand has diminished and is expected to continue to remain weak as a result of the current economic crisis. Although the pace of new lodging supply in various phases of development has increased over the past several quarters, we believe the timing of some of these projects may be affected by the current economic crisis and the reduced availability of financing. These factors may further dampen the pace of new supply development, including our own, beyond 2008. Nevertheless, we did witness new competitive luxury and boutique properties opening in 2008 in some of our markets, particularly in Los Angeles, Scottsdale and Miami Beach, that impacted our performance in these markets and may continue to do so.

For 2009, we believe that the economic forecasts for contraction of GDP, increasing unemployment and declines in business investment and profits, when combined with the turmoil in the credit markets, will continue to negatively affect both leisure and business travel and, accordingly, decrease lodging demand. As such, there can be no assurances that any increases in hotel revenues or earnings at our properties will continue or that any losses will not increase for these or any other reasons. Although the continuing uncertainty about the depth and duration of the economic crisis makes projections difficult, based on a review of hotel-specific and broad economic metrics, we believe that our results will be significantly weaker in 2009 as compared to the results of 2008.

Finally, global credit markets continue to tighten, with less credit available generally and on less favorable terms than were obtainable in the recent past. Given the current state of the credit markets, some of our joint venture projects, such as the Echelon project and Mondrian Palm Springs, may not be able to obtain adequate project financing in a timely manner or at all. If adequate project financing is not obtained, the joint ventures or developers, as applicable, may seek additional equity investors to raise capital, limit the scope of the project, defer the project or cancel the project altogether.

Recent Developments. In addition to the recent trends described above, we expect that a number of recent events will cause our future results of operations to differ from our historical performance. For a discussion of these recent events, see “Item 1 — Business — 2008 Transactions and Developments.”

55

Operating Results

Comparison of Year Ended December 31, 2008 To Year Ended December 31, 2007

The following table presents our operating results for the years ended December 31, 2008 and 2007, including the amount and percentage change in these results between the two periods. The consolidated operating results for the year ended December 31, 2008 is comparable to the consolidated operating results for the year ended December 31, 2007, with the exception of the renovation of Mondrian Los Angeles and the closure for renovation of Morgans in New York during a portion of the year ended December 31, 2008, the closure for renovation of Royalton during a portion of the year ended December 31, 2007, the investment in the Hard Rock in February 2007 and renovation and expansion work at the Hard Rock during the year ended December 31, 2008. The consolidated operating results are as follows:

	2008			2007			Change ($)			Change (%)
	(Dollars in thousands)
Revenues:
Rooms	$	184,059		$	186,752		$	(2,693	)		(1.4	)%
Food and beverage		99,254			104,271			(5,017	)		(4.8	)%
Other hotel		12,854			13,781			(927	)		(6.7	)%
Total hotel revenues		296,167			304,804			(8,637	)		(2.8	)%
Management fee — related parties and other income		18,300			18,181			119			0.7	%
Total revenues		314,467			322,985			(8,518	)		(2.6	)%
Operating Costs and Expenses:
Rooms		49,561			49,411			150			0.3	%
Food and beverage		71,695			69,998			1,697			2.4	%
Other departmental		7,461			7,923			(462	)		(5.8	)%
Hotel selling, general and administrative		60,311			60,246			65			0.1	%
Property taxes, insurance and other		16,957			19,017			(2,060	)		(10.8	)%
Total hotel operating expenses		205,985			206,595			(610	)		(0.3	)%
Corporate expenses, including stock compensation		41,889			44,744			(2,855	)		(6.4	)%
Depreciation and amortization		27,733			21,719			6,014			27.7	%
Restructuring, development and disposal costs		10,825			3,228			7,597				(1)
Impairment loss		13,430			—			13,430				(1)
Total operating costs and expenses		299,862			276,286			23,576			9.5	%
Operating income		14,605			46,699			(32,094	)		(68.7	)%
Interest expense, net		43,164			41,338			1,826			4.4	%
Equity in loss of unconsolidated joint ventures		56,581			24,580			32,001			130.1	%
Minority interest		3,894			3,566			328			9.2	%
Other non-operating expense		464			1,531			(1,067	)		(69.7	)%
Loss before income tax expense		(89,498	)		(24,316	)		(65,182	)			(1)
Income tax benefit		(32,400	)		(9,060	)		(23,340	)			(1)
Loss before minority interest		(57,098	)		(15,256	)		(41,842	)			(1)
Minority interest		(1,749	)		(460	)		(1,289	)			(1)
Net loss		(55,349	)		(14,796	)		(40,553	)			(1)
Other comprehensive income:
Unrealized loss on interest rate swap, net of tax		(5,878	)		(6,674	)		796			11.9	%
Foreign currency translation (loss) gain		(300	)		6			(306	)			(1)
Comprehensive loss	$	(61,527	)	$	(21,464	)	$	(40,063	)		186.7	%

⁽¹⁾ Not meaningful.

Total Hotel Revenues. Total hotel revenues decreased 2.8% to $296.2 million in 2008 compared to $304.8 million in 2007. The components of RevPAR from our comparable Owned Hotels for 2008 and 2007, which includes Hudson, Delano, Clift and Mondrian Scottsdale and excludes Morgans and Mondrian Los Angeles, which were under renovation during 2008, and Royalton, which was under renovation in 2007, are summarized as follows:

	2008			2007			Change ($)			Change (%)
Occupancy		80.6	%		80.9	%		—			(0.4	)%
ADR	$	302		$	302			—			0.0	%
RevPAR	$	243		$	245		$	(2	)		(0.7	)%

56

RevPAR from our comparable Owned Hotels decreased 0.78% to $243 in 2008 compared to $245 in 2007.

Rooms revenue decreased 1.4% to $184.1 million in 2008 compared to $186.8 million in 2007. The overall decrease was primarily attributable to disruptions due to renovations at Mondrian Los Angeles and Morgans during 2008, as well as the significant adverse impact on lodging demand as a result of the global economic downturn, particularly during the fourth quarter of 2008.

Food and beverage revenue decreased 4.8% to $99.3 million in 2008 compared to $104.3 million in 2007. The food and beverage revenues at Mondrian Los Angeles and Morgans decreased 22.1% and 13.3%, respectively, in 2008 as compared to 2007 due to hotel renovations during 2008 at each property, which impacted restaurant patronage. Partially offsetting this decrease were increases in food and beverage revenues of 15.4% and 56.1% at Delano Miami and Royalton, respectively. Delano Miami benefitted from The Florida Room nightclub and lounge which opened in December 2007. The increase in revenues at Royalton is due primarily to the new restaurant, Brasserie 44 and the recently renovated bar, both of which opened in October 2007 when the hotel reopened after renovations.

Other hotel revenue decreased 6.7% to $12.9 million in 2008 compared to $13.8 million in 2007, primarily due to a decline in telephone revenues in 2008 as compared to 2007, which we believe is generally consistent across the industry due to increased use of cell phones by our guests and decreased spa and gift shop revenues at Mondrian Los Angeles as a result of the renovation during 2008.

Management Fee — Related Parties and Other Income. Management fee — related parties and other income increased by 0.7% to $18.3 million in 2008 compared to $18.2 million in 2007. This increase is primarily due to a $1.5 million branding fee earned in September 2008 relating to the use of the Delano brand for the sale of residences to be constructed in connection with the Delano Dubai project. Offsetting this increase is a decrease in management fees earned at Hard Rock as a result of reduced revenues due to disruption from the expansion and renovations currently underway.

Operating Costs and Expenses

Rooms expense increased 0.3% to $49.6 million in 2008 compared to $49.4 million in 2007. This slight increase was primarily due to an increase of 48.1% in rooms expense at Royalton in 2008 as compared to 2007, when the hotel was closed for renovation. Offsetting this increase were decreases in rooms expense of 9.3% and 22.1% at Mondrian Los Angeles and Morgans, respectively which were both under renovation during 2008.

Food and beverage expense increased 2.4% to $71.7 million in 2008 compared to $70.0 million in 2007. Increases in food and beverage expenses were experienced at Delano Miami and Royalton. Delano Miami’s expenses increased as a result of the increase in revenues noted above related to The Florida Room nightclub and lounge which opened in December 2007. The increase in expenses at Royalton is due primarily to the new restaurant, Brasserie 44 and the recently renovated bar, both of which opened in October 2007, after the hotel was closed for renovation. Offsetting these increases, the food and beverage expenses at Mondrian Los Angeles decreased, in line with the decrease in revenues noted above, during 2008 as compared to 2007.

Other departmental expense decreased 5.8% to $7.5 million in 2008 compared to $7.9 million in 2007. This decrease was primarily due to lower expenses at the Mondrian Los Angeles spa and gift shop, which were closed for a portion of 2008 during the renovation.

Hotel selling, general and administrative expense increased slightly to $60.3 million in 2008 compared to $60.2 million in 2007. This increase was primarily due to the increase in expenses at Royalton in 2008 compared to 2007, since it was closed for renovation for approximately four months during 2007. Slightly offsetting this increase were reductions resulting from the closing of Morgans for renovation during 2008. Additionally, decreases in administrative and general expenses were experienced at Mondrian Los Angeles during 2008 as there was a delay in filling vacant managerial positions until the hotel renovation was completed.

Property taxes, insurance and other expense decreased 10.8% to $17.0 million in 2008 compared to $19.0 million in 2007. The decrease is primarily related to non-recurring preopening expenses incurred during 2007 at both Mondrian Scottsdale and Royalton, and a real estate tax refund received at Clift. Mondrian Scottsdale was repositioned and opened in January 2007 and Royalton opened after renovations in October 2007. In 2008, we successfully appealed the real estate tax basis of Clift and a refund of approximately $1.5 million was received for prior year taxes paid. Slightly offsetting these decreases, Mondrian Los Angeles and Morgans both incurred non-recurring pre-opening expenses as a result of their re-launch after renovation during late 2008. Additionally, slight increases in property taxes were incurred during 2008 at Hudson as a result of the expiration of a property tax abatement, which will continue to be phased out over the next three years, fully expiring in 2012.

57

Corporate expenses, including stock compensation decreased by 6.4% to $41.9 million in 2008 compared to $44.7 million in 2007. This decrease is due primarily to a decrease in stock compensation of $3.6 million in 2008 as compared to 2007 due to a one-time additional expense recognized in September 2007 in connection with the resignation of our former president and chief executive officer, as well as the impact of cost cutting initiatives implemented in October 2008. Slightly offsetting these decreases in 2008 were increases in public company costs in 2008 as compared to 2007.

Depreciation and amortization increased 27.7% to $27.7 million in 2008 compared to $21.7 million in 2007. This increase is a result of hotel renovations at Royalton, which took place during 2007, and Mondrian Los Angeles and Morgans, which both took place during 2008.

Restructuring, development and disposal costs increased to $10.8 million in 2008 as compared to $3.2 million in 2007. The increase in the expense is primarily related to approximately $2.0 million of severance expense incurred during 2008 as part of our cost reduction plans and increased costs related to abandoned development projects, including a $2.5 million write-off in 2008 of our investment in Mondrian Chicago, as the joint venture developing that hotel was terminated.

Impairment loss of $13.4 million was recognized in 2008 related to the write-down in the carrying value of Mondrian Scottsdale. No such impairment loss was recognized in 2007.

Interest Expense, net. Interest expense, net increased 4.4% to $43.2 million in 2008 compared to $41.3 million in 2007. The slight increase is primarily a result of the issuance of the Convertible Notes (as defined below) in October 2007.

Equity in loss of unconsolidated joint ventures was a loss of $56.6 million for the year ended 2008 compared to $24.6 million for the year ended 2007. This loss was primarily driven by increased losses at the Hard Rock in 2008 as compared to 2007, which is primarily due to impairment charges relating to certain intangible assets and disruptions as a result of the current renovation and expansion underway at the Hard Rock.

The components of RevPAR from our comparable Joint Venture Hotels for 2008 and 2007, which includes Sanderson, St Martins Lane and Shore Club, but excludes the Hard Rock, as we invested in this hotel in February 2007 and it is currently under renovation and expansion, and Mondrian South Beach, which opened in December 2008, are summarized as follows:

	2008			2007			Change ($)			Change (%)
Occupancy		69.4	%		71.7	%		—			(3.2	)%
ADR	$	419		$	472		$	(53	)		(11.2	)%
RevPAR	$	290		$	338		$	(48	)		(14.1	)%

58

The components of RevPAR from the Hard Rock for the year ended December 31, 2008 and the period from February 2, 2007 through December 31, 2007 are summarized as follows:

	Year ended			Period from
	December			Feb. 2, 2007 to
	2008			Dec. 31, 2007			Change ($)			Change (%)
Occupancy		91.7	%		94.6	%		—			(3.1	)%
ADR	$	186		$	207		$	(21	)		(10.1	)%
RevPAR	$	171		$	196		$	25			(13.0	)%

As is customary for companies in the gaming industry, the Hard Rock presents average occupancy rate and average daily rate including rooms provided on a complimentary basis. Like most operators of hotels in the non-gaming lodging industry, we do not follow this practice at our other hotels, where we present average occupancy rate and average daily rate net of rooms provided on a complimentary basis.

Other non-operating expense decreased 69.7% to $0.5 million in 2008 as compared to $1.5 million in 2007. The decrease in the expense is primarily related to reduced legal costs incurred related to the Shore Club litigation that was settled in 2008 and non-recurring costs associated with the resignation of our former president and chief executive officer in September 2007.

Income tax (benefit) expense resulted in a benefit of $32.4 million in 2008 compared to $9.1 million in 2007. The income tax benefit was due primarily to the recording of deferred tax assets from the net operating loss. We have approximately $28.3 million in net operating losses which may offset anticipated future taxable income and /or tax strategies which may include the sale of a property or an interest therein.

59

Comparison of Year Ended December 31, 2007 To Year Ended December 31, 2006

The following table presents our operating results for the year ended December 31, 2007 and the year ended December 31, 2006, including the amount and percentage change in these results between the two periods. The operations presented for the period from January 1, 2006 through February 16, 2006 are those of our predecessor (“Predecessor”), which is comprised of the subsidiaries and ownership interests that were contributed as part of the formation and structuring transactions from Morgans Hotel Group LLC, now known as Residual Hotel Interest LLC (“Former Parent”), to Morgans Group LLC, our operating company. We completed our initial public offering on February 17, 2006; therefore the period from February 17, 2006 through December 31, 2006, represents our results of operations. The combined periods in 2006 are comparable to our results for the year ended December 31, 2007 with the exception of the addition of the Mondrian South Beach development project in August 2006, the purchase of Hard Rock in February 2007, the addition of Mondrian Scottsdale in May 2006, which was under renovation during the year ended December 31, 2006, and the renovation of Royalton, which was closed for four months during 2007. Mondrian South Beach was operating as an apartment building at the time of its purchase in August 2006 and was in the development phases of converting into a hotel and condominium during the periods. Our investment in Mondrian South Beach and Hard Rock is accounted for using the equity method and our share of losses is recorded in the consolidated results of operations for the years ended December 31, 2006 and 2007. The combined operating results are as follows:

	2007			2006			Change ($)			Change (%)
	(Dollars in thousands)
Revenues:
Rooms	$	186,752		$	168,572		$	18,180			10.8	%
Food and beverage		104,271			89,105			15,166			17.0	%
Other hotel		13,781			15,437			(1,656	)		(10.7	)%
Total hotel revenues		304,804			273,114			31,690			11.6	%
Management fee — related parties and other income		18,181			8,769			9,412			107.3	%
Total revenues		322,985			281,883			41,102			14.6	%
Operating Costs and Expenses:
Rooms		49,411			43,086			6,325			14.7	%
Food and beverage		69,998			58,576			11,422			19.5	%
Other departmental		7,923			7,878			45				(1)
Hotel selling, general and administrative		60,246			55,387			4,859			8.8	%
Property taxes, insurance and other		19,017			15,995			3,022			18.9	%
Total hotel operating expenses		206,595			180,922			25,673			14.2	%
Corporate expenses, including stock compensation		44,744			27,306			17,438			63.9	%
Depreciation and amortization		21,719			19,112			2,607			13.6	%
Restructuring, development and disposal costs		3,228			1,617			1,611			99.6	%
Total operating costs and expenses		276,286			228,957			47,329			20.7	%
Operating income		46,699			52,926			(6,227	)		(11.8	)%
Interest expense, net		41,338			51,564			(10,226	)		(19.8	)%
Equity in loss (income) of unconsolidated joint ventures		24,580			(1,459	)		26,039				(1)
Minority interest		3,566			3,997			(431	)		(10.8	)%
Other non-operating expense		1,531			1,845			(314	)		(17.0	)%
Loss before income tax expense		(24,316	)		(3,021	)		(21,295	)			(1)
Income tax (benefit) expense		(9,060	)		11,204			(20,264	)			(1)
Loss before minority interest		(15,256	)		(14,225	)		(1,031	)		7.2	%
Minority interest		(460	)		(300	)		(160	)		53.3	%
Net loss		(14,796	)		(13,925	)		(871	)		6.3	%
Other comprehensive income:
Unrealized loss on interest rate swap, net of tax		(6,674	)		(1,303	)		(5,371	)			(1)
Foreign currency translation loss		6			200			(194	)		(97.0	)%
Comprehensive loss	$	(21,464	)	$	(15,028	)	$	(6,436	)		42.8	%

⁽¹⁾ Not meaningful.

60

Total Hotel Revenues. Total hotel revenues increased 11.6% to $304.8 million in 2007 compared to $273.1 million in 2006. RevPAR from our comparable Owned Hotels for 2007 and 2006, which includes Hudson, Morgans, Delano and Clift and excludes Royalton and Mondrian Los Angeles, which were under renovation during 2007, and Mondrian Scottsdale, which was under renovation in 2006, increased 14.2% to $266 in 2007 compared to $233 in 2006. The components of RevPAR from our comparable Owned Hotels in 2007 and 2006 are summarized as follows:

	2007			2006			Change ($)		Change (%)
Occupancy		84.6	%		80.5	%		—		5.1	%
ADR	$	314		$	289		$	25		8.6	%
RevPAR	$	266		$	233		$	33		14.2	%

Rooms revenue increased 10.8% to $186.8 million in 2007 compared to $168.6 million in 2006 driven by comparable Owned Hotels RevPAR growth partially offset by revenue declines at hotels under renovation. The comparable Owned Hotel RevPAR increase of 14.2% was primarily driven by Delano Miami which produced RevPAR growth of 20.2% and Clift which produced RevPAR growth of 14.0%. The growth at Delano Miami was primarily driven by the growth in rate experienced as a result of the rooms renovation that began in late 2006 and was completed in 2007. The growth at Clift is primarily attributable to an increased number of tourists and convention groups returning to San Francisco.

Food and beverage revenue increased 17.0% to $104.3 million in 2007 compared to $89.1 million in 2006. The increase in food and beverage revenue is primarily due to Mondrian Scottsdale and Hudson. During 2006, the restaurant and bars at Mondrian Scottsdale were operating on a limited service basis while the entire hotel was under renovation. The restaurant and bars at Mondrian Scottsdale opened in late January 2007 resulting in an increase of $5.7 million, for the year ended December 31, 2007 as compared to 2006. The food and beverage revenues at Hudson increased $5.4 million for the year ended December 31, 2007 as compared to 2006. The growth in the food and beverage revenues at the Hudson was primarily attributable to catering that was previously outsourced being performed in-house beginning in February 2007. Beginning in February 2007, Hudson began recording food and beverage revenues and expense for the catering department. Further, contributing to the overall increase in food and beverage revenues, the Company’s restaurants and bars are destinations in their own right, with a local customer base in addition to hotel guests; accordingly their revenue performance is driven by local market factors in the restaurant and bar business.

Other hotel revenue decreased by $1.7 million to $13.8 million in 2007 compared to $15.4 million in 2006. The decline is primarily due to the decline in telephone revenues of 15.7% in 2007 compared to 2006. The decline in telephone revenues is an industry-wide issue primarily caused by the increased use of cell phones.

Management Fee — Related Parties and Other Income. Management fee — related parties and other income increased by 107.3% to $18.2 million in 2007 compared to $8.8 million in 2006 due primarily to management fees earned relating to Hard Rock.

Operating Costs and Expenses

Rooms expense increased 14.7% to $49.4 million in 2007 compared to $43.1 million in 2006. The increase is primarily due to the increase in rooms expenses at Mondrian Scottsdale of $1.8 million which was primarily due to increased wages. Mondrian Scottsdale was acquired in May 2006 and was not fully staffed during the period from acquisition to December 31, 2006, as it was undergoing substantial renovation. When the hotel renovation was completed in January 2007, the hotel began operating with a full staff. Additionally, an increase in rooms expenses, which was not consistent with an increase of rooms revenue, was experienced at Mondrian Los Angeles and Delano Miami, primarily due to increased housekeeping wages and related costs.

Food and beverage expense increased 19.5% to $70.0 million in 2007 compared to $58.6 million in 2006. The increase in food and beverage expense is primarily due to Mondrian Scottsdale and Hudson. During 2006, the restaurant and bars at Mondrian Scottsdale were operating on a limited service basis while the hotel was under renovation. The restaurant and bars at Mondrian Scottsdale opened in late January 2007 resulting in an increase in food and beverage expenses of $3.8 million for the year ended December 31, 2007 as compared to 2006. The food and beverage expense at Hudson increased $4.7 million for the year ended December 31, 2007 as compared to 2006 as catering, previously outsourced, was performed in-house beginning in February 2007.

Other departmental expense increased an immaterial amount in 2007 compared to 2006, primarily due to the inclusion of Mondrian Scottsdale and increased costs associated with long distance telephone calls, offset by a change in the Delano Miami valet parking contract. The inclusion of Mondrian Scottsdale accounts for $0.6 million of the increase and is due to the hotel being fully operational after completion of the renovation in January 2007. Additionally, telephone expenses have increased across our portfolio by 5.0% or $0.1 million in 2007 compared to 2006 due to increased costs associated with long distance telephone calls. Offsetting these increases is a decrease of $0.8 million in parking costs resulting from the outsourcing of parking valet services at Delano Miami in June 2006.

61

Hotel selling, general and administrative expense increased 8.8% to $60.2 million in 2007 compared to $55.4 million in 2006. The inclusion of Mondrian Scottsdale accounts for $2.6 million of this $4.9 million increase from 2006 to 2007 with the remaining increase attributable to general inflation rates.

Property taxes, insurance and other expense increased 18.9% to $19.0 million in 2007 compared to $16.0 million in 2006. This increase was primarily due to the renovation of Royalton where the Company incurred nonrecurring pre-opening expenses as a result of the completion of the renovation and re-launch of the hotel, restaurant and bar in October 2007. Additionally, both hotels in California, Mondrian Los Angeles and Clift, experienced increases in earthquake insurance costs in 2007 as compared to 2006.

Corporate expenses, including stock compensation increased by 63.9% to $44.7 million in 2007 compared to $27.3 million in 2006. This increase is due primarily to the increase in stock compensation expense of $11.6 million due to additional expense recognized in connection with the resignation of our former president and chief executive officer in September 2007 and additional annual stock-based compensation granted to non-employee directors, officers and employees during 2007. Further, this increase is due to increased payroll and payroll related costs incurred as a result of the hiring of additional employees due to the expansion of the Company’s hotel portfolio and development efforts, as well as increased legal fees and Sarbanes-Oxley compliance costs.

Depreciation and amortization increased 13.6% to $21.7 million in 2007 compared to $19.1 million in 2006. This increase is a result of the renovations at Delano Miami, which took place in late 2006 and during 2007, and at Royalton, which took place during 2007.

Restructuring, development and disposal costs increased 99.6% to $3.2 million in 2007 as compared to $1.6 million in 2006. The increase in the expense is primarily related to increased costs related to abandoned development projects.

Interest Expense, net. Interest expense, net decreased 19.8% to $41.3 million in 2007 compared to $51.6 million in 2006. The $10.2 million decrease in interest expense, net is primarily attributable to:

• decreased interest expense of $4.7 million resulting from the February 2006 payoff and October 2006 refinancing of the mortgage and mezzanine debt, including prepayment fees, secured by five of our wholly-owned hotels;

• decreased amortization of deferred financing costs, including the write-off of costs associated with the above mentioned repaid loans of $10.5 million; offset by

• an increase of $2.4 million in interest expense due to changes in the value of an interest rate cap, which does not qualify for hedge accounting under SFAS No. 133;

• an increase in interest expense of $0.9 million related to the issuance of convertible notes in October 2007; and

• an increase in interest expense of $2.6 million related to the issuance of notes to a subsidiary issuing trust preferred securities in August 2006.

The weighted average interest rates in 2007 and 2006 were 5.8% and 6.1%, respectively.

Equity in loss (income) of unconsolidated joint ventures was a loss of $24.6 million for the year ended 2007 compared to income of $1.5 million for the year ended 2006. The loss recorded in 2007 was primarily driven by the Company’s share of losses from Hard Rock, which resulted primarily due to interest expense.

The components of RevPAR from our comparable Joint Venture Hotels for 2007 and 2006, which includes Sanderson, St Martins Lane and Shore Club, but excludes Hard Rock, as we invested in this hotel in February 2007, and Mondrian South Beach, which was in the development phase during the periods, are summarized as follows:

	2007			2006			Change ($)		Change (%)
Occupancy		71.7	%		72.2	%		—		(0.5	)%
ADR	$	472		$	407		$	65		15.9	%
RevPAR	$	338		$	294		$	44		15.0	%

62

The components of RevPAR from the Hard Rock for the period from February 2, 2007 through December 31, 2007 are summarized as follows:

Occupancy		94.6	%
ADR	$	207
RevPAR	$	196

As is customary for companies in the gaming industry, the Hard Rock presents average occupancy rate and average daily rate including rooms provided on a complimentary basis. Like most operators of hotels in the non-gaming lodging industry, we do not follow this practice at our other hotels, where we present average occupancy rate and average daily rate net of rooms provided on a complimentary basis.

Other non-operating expense decreased 17.0% to $1.5 million in 2007 as compared to $1.8 million in 2006. The expense recognized during 2007 primarily relates to expenses incurred in connection with the resignation of our former president and chief executive officer in September 2007 as well as legal expenses related to the Shore Club litigation. This was partially offset by a $6.1 million fee earned in facilitating the transfer of our former joint venture partner’s interest of the London hotels to our current joint venture partner in February 2007. In 2006, the other non-operating expenses are primarily due to expenses incurred in connection with the Shore Club litigation.

Income tax (benefit) expense resulted in a benefit of $9.1 million in 2007 compared to an expense of $11.2 million in 2006. The 2007 income tax benefit was due primarily to the recording of deferred tax assets from the unconsolidated subsidiaries losses and stock compensation expense. The expense recognized in 2006 was due primarily to the recording of a deferred tax liability as a result of difference in basis of assets and liabilities as part of the formation and structuring transaction undertaken in connection with our IPO. We are subject to corporate Federal and state income taxes effective February 17, 2006.

Liquidity and Capital Resources

As of December 31, 2008, we had approximately $49.2 million in cash and cash equivalents. We also had availability under our Revolving Credit Facility (as defined below), before $15.3 million of outstanding letters of credit posted against the Revolving Credit Facility, of approximately $68.7 million, with a potential increase to $177.2 million, before such posted letters of credit, at our option by increasing the amount of the borrowing capacity on Delano Miami through a mortgage filing and upon payment of the related additional recording tax. Our ability to borrow under the Revolving Credit Facility and the amount of cash that may need to be retained from such borrowings also depends on our ability to maintain the financial covenants described below. If current economic conditions continue, however, we expect that this borrowing base will be significantly reduced in the future. As a result, we cannot assure you of the future amount, if any, that will be available under our Revolving Credit Facility. See “Debt — Revolving Credit Facility.” We have both short-term and long-term liquidity requirements as described in more detail below.

Liquidity Requirements

Short-Term Liquidity Requirements. We generally consider our short-term liquidity requirements to consist of those items that are expected to be incurred within the next 12 months and believe those requirements currently consist primarily of funds necessary to pay operating expenses and other expenditures directly associated with our properties, including the funding of our reserve accounts, capital commitments associated with certain of our development projects, and payment of scheduled debt maturities, unless otherwise extended or refinanced.

We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as determined pursuant to our debt and lease agreements related to such hotels, with the exception of Delano Miami, Royalton and Morgans. Our Joint Venture Hotels generally are subject to similar obligations under debt agreements related to such hotels, or under our management agreements. These capital expenditures relate primarily to the periodic replacement or refurbishment of furniture, fixtures and equipment. Such agreements typically require us to reserve funds at amounts equal to 4% of the hotel’s revenues and require the funds to be set aside in restricted cash. In addition, our restaurant joint ventures require the ventures to set aside restricted cash of between 2% to 4% of gross revenues of the restaurant. Our Owned Hotels that were not subject to these reserve funding obligations — Delano Miami, Royalton, and Morgans — underwent significant room and common area renovations during 2006, 2007 and 2008, and as such, are not expected to require a substantial amount of capital spending during 2009.

63

In addition to reserve funds for capital expenditures, our debt and lease agreements also require us to deposit cash into escrow accounts for taxes, insurance and debt service payments. As of December 31, 2008, total restricted cash was $21.5 million.

Further, we anticipate that during 2009, we have aggregate capital commitments or plans to fund development projects of approximately $22.0 million including approximately $11.1 million of letters of credit to fund the expansion of the Hard Rock and approximately $4.2 million of letters of credit, that have now been drawn, to fund the completion of Boston Ames.

We expect to meet our short-term liquidity needs for the next 12 months through existing cash balances and cash provided by our operations; if necessary, we will also access borrowings under our Revolving Credit Facility. See also “—Potential Capital Expenditures and Liquidity Requirements” below for additional liquidity that may be required in the short-term, depending on market and other circumstances, including our ability to refinance or extend existing debt.

Long-Term Liquidity Requirements. We generally consider our long-term liquidity requirements to consist of those items that are expected to be incurred beyond the next 12 months and believe these requirements consist primarily of funds necessary to pay scheduled debt maturities, renovations and other non-recurring capital expenditures that need to be made periodically to our properties and the costs associated with acquisitions and development of properties under contract and new acquisitions and development projects that we may pursue.

Our non-recourse mortgage financing on Hudson and Mondrian Los Angeles, discussed below in “Debt —Mortgage Agreement,” consisting of a $217.0 million first mortgage note secured by Hudson, a $32.5 million mezzanine loan secured by a pledge of the equity interests in our subsidiary owning Hudson, and a $120.5 million first mortgage note secured by Mondrian Los Angeles (collectively, the “Mortgages”) all mature on July 15, 2010. We have the option of extending the maturity date of the Mortgages to October 15, 2011 provided that certain extension requirements are achieved, including maintaining a debt service coverage ratio, as defined in the Mortgages, for the two fiscal quarters preceding the maturity date of 1.55 to 1.00 or greater. A portion of the Mortgages may need to be repaid in order to meet this covenant, or alternatively, we may consider refinancing the Mortgages.

Historically, we have satisfied our long-term liquidity requirements through various sources of capital, including our existing working capital, cash provided by operations, equity and debt offerings, borrowings under our Revolving Credit Facility, and long-term mortgages on our properties. Other sources may include cash generated through asset dispositions and joint venture transactions. Additionally, we may secure other financing opportunities. This may include permanent mortgage financing on one or more of our hotels that currently secure our Revolving Credit Facility—Delano Miami, Royalton and Morgans. Given the current economic environment and turmoil in the credit markets, however, we may not be able to obtain such financings on terms acceptable to us or at all. We may require additional borrowings, including borrowings under our Revolving Credit Facility, to satisfy our long-term liquidity requirements.

Although the credit and equity markets are currently in economic turmoil, we believe that these sources of capital will become available to us in the future to fund our long-term liquidity requirements. However, our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, the value of our unleveraged assets, borrowing restrictions imposed by existing lenders and general market conditions. We will continue to analyze which source of capital is most advantageous to us at any particular point in time.

Potential Capital Expenditures and Liquidity Requirements

In addition to our expected short-term and long-term liquidity requirements, our liquidity requirements could also be affected by possible required expenditures or liquidity requirements at certain of our Owned Hotels or Joint Venture Hotels, as discussed below.

Mondrian Scottsdale Mortgage and Mezzanine Agreements. Mondrian Scottsdale is subject to $40.0 million of non-recourse mortgage and mezzanine financing, for which Morgans Group LLC has provided a standard non-recourse carve-out guaranty. These loans mature on June 1, 2009. While there are two one-year extension options, we do not believe that we will qualify for the one-year extension option in June 2009, and we may be unable to extend or refinance these loans. As such, we will continue to discuss various options with the lenders. We do not anticipate committing significant monies toward Mondrian Scottsdale in 2009. As of December 31, 2008, management concluded that Mondrian Scottsdale was impaired.

Gale Promissory Note. In November 2008, we extended our $10.0 million interest-only, non-recourse promissory note issued to purchase the Gale in South Beach to January 2010. Management does not intend to commence development of this hotel unless financing is available and will evaluate its options prior to maturity of the non-recourse promissory note.

64

Potential Litigation. We may have potential liability in connection with certain claims by a designer for which we have accrued $13.2 million as of December 31, 2008, as discussed in “Item 3 — Legal Proceedings —Potential Litigation” and Note 6 of the Consolidated Financial Statements.

Mondrian South Beach Mortgage and Mezzanine Agreements. On November 25, 2008, together with our joint venture partner, we amended and restated the non-recourse mortgage loan and mezzanine loan agreements related to the Mondrian South Beach to provide for, among other things, four one-year extension options of the third-party financing totaling $107.1 million as of December 31, 2008. Under the amended agreements, the initial maturity date of August 1, 2009 can be extended to July 29, 2013, subject to certain conditions including an amortization payment of approximately $17.5 million on August 1, 2009 for the first such annual extension. A portion of the proceeds obtained from condominium sales may be used to pay down all or part of this $17.5 million extension obligation, although there can be no assurances that such sale proceeds will be sufficient to cover the obligation. Further extensions require repayment of additional amounts and the satisfaction of certain financial covenants. A standard non-recourse carve-out guaranty by Morgans Group LLC is in place for the Mondrian South Beach loans.

Hard Rock Construction and Acquisition Loans. On February 2, 2007, our Hard Rock joint venture closed on $760.0 million of acquisition financing in connection with the acquisition of the Hard Rock, and on June 6, 2008, our Hard Rock joint venture closed on $620.0 million of the construction financing for the expansion of the Hard Rock. Both loans mature on February 9, 2010, with two one-year extension options, subject to certain conditions. We have entered into standard joint and several guarantees in connection with these loans, including construction completion guarantees, in connection with the Hard Rock expansion, which is scheduled to be completed in 2009. In our joint venture agreement with DLJMB, we have agreed to be responsible for the first $50.0 million of exposure on the completion guarantees, subject to certain conditions. As of December 31, 2008, the construction and expansion work was progressing generally on time and on budget, but large construction projects such as this are complicated and hard to predict, and there can be no assurance that we will not be required to fund some amounts under this or other guarantee obligations.

Hard Rock Land Loan. On August 1, 2008, a subsidiary of the Hard Rock joint venture completed an intercompany land purchase with respect to an 11-acre parcel of land located adjacent to the Hard Rock. In connection with the intercompany land purchase a subsidiary entered into a $50.0 million land acquisition financing agreement with various lenders. All outstanding amounts owed under the loan agreement become due and payable no later than August 9, 2009, subject to two six-month extension options. The Hard Rock joint venture is currently considering various options with respect to the adjacent land, including selling a portion of the land to a third party. We have entered into a standard joint and several non-recourse carve-out guaranty in connection with this financing agreement, although in our joint venture agreement, DLJMB has agreed to be responsible for 100% of any liability under the guaranty, subject to certain conditions.

Morgans Europe Mortgage Agreement. Morgans Europe, the 50/50 joint venture through which we own interests in two hotels located in London, England, St Martins Lane and Sanderson, has outstanding mortgage debt of £102.6 million as of December 31, 2008 which matures on November 24, 2010. The joint venture is currently considering various options with respect to the refinancing of this mortgage obligation.

Other Possible Uses of Capital. We have a number of owned expansion and development projects under consideration at our discretion, including the Gale in South Beach, the development of the lower level at Hudson, and the development of up to 30 guest rooms from rooms that were formerly SRO units at Hudson. We also have two joint venture projects, Mondrian SoHo and Boston Ames, under development which may require additional equity investments and/or credit support to complete.

Comparison of Cash Flows for the Year Ended December 31, 2008 to December 31, 2007

Given the current economic downturn, we have implemented various cost—saving initiatives in 2008 and 2009, which we believe will help prepare us for the anticipated continuing economic challenges during 2009. We believe that our properties will continue to generate positive cash flow as a result of our focus on operational efficiencies and these cost-saving initiatives.

Operating Activities. Net cash provided by operating activities was $25.7 million for the year ended December 31, 2008 as compared to $49.9 million for the year ended December 31, 2007. The decrease in cash provided by operating activities is primarily due to changes in working capital and lower operating cash flow due to hotels under renovation and the impact of the current economic downturn, particularly in the fourth quarter of 2008.

65

Investing Activities. Net cash used in investing activities amounted to $46.3 million for the year ended December 31, 2008 as compared to $105.5 million for the year ended December 31, 2007. The decrease in cash used in investing activities primarily relates to the $30.0 million deposit we made in February 2007 related to our investment in the Echelon Las Vegas project, which was returned to us in September 2008 as a result of the amended joint venture agreement with Boyd. Additionally, we received a dividend of $11.5 million from our London joint venture in December 2008.

Financing Activities. Net cash used in financing activities amounted to $52.9 million for the year ended December 31, 2008 as compared to net cash provided by financing activities of $150.9 million for the year ended December 31, 2007. In 2007, the Company completed an equity offering in July 2007 and a convertible debt offering in October 2007, for which there were no comparable offerings in 2008.

Debt

Revolving Credit Facility. On October 6, 2006, we and certain of our subsidiaries entered into a revolving credit facility in the initial commitment amount of $225.0 million, which includes a $50.0 million letter of credit sub-facility and a $25.0 million swingline sub-facility (collectively, the “Revolving Credit Facility”) with Wachovia Capital Markets, LLC and Citigroup Global Markets Inc. We may also, at our option, with the prior consent of the lenders and subject to customary conditions, request an increase in the aggregate commitment under the Revolving Credit Facility to up to $350.0 million.

The amount available for borrowings under the Revolving Credit Facility is contingent upon the borrowing base, which is calculated by reference to the appraised value and implied debt service coverage value of certain collateral properties securing the Revolving Credit Facility. As of December 31, 2008, the available borrowing base, before $15.3 million outstanding letters of credit posted against the Revolving Credit Facility, was approximately $68.7 million, with a potential increase to $177.2 million, before such posted letters of credit, at our option by increasing the amount of the borrowing capacity on Delano Miami through a mortgage filing and upon payment of the related additional recording tax. If current economic conditions continue, however, we expect that this borrowing base will be significantly reduced in the future. As a result, we cannot assure you of the future amount, if any, that will be available under our Revolving Credit Facility. Our ability to borrow under the Revolving Credit Facility and the amount of cash that may need to be retained from such borrowings also depends on our ability to maintain the financial covenants described below.

The commitments under the Revolving Credit Facility terminate on October 5, 2011, at which time all outstanding amounts under the Revolving Credit Facility will be due and payable.

The interest rate per annum applicable to loans under the Revolving Credit Facility is at a fluctuating rate of interest measured by reference to, at our election, either LIBOR or a base rate, plus a borrowing margin. LIBOR loans have a borrowing margin of 1.35% to 1.90%, based on our total leverage ratio (with an initial borrowing margin of 1.35%), and base rate loans have a borrowing margin of 0.35% to 0.90%, based on our total leverage ratio (with an initial borrowing margin of 0.35%). The Revolving Credit Facility also provides for the payment of a quarterly unused facility fee equal to the average daily unused amount for each quarter multiplied by 0.25%.

The Revolving Credit Facility requires us to maintain for each four-quarter period a total leverage ratio (defined generally as total consolidated indebtedness, net of cash and excluding indebtedness related to the Convertible Notes (defined below), the Trust Notes (defined below) and the Clift lease obligation to consolidated EBITDA excluding Clift’s EBITDA) of no more than 7.0 to 1.0 at any time during 2008, and 6.0 to 1.0 at any time after December 31, 2008, and a fixed charge coverage ratio (defined generally as consolidated EBITDA excluding Clift’s EBITDA to consolidated interest expense excluding Clift’s interest expense) of no less than 1.75 to 1.00 at all times. As of December 31, 2008, our leverage ratio was 4.5 times and our fixed charge coverage ratio was 2.3 times under these financial covenants. The Revolving Credit Facility contains negative covenants, subject in each case to certain exceptions, restricting incurrence of indebtedness, incurrence of liens, fundamental changes, acquisitions and investments, asset sales, transactions with affiliates and restricted payments, including, among others, a covenant prohibiting us from paying cash dividends on our common stock.

The Revolving Credit Facility provides for customary events of default, including failure to pay principal or interest when due, failure to comply with covenants, any representation proving to be incorrect, defaults relating to acceleration of certain other indebtedness of at least $10.0 million in the aggregate, certain insolvency and receivership events affecting us, judgments in excess of $5.0 million in the aggregate being rendered against us, the acquisition by any person of 40% or more of any outstanding class of capital stock having ordinary voting power in the election of our Directors, and the incurrence of certain ERISA liabilities in excess of $5.0 million in the aggregate.

66

As of December 31, 2008, we were in compliance with the financial covenants set forth in the Revolving Credit Facility, trust preferred securities and other debt instruments. Our compliance with the financial covenants, and our ability to borrow under the Revolving Credit Facility, however, may be negatively impacted by any deterioration in our operations brought on by the current economic downturn, potential further declines in hotel property values, and additional borrowings necessary to maintain our liquidity and meet our capital and financing obligations. In the event we breach our financial covenants, we would be in default under the Revolving Credit Facility, the trust preferred securities and/or certain other agreements, which could allow the lenders to declare all amounts outstanding under the applicable agreements to become due and payable. Additionally, an acceleration event under one debt instrument could allow for acceleration under other debt instruments. If this happens, there would be a material adverse effect on our financial position and results of operations.

Obligations under the Revolving Credit Facility are secured by, among other collateral, a mortgage on Delano Miami and the pledge of equity interests in Morgans Group LLC and certain of our subsidiaries, including the owners of Delano Miami, Royalton and Morgans, as well as a security interest in certain other significant personal property (including applicable trademarks and other intellectual property, reserves and deposits) relating to those hotels.

The Revolving Credit Facility is available on a revolving basis for general corporate purposes, including acquisitions. As of December 31, 2008, there were no borrowings outstanding under the Revolving Credit Facility, although there were approximately $15.3 million in letters of credit posted under the Revolving Credit Facility in connection with funding commitments at the Hard Rock and Boston Ames as described above.

Mortgage Agreements. Also on October 6, 2006, our subsidiaries entered into non-recourse mortgage financings with Wachovia Bank, National Association, as lender, consisting of two separate mortgage loans and a mezzanine loan. These loans, a $217.0 million first mortgage note secured by Hudson, a $32.5 million mezzanine loan secured by a pledge of the equity interests in our subsidiary owning Hudson, and a $120.5 million first mortgage note secured by Mondrian Los Angeles, collectively, the Mortgages, all mature on July 15, 2010.

The Mortgages bear interest at a blended rate of 30-day LIBOR plus 125 basis points. We have the option of extending the maturity date of the Mortgages to October 15, 2011 provided that certain extension requirements are achieved, including maintaining a debt service coverage ratio, as defined, at the subsidiary owning the relevant hotel for the two fiscal quarters preceding the maturity date of 1.55 to 1.00 or greater. We maintain swaps that effectively fix the LIBOR rate on the debt under the Mortgages at approximately 5.0% through the initial maturity date.

The prepayment clause in the Mortgages permits us to prepay the Mortgages in whole or in part on any business day.

The Mortgages require our subsidiary borrowers to fund reserve accounts to cover monthly debt service payments. Those subsidiary borrowers are also required to fund reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation and maintenance of those hotels. Reserves are deposited into restricted cash accounts and are released as certain conditions are met. Our subsidiary borrowers are not permitted to have any liabilities other than certain ordinary trade payables, purchase money indebtedness, capital lease obligations and certain other liabilities.

The Mortgages prohibit the incurrence of additional debt on Hudson and Mondrian Los Angeles. Furthermore, the subsidiary borrowers are not permitted to incur additional mortgage debt or partnership interest debt. In addition, the Mortgages do not permit (i) transfers of more than 49% of the interests in the subsidiary borrowers, Morgans Group LLC or the Company or (ii) a change in control of the subsidiary borrowers or in respect of Morgans Group LLC or the Company itself without, in each case, complying with various conditions or obtaining the prior written consent of the lender.

The Mortgages provide for events of default customary in mortgage financings, including, among others, failure to pay principal or interest when due, failure to comply with certain covenants, certain insolvency and receivership events affecting the subsidiary borrowers, Morgans Group LLC or the Company, and breach of the encumbrance and transfer provisions. In the event of a default under the Mortgages, the lender’s recourse is limited to the mortgaged property, unless the event of default results from insolvency, a voluntary bankruptcy filing or a breach of the encumbrance and transfer provisions, in which event the lender may also pursue remedies against Morgans Group LLC.

As of December 31, 2008, we were in compliance with the covenants of the Mortgages.

67

Notes to a Subsidiary Trust Issuing Preferred Securities. In August 2006, we formed a trust, MHG Capital Trust I (the “Trust”), to issue $50.0 million of trust preferred securities in a private placement. The sole assets of the Trust consist of the trust notes (the “Trust Notes”) due October 30, 2036 issued by Morgans Group LLC and guaranteed by Morgans Hotel Group Co. The Trust Notes have a 30-year term, ending October 30, 2036, and bear interest at a fixed rate of 8.68% for the first 10 years, ending October 2016, and thereafter will bear interest at a floating rate based on the three-month LIBOR plus 3.25%. These securities are redeemable by the Trust at par beginning on October 30, 2011.

The Trust Note agreement requires that we do not fall below a fixed charge coverage ratio, defined generally as the ratio of consolidated EBITDA excluding Clift’s EBITDA over consolidated interest expense excluding Clift’s interest expense, of 1.4 to 1.0 for four consecutive quarters. As of December 31, 2008, our fixed charge coverage ratio under this financial covenant was 2.4 and we were in compliance with the covenants of the Trust Note agreement.

Clift. We lease Clift under a 99-year non-recourse lease agreement expiring in 2103. The lease is accounted for as a financing with a balance of $81.6 million at December 31, 2008. The lease payments are $6.0 million per year through October 2014 with inflationary increases at five-year intervals thereafter beginning in October 2014.

Hudson. We lease two condominium units at Hudson which are reflected as capital leases with balances of $6.1 million at December 31, 2008. Currently annual lease payments total approximately $800,000 and are subject to increases in line with inflation. The leases expire in 2096 and 2098.

Promissory Note. The purchase of the Gale, the property across from the Delano Miami, was partially financed with the issuance of a $10.0 million three-year interest only non-recourse promissory note by us to the seller, with a scheduled maturity of January 24, 2009. At December 31, 2008, the note bore interest at 10.0%. In November 2008, we extended the maturity of the note until January 24, 2010 and agreed to pay 11.0% interest for the extension year which we were required to prepay in full at the time of the extension. The obligations under the note are secured by the property. Additionally, in January 2009, we borrowed an additional $0.5 million to obtain necessary permits. This $0.5 million promissory note matures on January 24, 2010 and bears interest at 11%. The obligations under this note are secured with a pledge of the equity interests in our subsidiary that owns the Gale.

Mondrian Scottsdale Debt. In May 2006, we obtained non-recourse mortgage financing on Mondrian Scottsdale. The $40.0 million loan, which accrues interest at LIBOR plus 2.30%, matures on June 1, 2009 with two remaining one-year extension options. We have purchased an interest rate cap which limits the interest rate exposure to 6.0% through June 1, 2009. We do not believe that we will qualify for the extension options, and we may be unable to extend or refinance these loans. As a result, we will continue to discuss our options with the lenders. We do not anticipate committing significant monies toward Mondrian Scottsdale in 2009. As of December 31, 2008, management concluded that Mondrian Scottsdale was impaired.

Convertible Notes. On October 17, 2007, we completed an offering of $172.5 million aggregate principal amount of 2.375% Senior Subordinated Convertible Notes (“Convertible Notes”) in a private offering, which included an additional issuance of $22.5 million in aggregate principal amount of Convertible Notes as a result of the initial purchasers’ exercise in full of their overallotment option. The Convertible Notes are senior subordinated unsecured obligations of the Company and are guaranteed on a senior subordinated basis by our operating company, Morgans Group LLC. The Convertible Notes are convertible into shares of our common stock under certain circumstances and upon the occurrence of specified events.

In connection with the private offering, the Company entered into certain Convertible Note hedge and warrant transactions. These transactions are intended to reduce the potential dilution to the holders of our common stock upon conversion of the Convertible Notes and will generally have the effect of increasing the conversion price of the Convertible Notes to approximately $40.00 per share, representing a 82.23% premium based on the closing sale price of our common stock of $21.95 per share on October 11, 2007. The net proceeds to us from the sale of the Convertible Notes were approximately $166.8 million (of which approximately $24.1 million was used to fund the Convertible Note call options and warrant transactions).

68

Contractual Obligations

We have various contractual obligations that are recorded as liabilities in our consolidated financial statements. We also enter into other purchase commitments and other executory contracts that are not recognized as liabilities until services are performed or goods are received. The following table summarizes our contractual obligations and other commitments (excluding interest, except as indicated, and debt obligations at our Joint Venture Hotels) as of December 31, 2008:

	Payments Due by Period
			Less Than 1						More Than
Contractual Obligations	Total		Year		1 to 3 Years		3 to 5 Years		5 Years
	(In thousands)
Mortgages	$	410,000	$	40,000	$	370,000	$	—	$	—
Promissory note on Gale		10,000		—		10,000		—		—
Liability to subsidiary trust		50,100		—		—		—		50,100
Convertible Notes		172,500		—		—		—		172,500
Funding of outstanding letters of credit		15,300		15,300		—		—		—
Interest on mortgage and notes payable		159,430		28,921		26,141		8,697		95,671
Capitalized lease obligations including amounts representing interest		126,788		606		1,466		489		124,227
Operating lease obligations		32,507		1,056		2,184		2,290		26,977
Clift pre-petition liabilities		571		571		—		—		—
Total	$	977,196	$	86,454	$	409,791	$	11,476	$	469,475

As described in “— Derivative Financial Instruments” below, we use some derivative financial instruments, primarily interest rate caps, to manage our exposure to interest rate risks related to our floating rate debt. As such, the interest rate on our debt is fixed for the majority of our outstanding debt, which is reflected in the table above.

We have a series of 50/50 joint ventures with Chodorow Ventures LLC and affiliates, or Chodorow, for the purpose of owning and operating restaurants, bars and other food and beverage operations at certain of our hotels. Currently, the joint ventures operate the restaurants in Morgans, Hudson, Delano Miami, Mondrian Los Angeles, Clift, Sanderson, St Martins Lane, and Mondrian South Beach as well as the bars in Delano Miami, Sanderson and St Martins Lane. Pursuant to various agreements, the joint ventures lease space from the hotels and pay a management fee to Chodorow. The management fee is typically equal to 3% of the gross revenues generated by the operation. The agreements expire on various dates through 2017 and generally have one or two five-year renewal periods at the restaurant venture’s option. Further, we are required to fund negative cash flows in certain of these restaurants. Fees to be paid to Chodorow and requirements to fund negative cash flow cannot be currently measured and therefore are not included in the table above.

We have license and management agreements with affiliates of Chodorow for the purpose of operating the Asia de Cuba restaurant at Mondrian Scottsdale. This restaurant is managed by Chodorow in return for management and license fees. The agreements expire in 2017 and include an option to extend at the discretion of Chodorow. The restaurant is owned by the Company.

Seasonality

The hospitality business is seasonal in nature. For example, our Miami hotels are generally strongest in the first quarter, whereas our New York hotels are generally strongest in the fourth quarter. Quarterly revenues also may be adversely affected by events beyond our control, such as the current recession, extreme weather conditions, terrorist attacks or alerts, natural disasters, airline strikes, and other considerations affecting travel. Room revenues by quarter for our comparable Owned Hotels (excluding Mondrian Los Angeles, Morgans and Royalton) during 2008 and 2007 help demonstrate this seasonality, as follows:

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
	(In millions)
Room Revenues
2007	$	33.1	$	34.7	$	31.1	$	40.2
2008	$	35.1	$	36.2	$	34.0	$	33.1

To the extent that cash flows from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may have to enter into additional short-term borrowings or draw on our revolving credit facility to meet cash requirements.

69

Capital Expenditures and Reserve Funds

We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as determined pursuant to our debt and lease agreements related to such hotels, with the exception of Delano Miami, Royalton and Morgans. Our Joint Venture Hotels generally are subject to similar obligations under debt agreements related to such hotels, or under our management agreements. These capital expenditures relate primarily to the periodic replacement or refurbishment of furniture, fixtures and equipment. Such agreements typically require us to reserve funds at amounts equal to 4% of the hotel’s revenues and require the funds to be set aside in restricted cash. In addition, our restaurant joint ventures require the ventures to set aside restricted cash of between 2% to 4% of gross revenues of the restaurant. As of December 31, 2008, $4.3 million was available in restricted cash reserves for future capital expenditures under these obligations related to our Owned Hotels.

The lenders under the Mortgages require the Company’s subsidiary borrowers to fund reserve accounts to cover monthly debt service payments. Those subsidiary borrowers are also required to fund reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation and maintenance of those hotels. Reserves are deposited into restricted cash accounts and are released as certain conditions are met. The Company’s subsidiary borrowers are not permitted to have any liabilities other than certain ordinary trade payables, purchase money indebtedness, capital lease obligations, and certain other liabilities.

During 2006, 2007 and 2008, our Owned Hotels that were not subject to these reserve funding obligations — Delano Miami, Royalton, and Morgans — underwent significant room and common area renovations, and as such, are not expected to require a substantial amount of capital spending during 2009. Management will evaluate the capital spent at these properties on an individual basis and ensure that such decisions do not impact the overall quality of our hotels or our guests’ experience.

Derivative Financial Instruments

We use derivative financial instruments to manage our exposure to the interest rate risks related to our variable rate debt. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. We determine the fair value of our derivative financial instruments using models which incorporate standard market conventions and techniques such as discounted cash flow and option pricing models to determine fair value. We believe these methods of estimating fair value result in general approximation of value, and such value may or may not be realized.

On February 22, 2006, we entered into an interest rate forward starting swap that effectively fixes the interest rate on $285.0 million of mortgage debt at approximately 4.25% on Mondrian Los Angeles and Hudson from June 2007 through July 2010. This derivative qualifies for hedge accounting treatment per SFAS No. 133 and accordingly, the change in fair value of this instrument is recognized in other comprehensive income.

In connection with the Mortgages, the Company also entered into an $85.0 million interest rate swap that effectively fixes the LIBOR rate on $85.0 million of the debt at approximately 5.0% with an effective date of July 9, 2007 and a maturity date of July 15, 2010. This derivative qualifies for hedge accounting treatment per SFAS No. 133 and accordingly, the change in fair value of this instrument is recognized in other comprehensive income.

In May 2006, we entered into an interest rate cap agreement with a notional amount of $40.0 million, the expected full amount of debt secured by Mondrian Scottsdale, with a LIBOR cap of 6.00% through June 1, 2009. This derivative qualifies for hedge accounting treatment per SFAS No. 133 and accordingly, the change in fair value of this instrument is recognized in other comprehensive income.

In connection with the sale of the Convertible Notes (discussed above) we entered into call options which are exercisable solely in connection with any conversion of the Convertible Notes and pursuant to which we will receive shares of our common stock from counterparties equal to the number of shares of our common stock, or other property, deliverable by us to the holders of the Convertible Notes upon conversion of the Convertible Notes, in excess of an amount of shares or other property with a value, at then current prices, equal to the principal amount of the converted Convertible Notes. Simultaneously, we also entered into warrant transactions, whereby we sold warrants to purchase in the aggregate 6,415,327 shares of our common stock, subject to customary anti-dilution adjustments, at an exercise price of approximately $40.00 per share of common stock. The warrants may be exercised over a 90-day trading period commencing January 15, 2015. The call options and the warrants are separate contracts and are not part of the terms of the Convertible Notes and will not affect the holders’ rights under the Convertible Notes. The call options are intended to offset potential dilution upon conversion of the Convertible Notes in the event that the market value per share of the common stock at the time of exercise is greater than the exercise price of the call options, which is equal to the initial conversion price of the Convertible Notes and is subject to certain customary adjustments.

70

Off-Balance Sheet Arrangements

Morgans Europe. We own interests in two hotels through a 50/50 joint venture known as Morgans Europe. Morgans Europe owns two hotels located in London, England, St Martins Lane, a 204-room hotel, and Sanderson, a 150-room hotel. Under a management agreement with Morgans Europe, we earn management fees and a reimbursement for allocable chain service and technical service expenses.

Morgans Europe’s net income or loss and cash distributions or contributions are allocated to the partners in accordance with ownership interests. At December 31, 2008, we had a negative investment in Morgans Europe of $2.7 million. We account for this investment under the equity method of accounting. Our equity in income or loss of the joint venture was a loss of $4.4 million for the year ended December 31, 2008.

Mondrian South Beach. We own a 50% interest in Mondrian South Beach, a recently renovated apartment building which was converted into a condominium and hotel. Mondrian South Beach opened in December 2008, at which time we began operating the property under a long-term management contract.

We account for this investment under the equity method of accounting. At December 31, 2008, our investment in Mondrian South Beach was $24.8 million. Our equity in loss of Mondrian South Beach was a loss of $3.6 million for the year ended December 31, 2008.

Hard Rock. As of December 31, 2008, we owned a 20.1% interest in the Hard Rock, based on cash contributions, through a joint venture with DLJMB. We also manage the Hard Rock under a management agreement, for which we receive a management fee and a chain service expense reimbursement based on a percentage of all non-gaming revenue including rental income, and a fixed annual gaming facilities support fee. We can also earn an incentive management fee based on EBITDA, as defined, above certain levels. We account for this investment under the equity method of accounting. At December 31, 2008, we had a negative investment in the Hard Rock of $11.1 million. Our equity in loss of this venture was $48.0 million for the year ended December 31, 2008.

Echelon Las Vegas. In January 2006, we entered into a 50/50 joint venture agreement with a subsidiary of Boyd to develop Delano Las Vegas and Mondrian Las Vegas as part of Boyd’s Echelon project. We account for this investment under the equity method of accounting. On August 1, 2008, Boyd delayed the Echelon project due to difficult economic conditions and capital markets and the joint venture agreement was amended. See “Item 1 — 2008 Transactions and Developments — Echelon Las Vegas.” At December 31, 2008 our investment in the joint venture was $17.2 million. Our investment balance was reduced in 2008 by approximately $30.0 million as a result of the return of the deposit we had been required to give Boyd upon consummation of the Hard Rock transaction. Our equity in loss of the joint venture was $0.9 million year ended December 31, 2008.

Mondrian SoHo. In June 2007, we contributed approximately $5.0 million for a 20% equity interest in a joint venture with Cape Advisors Inc. which is developing a Mondrian hotel in the SoHo neighborhood of New York City. Upon completion, we expect to operate the hotel under a 10-year management contract with two 10-year extension options. As of December 31, 2008 our investment in the Mondrian SoHo venture was $7.6 million.

Boston Ames. On June 17, 2008 the Company, Normandy Real Estate Partners, and local partner Ames Hotel Partners, entered into a joint venture to develop the Boston Ames hotel in Boston, Massachusetts. Upon completion, we expect to operate Boston Ames under a 20-year management contract. Boston Ames is currently expected to open in late 2009 or early 2010. We expect to have an approximately 35% economic interest in the joint venture. As of December 31, 2008, our investment in the Boston Ames joint venture was $7.0 million. In addition, on February 24, 2009 and March 11, 2009, we funded an additional $0.4 million and $3.8 million, respectively, in connection with draws of outstanding letters of credit. The project is expected to qualify for federal and state historic rehabilitation tax credits.

Convertible Note Call and Warrant Options. In connection with the issuance of the Convertible Notes (discussed above), we entered into convertible note hedge transactions with respect to our common stock (the “Call Options”) with Merrill Lynch Financial Markets, Inc. and Citibank, N.A. (collectively, the “Hedge Providers”). The Call Options are exercisable solely in connection with any conversion of the Convertible Notes and pursuant to which we will receive shares of our common stock from the Hedge Providers equal to the number of shares issuable to the holders of the Convertible Notes upon conversion. We paid approximately $58.2 million for the Call Options.

In connection with the sale of the Convertible Notes, we also entered into separate warrant transactions whereby we issued warrants (the “Warrants”) to purchase 6,415,327 shares of common stock, subject to customary anti-dilution adjustments, at an exercise price of approximately $40.00 per share of common stock. We received approximately $34.1 million from the issuance of the Warrants.

For further information regarding our off balance sheet arrangements, see Note 5 to the Consolidated Financial Statements.

71

Recent Accounting Pronouncements

On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). This statement permits companies to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under GAAP. SFAS No. 159 must be applied prospectively, and the effect of the first re-measurement to fair value, if any, should be reported as a cumulative effect adjustment to the opening balance of retained earnings. SFAS No. 159 was effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 had no material impact on the Company’s consolidated financial statements as the Company did not elect the fair value measurement option for any of its financial assets or liabilities.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”) which, among other things, provides guidance and establishes amended accounting and reporting standards for a parent company’s noncontrolling or minority interest in a subsidiary and the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company will adopt this Statement effective January 1, 2009 and will present its consolidated financial statements accordingly.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS No. 141R”), which replaces SFAS No. 141. SFAS No. 141R, among other things, establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired (including intangibles), the liabilities assumed and any noncontrolling interest in the acquired entity. Additionally, SFAS No. 141R requires that all transaction costs of a business acquisition will be expensed as incurred. SFAS No. 141R is effective for fiscal years beginning on or after December 15, 2008. Adoption is prospective and early adoption is not permitted. This Statement will only have an impact on our consolidated financial statements if we are involved in a business acquisition in fiscal year 2009 or later years.

In February 2008, the FASB issued Staff Position No. FAS 157-2 which provides for a one-year deferral of the effective date of SFAS No. 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. On January 1, 2009, the standard will also apply to all other fair value measurements. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No.161 requires enhanced disclosures related to derivative and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosure related to (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedge items are accounted for under SFAS No.133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No.161 must be applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS No. 133 for all financial statements issued for fiscal years and interim period beginning after November 15, 2008 with early application encouraged. We are currently evaluating the impact that SFAS No. 161 will have on the Company’s consolidated financial statement disclosures.

In May 2008, the FASB issued FASB Staff Position No. APB 14-1 (“FSP APB 14-1”) which clarifies the accounting for the Company’s convertible notes payable. FSP APB 14-1 requires the proceeds from the sale of the Company’s convertible notes to be allocated between a liability component and an equity component. The resulting debt discount must be amortized over the period the debt is expected to remain outstanding as additional interest expense. FSP APB 14-1 will require retroactive application to all periods presented and would be effective for fiscal years beginning after December 15, 2008. The FSP APB 14-1 is effective for us as of January 1, 2009 and early adoption is not permitted. The Company has evaluated the impact that FSP APB 14-1 will have on its consolidated financial statements once adopted and believes that the debt discount will be $15.9 million. The impact on the Company’s interest expense for 2007 and 2008 is an increase of approximately $0.5 million and $2.3 million, respectively, resulting in a net loss of $15.3 million and $57.6 for the years ended December 31, 2007 and 2008, respectively. The resulting loss per share would have been ($0.46) and ($1.83) for the years ended December 31, 2007 and 2008, respectively.

72

In June 2008, the FASB ratified EITF Issue 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock, (“EITF 07-5”). Paragraph 11(a) of SFAS 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of operations would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. EITF 07-5 is effective on January 1, 2009. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements as it applies to our Convertible Notes.

In October 2008, the FASB issued FASB Staff Position No. FAS 157-3 which clarifies the application of FASB Statement No. 157, Fair Value Measurements. Staff Position No. FAS 157-3 provides guidance in determining the fair value of a financial asset when the market for that financial asset is not active.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.

• Impairment of long-lived assets. When triggering events occur, we periodically review each property for possible impairment. Recoverability of such assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset, as determined by applying our operating budgets for future periods. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value. In this analysis of fair value, we use a discounted cash flow analysis to estimate the fair value of the asset taking into account each property’s expected cash flow from operations, holding period and net proceeds from the dispositions of the property. The factors we address in determining estimated net proceeds from disposition include anticipated operating cash flow in the year of disposition, terminal capitalization rate and selling price per room. Our judgment is required in determining the discount rate applied to estimated cash flows, the growth rate of the properties, the need for capital expenditures, as well as specific market and economic conditions. Additionally, the classification of these assets as held-for-sale requires the recording of these assets at our estimate of their fair value less estimated selling costs which can affect the amount of impairment recorded. As of December 31, 2008, management concluded, based on the discounted cash flow method, that Mondrian Scottsdale was impaired and that the fair value was in excess of the property’s carrying value by approximately $13.4 million. This impairment is reflected in our consolidated financial statements for the year ended December 31, 2008. As of December 31, 2008, management concluded that all other long-lived assets were not impaired.

73

• Impairment of goodwill. Goodwill represents the excess purchase price over the fair value of net assets attributable to business acquisitions and combinations. We test for impairment of goodwill at least annually and generally at year end. We will test for impairment more frequently if events or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In accordance with SFAS No. 142, management identifies potential impairments by comparing the fair value of the reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, including goodwill, the asset is not impaired. Any excess of carrying value over the implied fair value of goodwill would be recognized as an impairment loss in continuing operations. Management applies a five-year discounted cash flow method to perform its annual goodwill fair value impairment test using hotel operating budgets with conservative growth assumptions. For the year ended December 31, 2008, management used a growth assumption of 3%, which is less than the Company’s historical growth rates, given the current economic environment. The discount rate applied to the model is a weighted average of the Company’s cost of equity and debt and the cap rate is based on applicable market indices. As the Company has one reportable operating segment, management aggregates goodwill associated to all Owned Hotels when analyzing potential impairment. As of December 31, 2008, management concluded, based on the discounted cash flow method, that no goodwill impairment existed and that the Owned Hotels carrying value was well in excess of the implied fair value. Management does not believe it is reasonably likely that goodwill will become impaired in future periods, but will test before the 2009 year end if events or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

• Depreciation and amortization expense. Depreciation expense is based on the estimated useful life of our assets. The respective lives of the assets are based on a number of assumptions made by us, including the cost and timing of capital expenditures to maintain and refurbish our hotels, as well as specific market and economic conditions. Hotel properties and other completed real estate investments are depreciated using the straight-line method over estimated useful lives of 39.5 years for buildings and generally five years for furniture, fixtures and equipment. While our management believes its estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of our hotels or other assets. We have not changed the estimated useful lives of any of our assets during the periods discussed and believe that the future useful lives of our assets will be consistent with historical trends and experience.

• Derivative instruments and hedging activities. Derivative instruments and hedging activities require us to make judgments on the nature of our derivatives and their effectiveness as hedges. These judgments determine if the changes in fair value of the derivative instruments are reported as a component of interest expense in the consolidated/combined statements of operations or as a component of equity on the consolidated balance sheets. While we believe our judgments are reasonable, a change in a derivative’s fair value or effectiveness as a hedge could affect expenses, net income and equity. Management has concluded that the designation of our derivatives as an effective hedge or an ineffective hedge has not changed during 2008. Additionally, management determines fair value of our derivatives is in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). The valuation of interest rate caps and interest rate swaps is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Management believes that the valuation approach is acceptable and that our derivatives are properly stated at December 31, 2008.

• Consolidation Policy. We evaluate our variable interests in accordance with Financial Interpretation 46R to determine if they are variable interests in variable interest entities. Certain food and beverage operations at five of our Owned Hotels are operated under 50/50 joint ventures. We believe that we are the primary beneficiary of the entities because we absorb the majority of the restaurant ventures’ expected losses and residual returns. Therefore, the restaurant ventures are consolidated in our financial statements with our partner’s share of the results of operations recorded as minority interest in the accompanying financial statements. We have evaluated the applicability of FIN 46R to our investments in certain Joint Venture Hotels and related food and beverage operations at certain Joint Venture Hotels. We have determined that these ventures do not meet the requirements of a variable interest entity or we are not the primary beneficiary and therefore, consolidation of these ventures is not required. We account for these investments using the equity method as we believe we do not exercise control over significant asset decisions such as buying, selling or financing nor are we the primary beneficiary of the entities. Under the equity method, we increase our investment in unconsolidated joint ventures for our proportionate share of net income and contributions and decrease our investment balance for our proportionate share of net loss and distributions.

• Stock-based Compensation. We have adopted the fair value method of accounting prescribed in SFAS No. 123 “Accounting for Stock Based Compensation” (“SFAS 123”) (as amended by SFAS No. 148 and SFAS 123(R)) for equity-based compensation awards. SFAS 123(R) requires an estimate of the fair value of the equity award at the time of grant rather than the intrinsic value method. For all fixed equity-based awards to employees and Directors, which have no vesting conditions other than time of service, the fair value of the equity award at the grant date will be amortized to compensation expense over the award’s vesting period on a straight-line basis. For performance-based compensation plans, we recognize compensation expense at such time when the performance hurdle is anticipated to be achieved over the performance period based upon the fair value at the date of grant. The fair value is determined based on the value of the Company’s common stock on the grant date of the award, or in the case of stock option awards, the Black-Scholes option pricing model. Management’s assumptions when applying the Black-Scholes model are derived based upon the risk profile and volatility of our common stock and our peer group. We believe that the assumptions that we have applied to stock-based compensation are reasonable and we will continue to review such assumptions quarterly and revise them as market conditions change and management deems necessary.

74

• Deferred income taxes and valuation allowance. We account for deferred taxes by recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance will be provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Such valuation allowance will be estimated by management based on our projected future taxable income. The estimate of future taxable income is highly subjective. We have net operating loss for the tax year 2008 and anticipate that all or a major portion of the net operating loss will be utilized to offset any future gains on sale of assets. However, these assumptions may be inaccurate, and unanticipated events and circumstances may occur in the future. To the extent actual results differ from these estimates, our future results of operations may be affected. At December 31, 2008 and 2007, there is no valuation allowance set up to against any deferred tax assets.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Some of our outstanding debt has a variable interest rate. As described in “Management’s Discussion and Analysis of Financial Results of Operations — Derivative Financial Instruments” above, we use some derivative financial instruments, primarily interest rate caps, to manage our exposure to interest rate risks related to our floating rate debt. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. As of December 31, 2008, our total outstanding consolidated debt, including capitalized lease obligations, was approximately $730.4 million, of which approximately $410.0 million, or 56.1%, was variable rate debt.

We entered into hedging arrangements on $285.0 million of variable rate debt in connection with the mortgage debt on Hudson and Mondrian Los Angeles, which matures on July 9, 2010 and effectively fixes LIBOR at approximately 5.0%. At December 31, 2008, the one month LIBOR rate was 4.4%. If market rates of interest on this variable rate debt increase by 1.0%, or 100 basis points, the cap would be in the money and the maximum annual amount the interest expense would increase on this variable rate debt is $1.9 million due to our interest rate cap agreement, which would reduce future pre-tax earnings and cash flows by the same amount annually. If market rates of interest on this variable rate debt decrease by 1.0%, or 100 basis points, the decrease in interest expense would increase pre-tax earnings and cash flows by approximately $2.9 million annually.

In connection with the Mortgages, we also entered into an $85.0 million interest rate swap that effectively fixes the LIBOR rate on $85.0 million of the debt at approximately 4.9% with an effective date of July 9, 2007 and a maturity date of July 15, 2010. If market rates of interest on this variable rate debt increase by 1.0%, or 100 basis points, the swap would be in the money and the maximum annual amount the interest expense would increase on this variable rate debt is $0.5 million due to our interest rate swap agreement, which would reduce future pre-tax earnings and cash flows by the same amount annually. If market rates of interest on this variable rate debt decrease by 1.0%, or 100 basis points, the decrease in interest expense would increase pre-tax earnings and cash flows by approximately $0.9 million annually.

We also entered into hedging arrangements on $40.0 million of variable rate debt secured by Mondrian Scottsdale, with a LIBOR cap of 6.0% through June 1, 2009. If market rates of interest on this variable rate debt increase by 1.0%, or 100 basis points, the increase in interest expense would reduce future pre-tax earnings and cash flows by approximately $0.4 million annually. The maximum annual amount the interest expense would increase on this variable rate debt is $0.7 million due to our interest rate cap agreement. If market rates of interest on this variable rate debt decrease by 1.0%, or 100 basis points, the decrease in interest expense would increase pre-tax earnings and cash flows by approximately $0.4 million annually.

Our fixed rate debt consists of Trust Notes, the Convertible Notes, the promissory note on Gale, and the Clift lease, all further described above in “ Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Debt”. The fair value of some of this debt is greater than the book value. As such, if market rates of interest increase by 1.0%, or approximately 100 basis points, the fair value of our fixed rate debt would increase by approximately $5.4 million. If market rates of interest decrease by 1.0%, or 100 basis points, the fair value of our fixed rate debt would increase by $84.5 million.

75

Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments and future cash flows. These analyses do not consider the effect of a reduced level of overall economic activity. If overall economic activity is significantly reduced, we may take actions to further mitigate our exposure. However, because we cannot determine the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

Currency Exchange Risk

As we have international operations with our two London hotels, currency exchange risk between the U.S. dollar and the British pound arises as a normal part of our business. We reduce this risk by transacting this business in British pounds. A change in prevailing rates would have, however, an impact on the value of our equity in Morgans Europe. The U.S. dollar/British pound currency exchange is currently the only currency exchange rate to which we are directly exposed. Generally, we do not enter into forward or option contracts to manage our exposure applicable to net operating cash flows. We do not foresee any significant changes in either our exposure to fluctuations in foreign exchange rates or how such exposure is managed in the future.

Historically, we have not repatriated earnings from our London hotels because of our historical net losses in our United Kingdom operations and our joint venture agreement. During 2008, we repatriated approximately $11.5 million in cash dividends from the recapitalization of our London joint venture. The recapitalization required the consent of the lender and allows for future dividends from profits subject to lender consent.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of Morgans Hotel Group Co. and the notes related to the foregoing financial statements, together with the independent registered public accounting firm’s reports thereon, are set forth on pages F-1 through F-36 of this report. Additionally, the consolidated financial statements of the Company’s significant subsidiaries are filed as Exhibits 99.1, 99.2, 99.3 and 99.4 to this Annual Report on Form 10-K.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedure

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and the chief financial officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15) that occurred during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

76

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended. The 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.

Because of 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 connection with the preparation of the Company’s annual financial statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. The assessment was based upon the framework described in “Integrated Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management’s assessment included an evaluation of the design of internal control over financial reporting and testing of the operational effectiveness of internal control over financial reporting. We have reviewed the results of the assessment with the Audit Committee of our Board of Directors.

Based on our assessment under the criteria set forth in COSO, management has concluded that, as of December 31, 2008, the Company maintained effective internal control over financial reporting.

BDO Seidman, LLP, an independent registered public accounting firm, that audited our Financial Statements included in this Annual Report has issued an attestation report on our internal control over financial reporting as of December 31, 2008, which appears in Item 9A, below.

77

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

Board of Directors and Stockholders
Morgans Hotel Group Co.
475 Tenth Avenue
New York, NY 10018

We have audited Morgans Hotel Group Co.’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 (the COSO criteria). Morgans Hotel Group Co.’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, included in the accompanying Management’s Report on 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, Morgans Hotel Group Co. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Morgans Hotel Group Co. as of December 31, 2008 and 2007, and the related consolidated/combined statements of operations and comprehensive loss, changes in stockholders’ equity/net assets (deficit), and cash flows of Morgans Hotel Group Co. for the years ended December 31, 2008 and 2007 and the period from February 17, 2006 through December 31, 2006 and for the period from January 1 through February 16, 2006 for Morgans Hotel Group Co. Predecessor and our report dated March 13, 2009 expressed an unqualified opinion thereon.

/s/ BDO Seidman, LLP

March 13, 2009
New York, New York

78

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item regarding Directors, executive officers, corporate governance and our code of ethics is hereby incorporated by reference to the material appearing in the Proxy Statement for the Annual Stockholders Meeting to be held in 2009 (the “Proxy Statement”) under the captions “Board of Directors and Corporate Governance,” and “Executive Officer Biographies.” The information required by this item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Voting Securities of Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance.” The information required by this Item 10 with respect to the availability of our code of ethics is provided in Item 1 of this Annual Report on Form 10-K. See “Item 1 — Materials Available on Our Website.”

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation of Directors and Executive Officers,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information regarding security ownership of certain beneficial owners and management required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Voting Securities of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the captions “Certain Relationships and Related Transactions” and “Board of Directors and Corporate Governance — Director Independence.”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Audit Related Matters.”

79

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) and (c) Financial Statements and Schedules.

Reference is made to the “Index to the Financial Statements” on page F-1 of this report and to Exhibits 99.1, 99.2 and 99.3 filed herewith and Exhibit 99.4 incorporated herein by reference.

All other financial statement schedules are not required under the related instructions, or they have been omitted either because they are not significant, the required information has been disclosed in the consolidated financial statements and the notes related thereto.

(b) Exhibits

We hereby file as part of this Annual Report on Form 10-K the exhibits listed in the Index to Exhibits.

80

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets As of December 31, 2008 and 2007	F-2
Consolidated/Combined Statements of Operations and Comprehensive Loss For years ended December 31, 2008, 2007 and 2006	F-3
Consolidated/Combined Statements of Stockholders’ Equity/Net Assets (Deficit) For years ended December 31, 2008, 2007 and 2006	F-4
Consolidated/Combined Statements of Cash Flows For the years ended December 31, 2008, 2007 and 2006	F-5
Notes to Consolidated/Combined Financial Statements	F-6 – F-36

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Morgans Hotel Group Co.:

We have audited the accompanying consolidated balance sheets of Morgans Hotel Group Co. (the “Company”) as of December 31, 2008 and 2007, and the related consolidated / combined statements of operations and comprehensive loss, changes in stockholders equity/net assets (deficit), and cash flows of the Company for the years ended December 31, 2008 and 2007 and the period from February 17, 2006 through December 31, 2006 for the Company and the period from January 1 through February 16, 2006 for Morgans Hotel Group Co. Predecessor. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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/combined financial statements referred to above present fairly, in all material respects, the financial position of Morgans Hotel Group Co. as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years ended December 31, 2008 and 2007 and the period from February 17, 2006 through December 31, 2006 and of the Predecessor for the period from January 1 through February 16, 2006 in accordance with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Morgans Hotel Group Co.’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 13, 2009 expressed an unqualified opinion thereon.

/s/ BDO Seidman, LLP

New York, New York
March 13, 2009

F-1

Morgans Hotel Group Co.

Consolidated Balance Sheets

	As of December 31,
	2008			2007
	(In thousands)
ASSETS
Property and equipment, net	$	555,645		$	535,609
Goodwill		73,698			73,698
Investments in and advances to unconsolidated joint ventures		56,754			110,687
Cash and cash equivalents		49,150			122,712
Restricted cash		21,484			28,604
Accounts receivable, net		6,673			10,333
Related party receivables		7,900			3,422
Prepaid expenses and other assets		9,192			11,369
Deferred tax asset		66,279			27,636
Other, net		14,490			19,532
Total assets	$	861,265		$	943,602
LIABILITIES AND STOCKHOLDERS’ EQUITY
Long term debt and capital lease obligations	$	730,365		$	729,199
Accounts payable and accrued liabilities		26,711			36,126
Distributions and losses in excess of investment in unconsolidated joint ventures		14,563			479
Other liabilities		35,655			27,979
Total liabilities		807,294			793,783
Minority interest		18,017			19,833
Commitments and contingencies
Common stock, $.01 par value; 200,000,000 shares authorized; 36,277,495 shares issued at December 31, 2008 and December 31, 2007, respectively		363			363
Additional paid-in capital		232,022			216,494
Treasury stock, at cost, 6,758,303 and 3,057,581 shares of common stock at December 31, 2008 and 2007, respectively		(102,394	)		(54,361	)
Comprehensive income		(13,949	)		(7,771	)
Accumulated deficit		(80,088	)		(24,739	)
Stockholders’ equity		35,954			129,986
Total liabilities and stockholders’ equity	$	861,265		$	943,602

See accompanying notes to these consolidated financial statements.

F-2

Morgans Hotel Group Co. and Predecessor

Consolidated/Combined Statements of Operations and Comprehensive Loss

							Morgans Hotel			The
							Group Co.			Predecessor
	Morgans Hotel			Morgans Hotel			Period from			Period from
	Group Co.			Group Co.			February 17,			January 1,
	Year Ending			Year Ending			2006 to			2006 to
	December 31,			December 31,			December 31,			February 16,
	2008			2007			2006			2006
	(In thousands, except share data)
Revenues:
Rooms	$	184,059		$	186,752		$	150,830		$	17,742
Food and beverage		99,254			104,271			77,970			11,135
Other hotel		12,854			13,781			13,792			1,645
Total hotel revenues		296,167			304,804			242,592			30,522
Management fee-related parties and other income		18,300			18,181			7,747			1,022
Total revenues		314,467			322,985			250,339			31,544
Operating Costs and Expenses:
Rooms		49,561			49,411			37,988			5,098
Food and beverage		71,695			69,998			51,082			7,494
Other departmental		7,461			7,923			7,259			619
Hotel selling, general and administrative		60,311			60,246			48,546			6,841
Property taxes, insurance and other		16,957			19,017			13,971			2,024
Total hotel operating expenses		205,985			206,595			158,846			22,076
Corporate expenses, including stock compensation of $15.9 million, $19.5 million and $7.9 million, respectively		41,889			44,744			24,695			2,611
Depreciation and amortization		27,733			21,719			16,082			3,030
Restructuring, development and disposal costs		10,825			3,228			1,617			—
Impairment loss		13,430			—			—			—
Total operating costs and expenses		299,862			276,286			201,240			27,717
Operating income		14,605			46,699			49,099			3,827
Interest expense, net		43,164			41,338			45,027			6,537
Equity in loss (income) of unconsolidated joint ventures		56,581			24,580			(2,073	)		614
Minority interest		3,894			3,566			3,429			568
Other non-operating expenses		464			1,531			1,845			—
(Loss) income before income tax expense		(89,498	)		(24,316	)		871			(3,892	)
Income tax (benefit) expense		(32,400	)		(9,060	)		11,114			90
Loss before minority interest		(57,098	)		(15,256	)		(10,243	)		(3,982	)
Minority interest		(1,749	)		(460	)		(300	)		—
Net loss		(55,349	)		(14,796	)		(9,943	)		(3,982	)
Other comprehensive loss:
Unrealized loss on valuation of swap/cap agreements, net of tax		(416	)		(6,396	)		(1,303	)		—
Share of unrealized loss on valuation of swap/cap agreements of unconsolidated joint ventures, net of tax		(998	)		(278	)		—			—
Realized loss on settlement of swap/cap agreements, net of tax		(4,464	)		—			—			—
Foreign currency translation (loss) gain		(300	)		6			200			—
Comprehensive loss	$	(61,527	)	$	(21,464	)	$	(11,046	)	$	(3,982	)
Loss per share:
Basic and diluted	$	(1.76	)	$	(0.45	)	$	(0.30	)
Weighted average number of common shares outstanding:
Basic and diluted		31,413			33,239			33,492

See accompanying notes to these consolidated financial statements.

F-3

Morgans Hotel Group Co. and Predecessor

Consolidated/Combined Statements of Stockholders’ Equity/Net Assets (Deficit)

												Accumulated
						Additional						Other
				Common		Paid-in			Treasury			Comprehensive			Accumulated			Net Assets			Total
	Shares			Stock		Capital			Stock			Income (Loss)			Deficit			(Deficit)			Equity
	(In thousands)
The Predecessor
Balance, January 1, 2006																			(110,573	)		(110,573	)
Contributions																			3,738			3,738
Distributions																			(968	)		(968	)
Net Loss																			(3,982	)		(3,982	)
Balance, February 16, 2006																			(111,785	)		(111,785	)
The Company
Contribution of net assets (deficit) to the Company		18,500		$	185	$	(111,970	)	$	—		$	—		$	—			111,785			—
Adjustment to record minority interest		—			—		(20,000	)		—			—			—			—			(20,000	)
Net proceeds from initial public offering		15,000			150		272,371			—			—			—			—			272,521
Distributions to Former Parent		—			—		(9,500	)		—			—			—			—			(9,500	)
Net loss		—			—		—			—			—			(9,943	)		—			(9,943	)
Foreign currency translation		—			—		—			—			200			—			—			200
Derivative hedging instruments		—			—		—			—			(1,303	)		—			—			(1,303	)
Repurchase of common shares		(336	)		—		—			(5,683	)											(5,683	)
Stock-based compensation awards		—			—		7,939			—			—			—			—			7,939
December 31, 2006		33,164			335		138,840			(5,683	)		(1,103	)		(9,943	)		—			122,446
Net proceeds from stock offering		2,778			28		58,865			—			—			—			—			58,893
Net loss		—			—		—			—			—			(14,796	)		—			(14,796	)
Foreign currency translation		—			—		—			—			6			—			—			6
Derivative hedging instruments, net of tax		—			—		—			—			(6,674	)		—			—			(6,674	)
Cost of call options and warrants, net of tax		—			—		(111	)		—			—			—			—			(111	)
Repurchase of common shares		(2,784	)		—		—			(49,972	)		—			—			—			(49,972	)
Stock-based compensation awards		—			—		19,525			—			—			—			—			19,525
Issuance of stock-based awards		62			—		(625	)		1,294			—			—			—			669
December 31, 2007		33,220		$	363	$	216,494		$	(54,361	)	$	(7,771	)	$	(24,739	)	$	—		$	129,986
Net loss		—			—		—			—			—			(55,349	)		—			(55,349	)
Foreign currency translation		—			—		—			—			(300	)		—			—			(300	)
Net unrealized loss on interest rate swaps, net of tax		—			—		—			—			(5,878	)		—			—			(5,878	)
Shares of membership units converted to common stock		46			—		874			—			—			—			—			874
Repurchase of common shares		(3,951	)		—		—			(49,173	)		—			—			—			(49,173	)
Stock-based compensation awards		—			—		15,933			—			—			—			—			15,933
Issuance of stock-based awards		204			—		(1,279	)		1,140			—			—			—			(139	)
December 31, 2008		29,519		$	363	$	232,022		$	(102,394	)	$	(13,949	)	$	(80,088	)	$	—		$	35,954

See accompanying notes to these consolidated financial statements.

F-4

Morgans Hotel Group Co. and Predecessor

Consolidated/Combined Statements of Cash Flows

							Morgans Hotel			The
							Group Co.			Predecessor
	Morgans Hotel			Morgans Hotel			Period from			Period from
	Group Co.			Group Co.			February 17,			January 1,
	Year Ending			Year Ending			2006 to			2006 to
	December 31,			December 31,			December 31,			February 16,
	2008			2007			2006			2006
	(In thousands)
Cash flows from operating activities:
Net loss	$	(55,349	)	$	(14,796	)	$	(9,943	)	$	(3,982	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		26,999			21,102			15,492			2,911
Amortization of other costs		734			617			588			119
Amortization of deferred financing costs		2,784			2,182			11,521			1,214
Stock-based compensation		15,933			19,525			7,939			—
Accretion of interest on capital lease obligation		1,486			1,356			2,950			647
Equity in (income) losses from unconsolidated joint ventures		56,581			24,580			(2,073	)		614
Impairment loss and loss on disposal of assets		17,093			628			1,567			—
Deferred income taxes		(33,226	)		(12,772	)		10,166			—
Change in value of interest rate caps and swaps, net		—			3,018			1,511			(1,655	)
Minority interest		2,145			3,106			3,129			—
Changes in assets and liabilities:
Accounts receivable, net		3,660			(920	)		(1,716	)		(168	)
Related party receivables		(4,478	)		(1,037	)		305			(108	)
Restricted cash		(96	)		(3,886	)		(1,910	)		(2,080	)
Prepaid expenses and other assets		1,384			(3,195	)		(1,115	)		1,127
Accounts payable and accrued liabilities		(9,538	)		9,776			5,381			(2,082	)
Other liabilities		(462	)		573			(3,960	)		408
Net cash provided by (used in) operating activities		25,650			49,857			39,832			(3,035	)
Cash flows from investing activities:
Additions to property and equipment		(62,659	)		(62,800	)		(67,086	)		(5,091	)
Deposit in connection with Hard Rock purchase		—			—			(62,550	)		—
Withdrawals from (deposits into) capital improvement escrows, net		7,216			(350	)		12,422			(45	)
Distributions and reimbursements from unconsolidated joint ventures		42,123			11,770			33			—
Investment in unconsolidated joint ventures		(33,019	)		(54,172	)		(21,339	)		(2	)
Net cash used in investing activities		(46,339	)		(105,552	)		(138,520	)		(5,138	)
Cash flows from financing activities:
Proceeds from long term debt		—			240,172			592,427			—
Payments on long term debt and capital lease obligations		(320	)		(65,526	)		(712,407	)		(861	)
Payments on Clift Preferred Equity		—			—			(11,393	)		—
Cash paid in connection with vesting of stock based awards		(139	)		669			—			—
Contributions		—			—			—			3,738
Distributions to holders of minority interests in consolidated subsidiaries		(3,088	)		(3,591	)		(3,235	)		(1,701	)
Distributions to former parent		—			—			(9,500	)		—
Proceeds from issuance of common stock, net of costs		—			58,894			272,518			—
Repurchase of Company’s common stock		(49,173	)		(49,972	)		(5,684	)
Financing costs		(153	)		(5,638	)		(11,327	)		—
Payments on convertible note hedge		—			(24,150	)		—			—
Net cash (used in) provided by financing activities		(52,873	)		150,858			111,399			1,176
Net (decrease) increase in cash and cash equivalents		(73,562	)		95,163			12,711			(6,997	)
Cash and cash equivalents, beginning of period		122,712			27,549			14,838			21,835
Cash and cash equivalents, end of period	$	49,150		$	122,712		$	27,549		$	14,838
Supplemental disclosure of cash flow information:
Cash paid for interest	$	36,403		$	37,411		$	37,574		$	6,521
Cash paid for taxes	$	1,385		$	1,506		$	2,789		$	213
Non cash investing and financing:
Debt issued for purchase of a property	$	—		$	—		$	—		$	10,000

See accompanying notes to these consolidated financial statements.

F-5

Morgans Hotel Group Co. and Predecessor

Notes to Consolidated/Combined Financial Statements

1. Organization and Formation Transaction

Morgans Hotel Group Co. (the “Company”) was incorporated on October 19, 2005 as a Delaware corporation to complete an initial public offering (“IPO”) that was part of the formation and structuring transactions described below. The Company operates, owns, acquires and redevelops hotel properties.

The Morgans Hotel Group Co. predecessor (the “Predecessor”) comprised the subsidiaries and ownership interests that were contributed as part of the formation and structuring transactions from Morgans Hotel Group LLC, now known as Residual Hotel Interest LLC (“Former Parent”), to Morgans Group LLC, the Company’s operating company. At the time of the formation and structuring transactions, the Former Parent was owned approximately 85% by NorthStar Hospitality, LLC, a subsidiary of NorthStar Capital Investment Corp., and approximately 15% by RSA Associates, L.P.

In connection with the IPO, the Former Parent contributed the subsidiaries and ownership interests in nine operating hotels in the United States and the United Kingdom to Morgans Group LLC in exchange for membership units. Simultaneously, Morgans Group LLC issued additional membership units to the Predecessor in exchange for cash raised by the Company from the IPO. The Former Parent also contributed all the membership interests in its hotel management business to Morgans Group LLC in return for 1,000,000 membership units in Morgans Group LLC exchangeable for shares of the Company’s common stock. The Company is the managing member of Morgans Group LLC, and has full management control. On April 24, 2008, 45,935 outstanding membership units in Morgans Group LLC were redeemed in exchange for 45,935 shares of the Company’s common stock. As of December 31, 2008, 954,065 membership units in Morgans Group LLC remain outstanding.

On February 17, 2006, the Company completed its IPO. The Company issued 15,000,000 shares of common stock at $20 per share resulting in net proceeds of approximately $272.5 million, after underwriters’ discounts and offering expenses. On February 17, 2006, the Company paid down $294.6 million of long term debt which included principal and interest, and paid in full the preferred equity in Clift due a related party of $11.4 million, which included outstanding interest and distributed $9.5 million to certain stockholders.

These financial statements have been presented on a consolidated or combined basis and reflect the Company’s and the Predecessor’s assets, liabilities and results from operations. The equity method of accounting is utilized to account for investments in joint ventures over which the Company has significant influence, but not control.

The Company has one reportable operating segment; it operates, owns, acquires and redevelops boutique hotels.

Operating Hotels

The Company’s operating hotels as of December 31, 2008 are as follows:

		Number of
Hotel Name	Location	Rooms		Ownership
Delano Miami	Miami Beach, FL		194		(1	)
Hudson	New York, NY		807		(5	)
Mondrian Los Angeles	Los Angeles, CA		237		(1	)
Morgans	New York, NY		114		(1	)
Royalton	New York, NY		168		(1	)
Sanderson	London, England		150		(2	)
St Martins Lane	London, England		204		(2	)
Shore Club	Miami Beach, FL		309		(3	)
Clift	San Francisco, CA		366		(4	)
Mondrian Scottsdale	Scottsdale, AZ		189		(1	)
Hard Rock Hotel & Casino	Las Vegas, NV		646		(6	)
Mondrian South Beach	Miami Beach, FL		328		(2	)

(1)	Wholly-owned hotel.
(2)	Owned through a 50/50 unconsolidated joint venture.

F-6

(3)	Operated under a management contract, with an unconsolidated minority ownership interest of approximately 7%.
(4)	The hotel is operated under a long-term lease, which is accounted for as a financing.
(5)	The Company owns 100% of Hudson, which is part of a property that is structured as a condominium, in which Hudson constitutes 96% of the square footage of the entire building.
(6)	Operated under a management contract and owned through an unconsolidated joint venture, of which the Company owned approximately 20.1% at December 31, 2008 based on cash contributions.

Restaurant Joint Venture

The food and beverage operations of certain of the hotels are operated under 50/50 joint ventures with a third party restaurant operator.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company consolidates all wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in combination.

Financial Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, as amended (“FIN 46R”), requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Pursuant to FIN 46R, the Company consolidates five ventures that provide food and beverage services at the Company’s hotels as the Company absorbs a majority of the ventures’ expected losses and residual returns. FIN 46R has been applied retroactively. These services include operating restaurants including room service at five hotels, banquet and catering services at four hotels and a bar at one hotel. No assets of the Company are collateral for the venturers’ obligations and creditors of the venturers’ have no recourse to the Company.

Management has evaluated the applicability of FIN 46R to its investments in certain joint ventures and determined that these joint ventures do not meet the requirements of a variable interest entity or the Company is not the primary beneficiary and, therefore, consolidation of these ventures is not required. Accordingly, these investments are accounted for using the equity method.

Use of 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 that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include investments with maturities of three months or less from the date of purchase.

Restricted Cash

Certain loan agreements require the hotels to deposit 4% of Gross Revenues, as defined, in restricted cash escrow accounts for the future replacement of furniture, fixtures and equipment. As replacements occur, the Company’s subsidiaries are eligible for reimbursement from these escrow accounts.

As further required by certain loan agreements, restricted cash also consists of cash held in escrow accounts for taxes, insurance and debt service payments.

The restaurants owned by the restaurant joint ventures require the ventures to deposit between 2% and 4% of Gross Revenues, as defined, in an escrow account for the future replacement of furniture, fixtures and equipment.

F-7

Accounts Receivable

Accounts receivable are carried at their estimated recoverable amount, net of allowances. Management provides for the allowances based on a percentage of aged receivables and assesses accounts receivable on a periodic basis to determine if any additional amounts will potentially be uncollectible. After all attempts to collect accounts receivable are exhausted, the uncollectible balances are written off against the allowance. The allowance for doubtful accounts is immaterial for all periods presented.

Property and Equipment

Building and building improvements are depreciated on a straight-line method over their estimated useful life of 39.5 years. Furniture, fixtures and equipment are depreciated on a straight-line method using five years. Building and equipment under capital leases and leasehold improvements are amortized on a straight-line method over the shorter of the lease term or estimated useful life of the asset.

Costs of significant improvements, including real estate taxes, insurance, and interest during the construction periods are capitalized. Capitalized interest for the years ended December 31, 2008 and 2007 was $1.1 million and $2.8 million, respectively.

Goodwill

Goodwill represents the excess purchase price over the fair value of net assets attributable to business acquisitions. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), the Company tests for impairment at least annually and generally at year end. The Company will test for impairment more frequently if events or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In accordance with SFAS No. 142, the Company identifies potential impairments by comparing the fair value of the reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, including goodwill, the asset is not impaired. Any excess of carrying value over the implied fair value of goodwill would be recognized as an impairment loss in continuing operations.

Management applies a five-year discounted cash flow method to perform its annual goodwill fair value impairment test using hotel operating budgets with conservative growth assumptions. For the year ended December 31, 2008, management assumed a growth assumption of 3%, which is less than the Company’s historical growth rates, given the current economic environment. The discount rate applied to the model is a weighted average of the Company’s cost of equity and debt and the cap rate is based on applicable market indices. As the Company has one reportable operating segment, management aggregates goodwill associated to all Owned Hotels when analyzing potential impairment. As of December 31, 2008, management concluded, based on the discounted cash flow method, that no goodwill impairment existed and that the Owned Hotels carrying value was well in excess of the implied fair value.

Impairment of Long-Lived Assets

In accordance with SFAS Statement No. 144, Accounting for the Impairment of Disposal of Long Lived Assets, long-lived assets currently in use are reviewed periodically for possible impairment and will be written down to fair value if considered impaired. Long-lived assets to be disposed of are written down to the lower of cost or fair value less the estimated cost to sell. The Company reviews its portfolio of long-lived assets for impairment at least annually. When events or changes of circumstances indicate that an asset’s carrying value may not be recoverable, we test for impairment by reference to the asset’s estimated future cash flows. In this analysis of fair value, we use discounted cash flow analysis to estimate the fair value of our properties taking into account each property’s expected cash flow from operations, holding period and net proceeds from the dispositions of the property. The factors we address in determining estimated net proceeds from disposition include anticipated operating cash flow in the year of disposition, terminal capitalization rate and selling price per room. As of December 31, 2008, management concluded, based on the discounted cash flow method, that Mondrian Scottsdale was impaired and that the fair value was in excess of the property’s carrying value by approximately $13.4 million. This impairment is reflected in our consolidated financial statements for the year ended December 31, 2008. As of December 31, 2008, management concluded that all other long-lived assets were not impaired. There were no impairment write-downs during the years ended December 31, 2007 or 2006.

F-8

Investments in and Advances to Unconsolidated Joint Ventures

The Company accounts for its investments in unconsolidated joint ventures using the equity method as it does not exercise control over significant asset decisions such as buying, selling or financing nor is it the primary beneficiary under FIN 46R, as discussed above. Under the equity method, the Company increases its investment for its proportionate share of net income and contributions to the joint venture and decreases its investment balance by recording its proportionate share of net loss and distributions. For investments in which there is recourse or unfunded commitments to provide additional equity, distributions and losses in excess of the investment are recorded as a liability.

The Company periodically reviews its investment in unconsolidated joint ventures for other temporary declines in market value. In this analysis of fair value, we use discounted cash flow analysis to estimate the fair value of our investment taking into account expected cash flow from operations, holding period and net proceeds from the dispositions of the property. Any decline that is not expected to be recovered in the next 12 months is considered other than temporary and an impairment charge is recorded as a reduction in the carrying value of the investment. No impairment charges were recognized in the years ended December 31, 2008, 2007 or 2006.

Other Assets

Other assets consist primarily of deferred financing costs and the costs the Company incurred to invest in Shore Club, which has been accounted for as costs to obtain the management contract on that hotel. The costs associated with the management contract are being amortized, using the straight line method, which approximates the interest yield method, over the 20 year life of the contract. Deferred financing costs are being amortized, using the straight line method, over the terms of the related debt agreements.

Foreign Currency Translation

The Company has entered into certain transactions with its foreign joint ventures. The translation of transactions with its foreign joint ventures has resulted in foreign currency transaction gains and losses, which have been reflected in the results of operations based on exchange rates in effect at the translation date or the date of the transactions, as applicable. Such transactions did not have a material effect on the Company’s earnings. The Company’s investments in its foreign joint ventures have been translated at the applicable year-end exchange rate with the translation adjustment presented as a component of other comprehensive loss. The Company recognized a loss of $0.3 million for the year ended December 31, 2008, gain of less than $0.1 million for the year ended December 31, 2007 and a gain of $0.2 million for the year ended December 31, 2006 for this translation adjustment.

Revenue Recognition

The Company’s revenues are derived from lodging, food and beverage and related services provided to hotel customers such as telephone, minibar and rental income from tenants, as well as hotel management services. Revenue is recognized when the amounts are earned and can reasonably be estimated. These revenues are recorded net of taxes collected from customers and remitted to government authorities and are recognized as the related services are delivered. Rental revenue is recorded on a straight-line basis over the term of the related lease agreement.

Additionally, the Company recognizes base and incentive management fees and chain service fees related to the management of the operating hotels in unconsolidated joint ventures and licensing fees related to the use of the Company’s brand in the Delano Dubai project. These fees are recognized as revenue when earned in accordance with the applicable management agreement. The Company recognizes base management and chain service fees as a percentage of revenue and incentive management fees as a percentage of net operating income or Net Capital or Refinancing Proceeds, as defined in the management agreement. The chain service fees represent cost reimbursements from managed hotels, which are incurred, and reimbursable costs to the Manager.

Concentration of Credit Risk

The Company places its temporary cash investments in high credit financial institutions. However, a portion of temporary cash investments may exceed FDIC insured levels from time to time.

Advertising and Promotion Costs

Advertising and promotion costs are expensed as incurred and are included in hotel selling, general and administrative expenses on the accompanying consolidated/combined statements of operations and comprehensive loss. These costs amounted to approximately $13.3 million, $13.4 million and $11.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.

F-9

Repairs and Maintenance Costs

Repairs and maintenance costs are expensed as incurred and are included in hotel selling, general and administrative expenses on the accompanying consolidated/combined statements of operations and comprehensive loss.

Income Taxes

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting basis of assets and liabilities and for loss and credit carry forwards. Valuation allowances are provided when it is more likely than not that the recovery of deferred tax assets will not be realized.

The United States entities included in the accompanying combined financial statements for the period January 1, 2006 to February 16, 2006 are either partnerships or limited liability companies, which are treated similarly to partnerships for tax reporting purposes. Accordingly, Federal and state income taxes have not been provided for those accompanying combined financial statements as the partners or members are responsible for reporting their allocable share of the Predecessor’s income, gains, deductions, losses and credits on their individual income tax returns.

The Company’s foreign subsidiaries are subject to United Kingdom corporate income taxes. Income tax expense is reported at the applicable rate for the periods presented.

Subsequent to the IPO, the Company is subject to Federal and state income taxes as a C corporation. Income taxes for the period of February 17, 2006 to December 31, 2006 and for the years ended December 31, 2007 and 2008, were computed using the Company’s effective tax rate. The Company recorded $10.2 million in net deferred taxes, related to cumulative differences in the basis recorded for certain assets and liabilities, primarily goodwill and property and equipment at February 17, 2006.

Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued liabilities, and long-term debt. Substantially all of the Company’s long-term debt accrues interest at a floating rate, which re-prices frequently. Management believes the carrying amount of the aforementioned financial instruments is a reasonable estimate of fair value as of December 31, 2008 and 2007 due to the short-term maturity of these items or variable interest rate. The fair value of the Company’s fixed rate debt amounted to approximately $242.0 million and $208.0 million, respectively, using market interest rates ranging from 1.4% to 4.9%.

Derivative Instruments and Hedging Activities

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (“SFAS No. 133”), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction.

The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. During 2008, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

F-10

The Company has interest rate caps that are not designated as hedges. These derivatives are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks, but the Company has elected not to designate these instruments in hedging relationships based on the provisions in SFAS No. 133. The changes in fair value of derivatives not designated in hedging relationships have been recognized in earnings.

A summary of the Company’s derivative and hedging instruments that have been recognized in earnings as of December 31, 2008 and 2007 is as follows (in thousands):

						Estimated			Estimated
						Fair Market			Fair Market
						Value at			Value at
	Type of	Maturity	Strike			December 31,			December 31,
Notional Amount	Instrument	Date	Rate			2008			2007
$    285,000	Sold interest cap	July 9, 2010		4.25	%		(15	)		(1,793	)
285,000	Interest cap	July 9, 2010		4.25	%		17			1,831
85,000	Interest cap	July 15, 2010		7.00	%		—			15
85,000	Sold interest cap	July 15, 2010		7.00	%		—			(15	)
Fair value of derivative instruments not designated as hedges						$	2		$	38

A summary of the Company’s derivative instruments that have been designated as hedges under SFAS 133 as of December 31, 2008 and 2007 is as follows (in thousands):

						Estimated			Estimated
						Fair Market			Fair Market
						Value at			Value at
	Type of	Maturity	Strike			December 31,			December 31,
Notional Amount	Instrument	Date	Rate			2008			2007
$   285,000	Interest swap	July 9, 2010		5.04	%	$	(16,953	)	$	(9,409	)
85,000	Interest swap	July 15, 2010		4.91	%		(4,941	)		(2,537	)
22,000	Interest cap	June 1, 2009		6.00	%		—			—
18,000	Interest cap	June 1, 2009		6.00	%		—			—
Fair value of derivative instruments designated as effective hedges						$	(21,894	)	$	(11,946	)
Total fair value of derivative instruments						$	(21,892	)	$	(11,908	)
Total fair value included in other assets						$	17		$	1,846
Total fair value included in other liabilities						$	(21,909	)	$	(13,754	)

At December 31, 2008 and 2007, derivatives with a fair value of less than $0.1 million and $1.8 million, respectively, were included in other assets and derivatives with a fair value of $21.9 million and $13.8 million, respectively, were included in other liabilities. The change in net unrealized losses, net of tax of $4.9 million in 2008 and $6.4 million in 2007 for derivatives designated as cash flow hedges is separately disclosed in the consolidated/combined Statements of Operations and Comprehensive Loss. The realized and unrealized gains and losses of derivatives not designated as hedges was $0 and $3.0 million, in 2008 and 2007, respectively, and is included in interest expense, net.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. An immaterial amount of net unrealized losses was reclassified from accumulated other comprehensive income to interest expense during 2007 and 2006. The Company reflects the change in fair value of all hedging instruments in cash flows from operating activities. It is estimated that approximately $15.1 million included in accumulated other comprehensive income related to derivatives will be reclassified to interest expense in the 2009 results of operations.

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

F-11

SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Currently, the Company uses interest rate caps and interest rate swaps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2008, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.

Stock-based Compensation

The Company accounts for stock based employee compensation using the fair value method of accounting described in SFAS No. 123R, Accounting for Stock-Based Compensation (“SFAS No. 123”) (as amended by SFAS No. 148 and SFAS No. 123(R)). For share grants, total compensation expense is based on the price of the Company’s stock at the grant date. For option grants, the total compensation expense is based on the estimated fair value using the Black-Scholes option-pricing model. Compensation expense is recorded ratably over the vesting period, if any. Stock compensation expense recognized for the years ended December 31, 2008, 2007 and 2006 were $15.9 million, $19.5 million and $7.9 million, respectively.

Income (Loss) Per Share

Basic net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less any dividends on unvested restricted common stock, by the weighted-average number of common stock outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less dividends on unvested restricted common stock, by the weighted-average number of common stock outstanding during the period, plus other potentially dilutive securities, such as unvested shares of restricted common stock and warrants.

Minority Interest

The percentage of membership units in Morgans Group LLC, our operating company, owned by the Former Parent is presented as minority interest in Morgans Group LLC in the consolidated balance sheet and was approximately $16.6 million as of December 31, 2008 and $19.2 million as of December 31, 2007. The minority interest in Morgans Group LLC is (i) increased or decreased by the limited members’ pro rata share of Morgans Group LLC’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemptions of membership units for the Company’s common stock; and (iv) adjusted to equal the net equity of Morgans Group LLC multiplied by the limited members’ ownership percentage immediately after each issuance of units of Morgans Group LLC and/or shares of the Company’s common stock and after each purchase of treasury stock through an adjustment to additional paid-in capital. Net income or net loss allocated to the minority interest in Morgans Group LLC is based on the weighted-average percentage ownership throughout the period.

F-12

Additionally, $1.4 million and $0.6 million was recorded as minority interest as of December 31, 2008 and 2007, respectively, which represents our third-party food and beverage joint venture partner’s interest in the restaurant venture at certain of our hotels.

New Accounting Pronouncements

On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). This statement permits companies to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under GAAP. SFAS No. 159 must be applied prospectively, and the effect of the first re-measurement to fair value, if any, should be reported as a cumulative effect adjustment to the opening balance of retained earnings. SFAS No. 159 was effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 had no material impact on the Company’s consolidated financial statements as the Company did not elect the fair value measurement option for any of its financial assets or liabilities.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”) which, among other things, provides guidance and establishes amended accounting and reporting standards for a parent company’s noncontrolling or minority interest in a subsidiary and the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company will adopt this Statement effective January 1, 2009 and will present its consolidated financial statements accordingly.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS No. 141R”), which replaces SFAS No. 141. SFAS No. 141R, among other things, establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired (including intangibles), the liabilities assumed and any noncontrolling interest in the acquired entity. Additionally, SFAS No. 141R requires that all transaction costs of a business acquisition will be expensed as incurred. SFAS No. 141R is effective for fiscal years beginning on or after December 15, 2008. Adoption is prospective and early adoption is not permitted. This Statement will only have an impact on our consolidated financial statements if we are involved in a business acquisition in fiscal year 2009 or later years.

In February 2008, the FASB issued Staff Position No. FAS 157-2 which provides for a one-year deferral of the effective date of SFAS No. 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. On January 1, 2009, the standard will also apply to all other fair value measurements. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No.161 requires enhanced disclosures related to derivative and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosure related to (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedge items are accounted for under SFAS No.133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No.161 must be applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS No. 133 for all financial statements issued for fiscal years and interim period beginning after November 15, 2008 with early application encouraged.

In May 2008, the FASB issued FASB Staff Position No. APB 14-1 (“FSP APB 14-1”) which clarifies the accounting for the Company’s convertible notes payable. FSP APB 14-1 requires the proceeds from the sale of the Company’s convertible notes to be allocated between a liability component and an equity component. The resulting debt discount must be amortized over the period the debt is expected to remain outstanding as additional interest expense. FSP APB 14-1 will require retroactive application to all periods presented and would be effective for fiscal years beginning after December 15, 2008. The FSP APB 14-1 is effective for us as of January 1, 2009 and early adoption is not permitted. The Company has evaluated the impact that FSP APB 14-1 will have on its consolidated financial statements once adopted and believes that the debt discount will be $15.9 million. The impact on the Company’s interest expense for 2007 and 2008 is an increase of approximately $0.5 million and $2.3 million, respectively, resulting in a net loss of $15.3 million and $57.6 for the years ended December 31, 2007 and 2008, respectively. The resulting loss per share would have been ($0.46) and ($1.83) for the years ended December 31, 2007 and 2008, respectively.

F-13

In June 2008, the FASB ratified EITF Issue 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock, (“EITF 07-5”). Paragraph 11(a) of SFAS 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of operations would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. EITF 07-5 is effective on January 1, 2009. The Company is currently evaluating the impact of the adoption of this standard on the Company’s consolidated financial statements as it applies to the Convertible Notes.

In October 2008, the FASB issued FASB Staff Position No. FAS 157-3 which clarifies the application of FASB Statement No. 157, Fair Value Measurements. Staff Position No. FAS 157-3 provides guidance in determining the fair value of a financial asset when the market for that financial asset is not active.

Reclassifications

Certain prior year financial statement amounts have been reclassified to conform to the current year presentation.

3. Income (Loss) Per Share

Basic earnings per share is calculated based on the weighted average number of common stock outstanding during the period. Diluted earnings per share include the effect of potential shares outstanding, including dilutive securities. Potential dilutive securities may include shares and options granted under the Company’s stock incentive plan and membership units in Morgans Group LLC, which may be exchanged for shares of the Company’s common stock under certain circumstances. The 954,065 outstanding Morgans Group LLC membership units (which may be converted to common stock) at December 31, 2008 have been excluded from the diluted net income (loss) per common share calculation, as there would be no effect on reported diluted net income (loss) per common share. All unvested restricted stock units, LTIP Units (as defined in Note 10), stock options and contingent convertible Notes (as defined in Note 7) are excluded from loss per share as they are anti-dilutive.

The table below details the components of the basic and diluted loss per share calculations (in thousands, except for per share data):

	Year Ended December 31, 2008								Year Ended December 31, 2007
				Weighted								Weighted
				Average		EPS						Average		EPS
	Loss			Shares		Amount			Loss			Shares		Amount
Basic loss per share	$	(55,349	)		31,413	$	(1.76	)	$	(14,796	)		33,239	$	(0.45	)
Effect of dilutive stock compensation		—			—		—			—			—		—
Diluted loss per share	$	(55,349	)		31,413	$	(1.76	)	$	(14,796	)		33,239	$	(0.45	)

On July 1, 2008, the Company’s Board of Directors authorized the repurchase of up to $30.0 million of the Company’s common stock, or approximately 9% of its outstanding shares based on the then current market price. This repurchase authorization was in addition to the $75.0 million that was previously authorized by the Company’s Board of Directors under separate plans in 2006 and 2007. The Company repurchased its stock through the open market or in privately negotiated transactions. The timing and actual number of shares repurchased depended on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. As of December 31, 2008, the Company had completed all authorized share repurchase programs and purchased an aggregate of 7,072,065 shares for approximately $104.8 million throughout 2006, 2007 and 2008. The Company records its stock repurchases at cost.

F-14

4. Property and Equipment

Property and equipment consist of the following (in thousands):

	As of			As of
	December 31,			December 31,
	2008			2007
Land	$	93,912		$	93,912
Building		493,964			459,449
Furniture, fixtures and equipment		107,147			104,079
Construction in progress		9,761			21,861
Property subject to capital lease		6,938			6,938
Subtotal		711,722			686,239
Less accumulated depreciation		(156,077	)		(150,630	)
Property and equipment, net	$	555,645		$	535,609

Depreciation on property and equipment was $27.0 million, $21.1 million and $18.4 million for the years ended December 31, 2008, 2007 and 2006, respectively. Included in this expense was $0.3 million in each period related to depreciation on property subject to capital leases.

5. Investments in and Advances to Unconsolidated Joint Ventures

The Company’s investments in and advances to unconsolidated joint ventures and its equity in earnings (losses) of unconsolidated joint ventures are summarized as follows (in thousands):

Investments

	As of		As of
	December 31,		December 31,
Entity	2008		2007
Morgans Hotel Group Europe Ltd.	$	—	$	13,679
Restaurant Venture — SC London		—		—
Mondrian South Beach		24,785		13,373
Hard Rock Hotel & Casino		—		36,767
Shore Club		57		57
Echelon Las Vegas		17,198		40,826
Mondrian SoHo		7,564		5,051
Mondrian Chicago		—		834
Boston Ames		7,049		—
Other		101		100
Total investments in and advances to unconsolidated joint ventures	$	56,754	$	110,687

	As of			As of
	December 31,			December 31,
Entity	2008			2007
Morgans Hotel Group Europe Ltd.	$	(2,689	)	$	—
Restaurant Venture — SC London		(811	)		(479	)
Hard Rock Hotel & Casino		(11,063	)		—
Total losses from and distributions in excess of investment in unconsolidated joint ventures	$	(14,563	)	$	(479	)

Equity in income (loss) from unconsolidated joint ventures

							For the Period			For the Period
							from February 17,			from January 1
	Year Ended			Year Ended			2006 to			2006 to
	December 31,			December 31,			December 31,			February 16,
	2008			2007			2006			2006
Morgans Hotel Group Europe Ltd.	$	(4,416	)	$	1,702		$	3,922		$	(488	)
Restaurant Venture — SC London		330			(258	)		941			(96	)
Mondrian South Beach		(3,626	)		(2,734	)		(2,630	)		—
Hard Rock Hotel & Casino		(47,975	)		(22,106	)		—			—
Shore Club		—			—			(160	)		(30	)
Echelon Las Vegas		(903	)		(1,193	)		—			—
Other		9			9			—			—
Total	$	(56,581	)	$	(24,580	)	$	2,073		$	(614	)

F-15

Morgans Hotel Group Europe Limited

As of December 31, 2008, the Company owned interests in two hotels in London, England, St Martins Lane, a 204-room hotel, and Sanderson, a 150-room hotel, through a 50/50 joint venture known as Morgans Hotel Group Europe Limited (“Morgans Europe”) with Walton MG London Investors V, L.L.C.

On July 27, 2006, our former joint venture partner in ownership of our London hotels, Burford Hotels Limited (“Burford”), sent the Company a notice purporting to exercise rights under the buy/sell provision of the joint venture agreement (the “Notice”). As a result of the Notice, the Company began marketing Burford’s share of the joint venture and on February 16, 2007, a subsidiary of the Company and Walton MG London Investors V, L.L.C. (“Walton”), entered into a joint venture agreement for the ownership and operation of hotels in Europe by Morgans Europe. Walton purchased Burford’s interest in the joint venture for the equivalent of approximately $52.0 million implying a gross value for the assets of over $300.0 million. For facilitating the transaction, the Company received approximately $6.1 million in cash at closing, and could receive additional consideration based on the value of an interest rate hedge on the existing joint venture debt in the event of a debt refinancing.

Under the new joint venture agreement with Walton, the Company continues to own indirectly a 50% equity interest in Morgans Europe and continues to have an equal representation on the Morgans Europe board of directors. In the event the parties cannot agree on certain specified decisions, such as approving hotel budgets or acquiring a new hotel property, or beginning any time after February 9, 2010, either party has the right to buy all the shares of the other party in the joint venture or, if its offer is rejected, require the other party to buy all of its shares at the same offered price per share in cash. The Company also maintained the management of the London hotels under the same terms.

Under a management agreement with Morgans Europe, the Company earns management fees and a reimbursement for allocable chain service and technical service expenses. The Company is also entitled to an incentive management fee and a capital incentive fee. The Company did not earn any incentive fees during the years ended December 31, 2008, 2007 or 2006.

In December 2008, the Company received a distribution of approximately $11.5 million in cash dividends from the recapitalization of the Morgans Europe joint venture. The recapitalization required the consent of the lender and allows for future dividends from profits subject to lender consent.

Morgans Europe, has outstanding mortgage debt of £102.6 million as of December 31, 2008 which matures on November 24, 2010. The joint venture is currently considering various options with respect to the refinancing of this mortgage obligation.

Net income or loss and cash distributions or contributions are allocated to the partners in accordance with ownership interests. The Company accounts for this investment under the equity method of accounting.

Summarized consolidated balance sheet information of Morgans Europe is as follows (in thousands). The currency translation is based on an exchange rate of 1 British pound to 1.45 and 2.00 U.S. dollars as of December 31, 2008 and 2007, respectively, as provided by www.oanda.com:

	As of			As of
	December 31,			December 31,
	2008			2007
Property and equipment, net	$	133,751		$	193,910
Other assets		6,209			35,266
Total assets	$	139,960		$	229,176
Other liabilities		11,562			7,777
Debt		148,589			209,130
Total (deficit) equity		(20,191	)		12,269
Total liabilities and (deficit) equity	$	139,960		$	229,176
Company’s share of (deficit) equity		(10,096	)		6,134
Capitalized costs and designer fee		7,407			7,545
Total losses from and distributions in excess of investment in unconsolidated joint ventures	$	(2,689	)	$	13,679

F-16

Included in capitalized costs and designer fee is approximately $4.2 million, $4.3 million and $4.5 million of capitalized interest as of December 31, 2008, 2007 and 2006, respectively. The capitalized interest costs are being amortized on a straight-line basis over 39.5 years into equity in earnings in the accompanying consolidated statements of operations and comprehensive loss.

Summarized consolidated income statement information of Morgans Europe is as follows (in thousands). The currency translation is based on an exchange rate of 1 British pound to 1.86, 2.00 and 1.84 which is an average monthly exchange rate provided by www.oanda.com for the years ended December 31, 2008, 2007 and 2006, respectively.

	Year Ended December 31,
	2008			2007			2006
Hotel operating revenues	$	57,500		$	65,402		$	56,928
Hotel operating expenses		36,003			38,362			33,606
Depreciation and amortization		7,092			7,342			8,170
Operating income		14,405			19,698			15,152
Interest expense		22,957			16,011			7,938
Net (loss) income for period		(8,552	)		3,687			7,214
Other comprehensive gain (loss)		(1,002	)		11			400
Comprehensive (loss) income	$	(9,554	)	$	3,698		$	7,614
Company’s share of net (loss) income	$	(4,276	)	$	1,843		$	3,607
Company’s share of other comprehensive (loss) gain		(500	)		6			200
Company’s share of comprehensive (loss) gain	$	(4,776	)	$	1,849		$	3,807
Other amortization		(140	)		(141	)		(173	)
Amount recorded in combined statement of operations	$	(4,416	)	$	1,702		$	3,434

Restaurant Venture — SC London

The Company has a 50% interest in the restaurants located in St Martins Lane and Sanderson hotels located in London.

Summarized consolidated balance sheet information of SC London is as follows (in thousands). The currency translation is based on an exchange rate of 1 British pound to 1.45 and 2.00 U.S. dollars at December 31, 2008 and 2007, respectively, as provided by www.oanda.com:

	As of			As of
	December 31,			December 31,
	2008			2007
Property and equipment, net	$	1,214		$	1,900
Other assets		5,275			6,710
Total assets	$	6,489		$	8,610
Other liabilities		2,686			4,078
Total equity		3,803			4,532
Total liabilities and equity	$	6,489		$	8,610
Total losses from and distributions in excess of investment in unconsolidated joint ventures	$	(811	)	$	(479	)

Summarized consolidated income statement information of SC London is as follows (in thousands). The currency translation is based on an exchange rate of 1 British pound to 1.86, 2.00 and 1.84 which is an average monthly exchange rate provided by www.oanda.com for the twelve months ended December 31, 2008, 2007 and 2006, respectively.

	Year Ended December 31,
	2008		2007			2006
Operating revenues	$	27,735	$	30,750		$	29,649
Operating expenses		26,570		31,053			27,565
Depreciation		505		435			394
Net income		660		(516	)		1,690
Amount recorded in equity in income (loss)	$	330	$	(258	)	$	845

F-17

Mondrian South Beach

On August 8, 2006, the Company entered into a 50/50 joint venture with an affiliate of Hudson Capital to renovate and convert apartment building on Biscayne Bay in South Beach Miami into a condominium hotel, Mondrian South Beach, which opened in December 2008. The Company operates Mondrian South Beach under a long-term incentive management contract.

The joint venture acquired the existing building and land for a gross purchase price of $110.0 million. An initial equity investment of $15.0 million from each of the Company and Hudson Capital was funded at closing. Additionally, the joint venture initially received mortgage loan financing of approximately $124.0 million at a rate of LIBOR, based on the rate set date, plus 300 basis points. A portion of this mortgage debt was paid down, prior to refinancing discussed below, with proceeds obtained from condominium sales. Further, in April 2008, the Mondrian South Beach joint venture obtained a mezzanine loan of $28.0 million bearing interest at LIBOR, based on the rate set date, plus 600 basis points. The mezzanine loan was also refinanced in November 2008, as discussed below.

On November 25, 2008, together with its joint venture partner, the Company amended and restated the mortgage loan and mezzanine loan agreements related to the Mondrian South Beach to provide for, among other things, four one-year extension options of the third-party financing totaling $107.1 million as of December 31, 2008. Under the amended agreements, the initial maturity date of August 1, 2009 can be extended to July 29, 2013, subject to certain conditions including an amortization payment of approximately $17.5 million on August 1, 2009 for the first such annual extension, repayment of the remainder of the A-Note, as defined, by August 1, 2010 for the exercise of the second annual extension, achievement of defined debt service coverage ratios for the exercise of the third and fourth annual extensions, and achievement of a loan to value test for the fourth annual extension. A portion of the proceeds obtained from condominium sales may be used to pay down all or part of the approximately $17.5 million extension obligation due on August 1, 2009, although there can be no assurances that such sale proceeds will be sufficient to cover the obligation. Further, the Company and an affiliate of its joint venture partner have provided additional mezzanine financing of approximately $22.5 million to the joint venture to fund completion of the construction and renovations at Mondrian South Beach. Mondrian South Beach opened on December 1, 2008.

The joint venture is in the process of selling units as condominiums, subject to market conditions, and unit buyers will have the opportunity to place their units into the hotel’s rental program. In addition to hotel management fees, the Company could also realize fees from the sale of condominium units.

During conversion and renovation, the joint venture was accounted for as a development project in accordance with SFAS No. 67.

Summarized balance sheet information of Mondrian South Beach is as follows (in thousands):

	As of			As of
	December 31,			December 31,
	2008			2007
Real estate, net	$	167,414		$	153,679
Other assets		19,637			21,006
Total assets	$	187,051		$	174,685
Other liabilities		29,549			46,507
Debt		129,562			100,986
Total equity		27,940			27,192
Total liabilities and equity	$	187,051		$	174,685
Company’s share of equity		13,970			13,596
Advance to joint venture in the form of mezzanine financing		11,250			100,986
Capitalized costs/reimbursements		(435	)		(223	)
Company’s investment balance	$	24,785		$	13,373

F-18

Summarized income statement information of Mondrian South Beach is as follows (in thousands):

							Period from
	Year Ended			Year Ended			August 8, 2006 to
	December 31,			December 31,			December 31,
	2008			2007			2006
Operating revenues	$	69,105		$	350		$	1,113
Operating expenses		75,469			5,291			2,093
Depreciation		53			189			952
Operating loss		(6,417	)		(5,130	)		(1,932	)
Interest expense		835			338			3,328
Net loss		(7,252	)		(5,468	)		(5,260	)
Amount recorded in equity in loss	$	(3,626	)	$	(2,734	)	$	(2,630	)

Hard Rock Hotel & Casino

On May 11, 2006, the Company and its wholly-owned subsidiary, MHG HR Acquisition Corp. (“Acquisition Corp”), entered into an Agreement and Plan of Merger with Hard Rock Hotel, Inc. (“HRH”) pursuant to which the Acquisition Corp agreed to acquire HRH in an all cash merger (the “Merger”). Additionally, an affiliate of the Company entered into several asset purchase agreements with HRH or affiliates of HRH to acquire a development land parcel adjacent to the Hard Rock Hotel & Casino in Las Vegas (“Hard Rock”) and certain intellectual property rights related to the Hard Rock (such asset purchases, together with the Merger, the “Transactions”). The aggregate consideration for the Transactions was $770.0 million.

On November 7, 2006, the Company entered into a definitive agreement with an affiliate of DLJ Merchant Banking Partners (“DLJMB”), as amended in December 2006, under which DLJMB and the Company agreed to form a joint venture in connection with the acquisition and development of the Hard Rock. The joint venture agreement included certain affiliates of DLJMB and Morgans Group LLC as additional members. DLJMB and such affiliates are referred to as the DLJMB Parties. The Company and Morgans Group LLC are referred to as the Morgans Parties.

The closing of the Transactions and completion of the Merger occurred on February 2, 2007. The Morgans Parties funded one-third of the equity, or approximately $57.5 million, and the DLJMB Parties funded two-thirds of the equity, or approximately $115.0 million, through a joint venture. The remainder of the $770.0 million purchase price was financed with mortgage financing under a credit agreement entered into by the joint venture. The credit agreement provides for a secured term loan facility, which matures on February 9, 2010 with two one-year extension options subject to certain conditions, consisting of a $760.0 million loan for the acquisition and a loan for future expansion of the Hard Rock, discussed further below. On November 6, 2007, the joint venture entered into an amended and restated credit agreement in which the lender exercised its right to split the loan made pursuant to the original credit agreement into a mortgage loan, which is comprised of a construction loan component and an acquisition loan component, and three mezzanine loans. The proceeds of the mezzanine loans were used to prepay the acquisition loan portion of the mortgage loan made pursuant to the original credit agreement.

On June 6, 2008, the joint venture closed the $620.0 million of construction financing for the expansion of the Hard Rock. The construction financing loan also matures on February 9, 2010, with two one-year extension options, subject to certain conditions.

The Company has entered into standard joint and several guarantees in connection with the acquisition and construction loans, including construction completion guarantees related to the Hard Rock expansion, which is scheduled to be completed in 2009. In its joint venture agreement with DLJMB, the Company has agreed to be responsible for the first $50.0 million of exposure on the completion guarantees, subject to certain conditions. As of December 31, 2008, the construction and expansion work was progressing generally on time and on budget, but large construction projects such as this are complicated and hard to predict, and there can be no assurance that the Company will not be required to fund some amounts under this or other guarantee obligations.

As of December 31, 2008, the Company has issued approximately $11.1 million of letters of credit toward the expansion, which are expected to be funded in 2009.

Also on June 6, 2008, the Morgans Parties and DLJMB Parties also amended their joint venture agreement to reflect DLJMB’s commitment to make additional capital contributions to the Hard Rock of up to $144.0 million for the expansion project and up to $110.0 million to satisfy the minimum sales price or amortization payment requirements under the loan facility relating to the approximately 15.0 acres of excess land held for sale by the Hard Rock.

F-19

On August 1, 2008, a subsidiary of the Hard Rock joint venture completed an intercompany land purchase with respect to an 11-acre parcel of land located adjacent to the Hard Rock. In connection with the intercompany land purchase a subsidiary entered into a $50.0 million land acquisition financing agreement with various lenders. All outstanding amounts owed under the loan agreement become due and payable no later than August 9, 2009, subject to two six-month extension options. The Hard Rock joint venture is currently considering various options with respect to the land collateralizing this loan, including selling a portion of the land to a third party. The Company has entered into a standard joint and several non-recourse carve-out guaranty in connection with this financing agreement, although in the joint venture agreement, DLJMB has agreed to be responsible for 100% of any liability under the guaranty, subject to certain conditions. NorthStar Realty Finance Corp. is a participant lender in the loan. In connection with the loan, Morgans Group LLC, together with DLJMB, as guarantors, entered into a non-recourse carve-out guaranty agreement, which is only triggered in the event of certain “bad boy” clauses, in favor of Column Financial, Inc. See Note 11 to the Consolidated Financial Statements.

As part of the August 1, 2008 intercompany land purchase, the DLJMB Parties contributed an aggregate of approximately $74.0 million to the Hard Rock joint venture to fund the remaining portion of the $110.0 million of proceeds necessary to complete the intercompany land purchase and to pay for all costs and expenses in connection with its closing and related financing. The proceeds from the financing, together with the equity contribution from the DLJMB Parties, were used to fully satisfy the $110.0 million amortization payment under the joint venture’s commercial mortgage backed securities loan facility.

Also on August 1, 2008, the DLJMB Parties and the Morgans Parties amended the joint venture agreement. Among other things, the amended joint venture agreement clarifies certain obligations of the parties in the event that capital contributions are required for additional costs and expenses relating to the 11-acre parcel. In general, any decision to call for such additional capital contributions will be in the discretion of the Hard Rock joint venture’s board of directors. Subject to certain terms and conditions, the DLJMB Parties could also cause the joint venture to seek such additional capital contributions from third parties. However, each member that is not in default under the joint venture agreement will be given an opportunity to participate in the funding. The amended joint venture agreement also clarifies certain provisions used to calculate each member’s percentage interest in the joint venture in the event that such additional capital contributions are funded.

As a result of additional cash contributions made by the DLJMB Parties, the Company holds approximately a 20.1% ownership interest in the joint venture as of December 31, 2008.

Under an amended property management agreement, the Company operates the hotel, retail, food and beverage, entertainment and all other businesses related to the Hard Rock, excluding the casino through March 1, 2008, as discussed below. Under the terms of the agreement, the Company receives a management fee and a chain service expense reimbursement of all non-gaming revenue including casino rents and all other rental income. The Company can also earn an incentive management fee based on EBITDA, as defined, above certain levels. The term of the management contract is 20 years with two 10-year renewals. Beginning 12 months following completion of the expansion, the Company’s management fees are subject to certain performance tests, namely achievement of an EBITDA hurdle, as defined in the amended property management agreement.

Effective March 1, 2008, the joint venture began operating the casino at Hard Rock. Prior to that date, the casino was operated by a third party subject to a lease.

As a result of its impairment analysis in 2008, Hard Rock concluded that impairment charges of approximately $181.3 million related to goodwill and $10.0 million related to certain indefinite-lived intangible assets would be recognized in the fourth quarter of 2008. The impairment charge represents all of the goodwill recognized at the time of the Hard Rock acquisition and a portion of the value of the Hard Rock license. The impairment charge resulted from factors impacted by current market conditions including: i) lower market valuation multiples for gaming assets; ii) higher discount rates resulting from turmoil in the credit and equity markets; and iii) current cash flow forecasts for Hard Rock.

F-20

Summarized balance sheet information of Hard Rock is as follows (in thousands):

	As of			As of
	December 31,			December 31,
	2008			2007
Property and equipment, net	$	784,127		$	515,924
Asset held for sale		95,160			95,160
Goodwill		—			139,549
Other assets		283,667			192,681
Total assets	$	1,162,954		$	943,314
Other liabilities		140,655			35,886
Debt		1,083,813			793,452
Total equity		(61,514	)		113,976
Total liabilities and equity	$	1,162,954		$	943,314
Company’s share of equity		(11,063	)		37,992
Capitalized costs/unreimbursed costs		—			(1,255	)
Total losses from and distributions in excess of investment in unconsolidated joint ventures	$	(11,063	)	$	36,767

Summarized income statement information of Hard Rock is as follows (in thousands):

				Period from
	Year Ended			February 2, 2007 to
	December 31,			December 31,
	2008			2007
Operating revenues	$	164,345		$	173,655
Operating expenses		155,149			140,699
Depreciation and amortization		23,454			17,413
Operating (loss) income		(14,258	)		15,543
Interest expense		77,280			84,136
Impairment loss		191,349			84,136
Income tax benefit		(585	)		(2,277	)
Net loss		(282,302	)		(66,316	)
Comprehensive loss		(17,168	)		(835	)
Amount recorded in equity in loss	$	(47,975	)	$	(22,106	)

Echelon Las Vegas

In January 2006, the Company entered into a 50/50 joint venture with a subsidiary of Boyd Gaming Corporation (“Boyd”), through which the joint venture plans to develop Delano Las Vegas and Mondrian Las Vegas as part of Boyd’s Echelon project.

On August 1, 2008, Boyd announced that it will delay the entire Echelon project due to the current capital markets and economic conditions. On September 23, 2008, the Company and Boyd amended their joint venture agreement to, among other things, extend the deadline by which the joint venture must obtain construction financing for the development of Delano Las Vegas and Mondrian Las Vegas to December 31, 2009. The amended joint venture agreement also provided for the immediate return of the $30.0 million deposit the Company had provided for the project, plus interest, the elimination of the Company’s future funding obligations of approximately $41.0 million and the elimination of any obligation by the Company to provide a construction loan guaranty. The amended joint venture agreement also limits the amounts that the Company and Boyd are required to continue to fund for pre-development and related costs to approximately $0.4 million each, which will be fully paid in early 2009. Each partner has the right to terminate the joint venture for any reason prior to December 31, 2009. Additionally, the terms of the management agreement, which provide for the Company to operate the joint venture hotels upon their completion, remain unchanged.

As of December 31, 2008 and 2007, the Company’s investment in Echelon Las Vegas was $17.2 million and $40.8 million, respectively, and the Company’s portion of equity in loss for the years ended December 31, 2008 and 2007 was $0.9 million and $1.2 million, respectively, primarily related to overhead costs and pre-development plans that were not capitalizable. As of December 31, 2008 the Company concluded that the investment in Echelon Las Vegas was not impaired as the joint venture agreement is still in effect and although neither party is obligated to contributed additional equity, the partners’ intent is to continue with the project under the amended joint venture agreement assuming financing becomes available.

Mondrian SoHo

In June 2007, the Company contributed approximately $5.0 million for a 20% equity interest in a joint venture with Cape Advisors Inc. to acquire and develop a Mondrian hotel in the SoHo neighborhood of New York City. The Mondrian SoHo is currently expected to have approximately 270 rooms, a restaurant, bar, ballroom, meeting rooms, exercise facility and a penthouse suite with outdoor space that can be used as a guest room or for private events. Upon completion in late 2009 or early 2010, the Company is expected to operate the hotel under a 10-year management contract with two 10-year extension options.

F-21

Boston Ames

On June 17, 2008 the Company, Normandy Real Estate Partners, and Ames Hotel Partners entered into a joint venture agreement as part of the development of the Boston Ames hotel in Boston, Massachusetts, located near Government Center, Boston Common and Faneuil Hall. Upon completion, the Company expects to operate the hotel under a long-term management contract. Boston Ames is expected to open in late 2009 or early 2010 and to have approximately 115 guest rooms, a restaurant, bar and exercise facility.

The total development budget for the project is approximately $91.7 million with the Company having an approximately 35% interest in the joint venture. The project is expected to qualify for federal and state historic rehabilitation tax credits. Normandy Real Estate Partners has closed on a development loan from UBS for up to $46.5 million. As of December 31, 2008, the Company had issued approximately $4.2 million of letters of credit toward the development of the hotel, which were funded in 2009.

Mondrian Chicago

In November 2008, the joint venture with M Development to lease and develop a Mondrian hotel in Chicago was terminated and the Company’s investment of $2.5 million was written off, which is included in restructuring and disposal costs. The development of Mondrian Chicago was unable obtain adequate project financing in a timely manner.

6. Other Liabilities

Other liabilities consist of the following (in thousands):

	As of		As of
	December 31,		December 31,
	2008		2007
Interest swap liability (Note 2)	$	21,909	$	13,754
Designer fee payable		13,175		12,478
Other		571		1,747
	$	35,655	$	27,979

Interest Swap Liability

As discussed further in Note 2, the fair value of the interest rate swap derivative liability was approximately $21.9 million and $13.8 million at December 31, 2008 and 2007, respectively.

Designer Fee Payable

The Former Parent had an exclusive service agreement with a hotel designer, pursuant to which the designer has initiated various claims related to the agreement. Although the Company is not a party to the agreement, it may have certain contractual obligations or liabilities to the Former Parent in connection with the agreement. While defenses and/or counter-claims may be available to the Company or the Former Parent in connection with any claims brought by the designer, a liability amount has been recorded in these consolidated financial statements. According to the agreement, the designer is owed a base fee for each designed hotel, plus 1% of Gross Revenues, as defined in the agreement, for a 10-year period from the opening of each hotel. The estimated costs of the design services were capitalized as a component of the applicable hotel and are being amortized over the five-year estimated life of the related design elements. Interest is accreted each year on the liability and charged to interest expense using a rate of 9%. Changes to the liability recorded in these consolidated financial statements are recorded as an adjustment to the capitalized design fee and amortized prospectively. Adjustments to the liability after the five-year life of the design asset will be charged directly to operations. In addition, the agreement also called for the designer to design a minimum number of projects for which the designer would be paid a minimum fee, which is recorded in the above liability. See further discussion in Note 8.

7. Long-Term Debt and Capital Lease Obligations

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

	As of		As of		Interest rate at
	December 31,		December 31,		December 31,
Description	2008		2007		2008
Notes secured by Hudson and Mondrian(a)	$	370,000	$	370,000	LIBOR + 1.25		%
Clift debt(b)		81,578		80,092		9.6	%
Promissory note(c)		10,000		10,000		10.0	%
Note secured by Mondrian Scottsdale(d)		40,000		40,000	LIBOR + 2.30		%
Liability to subsidiary trust(e)		50,100		50,100		8.68	%
Revolving credit(f)		—		—		(f	)
Convertible Notes(g)		172,500		172,500		2.375	%
Capital lease obligations(h)		6,187		6,507		(h	)
Total long term debt	$	730,365	$	729,199

F-22

(a) Mortgage Agreement — Notes secured by Hudson and Mondrian Los Angeles

On October 6, 2006, subsidiaries of the Company entered into non-recourse mortgage financings with Wachovia Bank, National Association, as lender, consisting of two separate mortgage loans and a mezzanine loan (collectively, the “Mortgages”). These loans, a $217.0 million first mortgage note secured by Hudson, a $32.5 million mezzanine loan secured by a pledge of the equity interests in the Company’s subsidiary owning Hudson, and a $120.5 million first mortgage note secured by Mondrian Los Angeles all mature on July 15, 2010.

The Mortgages bear interest at a blended rate of 30-day LIBOR plus 125 basis points. The Company maintains swaps that effectively fix the LIBOR rate on the debt under the Mortgages at approximately 5.0% through the initial maturity date.

The Company has the option of extending the maturity date of the Mortgages to October 15, 2011 provided that certain extension requirements are achieved, including maintaining a debt service coverage ratio, as defined, at the subsidiary owning the relevant hotel for the two fiscal quarters preceding the maturity date of 1.55 to 1.00 or greater. The Company anticipates it will extend these maturities in 2010. Alternatively, we may consider refinancing these Mortgages.

The prepayment clause in the Mortgages permits the Company to prepay the Mortgages in whole or in part on any business day.

The Mortgages require our subsidiary borrowers to fund reserve accounts to cover monthly debt service payments. Those subsidiary borrowers are also required to fund reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation and maintenance of those hotels. Reserves are deposited into restricted cash accounts and are released as certain conditions are met. Our subsidiary borrowers are not permitted to have any liabilities other than certain ordinary trade payables, purchase money indebtedness, capital lease obligations and certain other liabilities.

The Mortgages prohibit the incurrence of additional debt on Hudson and Mondrian Los Angeles. Furthermore, the subsidiary borrowers (entities owning Hudson and Mondrian Los Angeles) are not permitted to incur additional mortgage debt or partnership interest debt. In addition, the Mortgages do not permit (1) transfers of more than 49% of the interests in the subsidiary borrowers, Morgans Group LLC or the Company or (2) a change in control of the subsidiary borrowers or in respect of Morgans Group LLC or the Company itself without, in each case, complying with various conditions or obtaining the prior written consent of the lender.

The Mortgages provide for events of default customary in mortgage financings, including, among others, failure to pay principal or interest when due, failure to comply with certain covenants, certain insolvency and receivership events affecting the subsidiary borrowers, Morgans Group LLC or the Company, and breach of the encumbrance and transfer provisions. In the event of a default under the Mortgages, the lender’s recourse is limited to the mortgaged property, unless the event of default results from insolvency, a voluntary bankruptcy filing or a breach of the encumbrance and transfer provisions, in which event the lender may also pursue remedies against Morgans Group LLC.

As of December 31, 2008, we were in compliance with the covenants of the Mortgages.

(b) Clift Debt

In October 2004, Clift Holdings LLC sold the hotel to an unrelated party for $71.0 million and then leased it back for a 99-year lease term. Under this lease, the Company is required to fund operating shortfalls including the lease payments and to fund all capital expenditures. This transaction did not qualify as a sale due to the Company’s continued involvement and therefore is treated as a financing.

The lease payment terms are as follows:

Years 1 and 2	$2.8 million per annum (completed in October 2006)
Years 3 to 10	$6.0 million per annum
Thereafter	Increased at 5-year intervals by a formula tied to increases in the Consumer Price Index. At year 10, the increase has a maximum of 40% and a minimum of 20%. At each payment date thereafter, the maximum increase is 20%and the minimum is 10%.

F-23

(c) Gale Promissory Note

The purchase of the Gale, the property across from the Delano Miami, was partially financed with the issuance of a $10.0 million three-year interest only non-recourse promissory note by the Company to the seller, with a scheduled maturity of January 24, 2009. At December 31, 2008, the note bore interest at 10.0%. In November 2008, the Company extended the maturity of the note until January 24, 2010 and agreed to pay 11.0% interest for the extension year which the Company was required to prepay in full at the time of the extension. The obligations under the note are secured by the property. Additionally, in January 2009, the Company borrowed an additional $0.5 million to obtain necessary permits. This $0.5 million promissory note matures on January 24, 2010 and bears interest at 11%. The obligations under this note are secured with a pledge of the equity interests in the Company’s subsidiary that owns the Gale.

(d) Mondrian Scottsdale Debt

In May 2006, the Company obtained non-recourse mortgage and mezzanine financing on Mondrian Scottsdale. The $40.0 million mortgage and mezzanine loans, which accrue interest at LIBOR plus 2.3%, mature on June 1, 2009 with two remaining one-year extension options. These extensions are subject to certain performance tests. The Company purchased an interest rate cap which limits the interest rate exposure to 6.0% through June 1, 2009. This interest rate cap expires on June 1, 2009. The Company does not believe it will qualify for the extension options and the Company may be unable to extend or refinance these loans. As a result, management will continue to discuss our options with the lenders. The Company does not anticipate committing significant monies toward Mondrian Scottsdale in 2009.

(e) Liability to Subsidiary Trust Issuing Preferred Securities

On August 4, 2006, a newly established trust formed by the Company, MHG Capital Trust I (the “Trust”), issued $50.0 million in trust preferred securities in a private placement. The Company owns all of the $0.1 million of outstanding common stock of the Trust. The Trust used the proceeds of these transactions to purchase $50.1 million of junior subordinated notes issued by the Company’s operating company and guaranteed by the Company (the “Trust Notes”) which mature on October 30, 2036. The sole assets of the Trust consist of the Trust Notes. The terms of the Trust Notes are substantially the same as preferred securities issued by the Trust. The Trust Notes and the preferred securities have a fixed interest rate of 8.68% per annum during the first 10 years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.25% per annum. The Trust Notes are redeemable by the Trust, at the Company’s option, after five years at par. To the extent the Company redeems the Trust Notes, the Trust is required to redeem a corresponding amount of preferred securities. The Trust Note agreement requires that the Company does not fall below a fixed charge coverage ratio, defined generally as Consolidated EBITDA excluding Clift’s EBITDA over consolidated interest expense excluding Clift’s interest expense, of 1.4 to 1.0 for four consecutive quarters. As of December 31, 2008, the Company’s fixed charge coverage ratio was 2.4 and the Company was in compliance with the covenants of the Trust Note agreement.

FIN 46R requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company has identified that the Trust is a variable interest entity under FIN 46R. Based on management’s analysis, the Company is not the primary beneficiary since it does not absorb a majority of the expected losses, nor is it entitled to a majority of the expected residual returns. Accordingly, the Trust is not consolidated into the Company’s financial statements. The Company accounts for the investment in the common stock of the Trust under the equity method of accounting.

(f) Revolving Credit Facility

On October 6, 2006, the Company and certain of its subsidiaries entered into a revolving credit facility in the initial commitment amount of $225.0 million, which includes a $50.0 million letter of credit sub-facility and a $25.0 million swingline sub-facility (collectively, the “Revolving Credit Facility”) with Wachovia Capital Markets, LLC and Citigroup Global Markets Inc. We may also, at our option, with the prior consent of the lenders and subject to customary conditions, request an increase in the aggregate commitment under the Revolving Credit Facility to up to $350.0 million.

F-24

The amount available for borrowings under the Revolving Credit Facility is contingent upon the borrowing base, which is calculated by reference to the appraised value and implied debt service coverage value of certain collateral properties securing the Revolving Credit Facility. As of December 31, 2008, the available borrowing base, before $15.3 million outstanding letters of credit posted against the Revolving Credit Facility, was approximately $68.7 million, with a potential increase to $177.2 million, before such posted letters of credit, at the Company’s option by increasing the amount of the borrowing capacity on Delano Miami through a mortgage filing and upon payment of the related additional recording tax. If current economic conditions continue, however, the Company expects that this borrowing base will be significantly reduced in the future. The Company’s ability to borrow under the Revolving Credit Facility and the amount of cash that may need to be retained from such borrowings also depends on the Company’s ability to maintain the financial covenants described below.

The commitments under the Revolving Credit Facility terminate on October 5, 2011, at which time all outstanding amounts under the Revolving Credit Facility will be due and payable.

The interest rate per annum applicable to loans under the Revolving Credit Facility is a fluctuating rate of interest measured by reference to, at the Company’s election, either LIBOR or a base rate, plus a borrowing margin. LIBOR loans have a borrowing margin of 1.35% to 1.90%, based on the Company’s total leverage ratio (with an initial borrowing margin of 1.35%), and base rate loans have a borrowing margin of 0.35% to 0.90% , based on the Company’s total leverage ratio (with an initial borrowing margin of 0.35%). The Revolving Credit Facility also provides for the payment of a quarterly unused facility fee equal to the average daily unused amount for each quarter multiplied by 0.25%.

The Revolving Credit Facility requires the Company to maintain for each four-quarter period a total leverage ratio (defined generally as total consolidated indebtedness, net of cash and excluding indebtedness related to the Convertible Notes (defined below), the Convertible Notes (defined below) and the Clift lease obligation to consolidated EBITDA excluding Clift’s EBITDA) of no more than 7.0 to 1.0 at any time during 2008, and 6.0 to 1.0 at any time after December 31, 2008, and a fixed charge coverage ratio (defined generally as consolidated EBITDA excluding Clift’s EBITDA to consolidated interest expense excluding Clift’s interest expense) of no less than 1.75 to 1.00 at all times. As of December 31, 2008, the Company’s leverage ratio was 4.5 times and our fixed charge coverage ratio was 2.3 times under these financial covenants. The Revolving Credit Facility contains negative covenants, subject in each case to certain exceptions, restricting incurrence of indebtedness, incurrence of liens, fundamental changes, acquisitions and investments, asset sales, transactions with affiliates and restricted payments, including, among others, a covenant prohibiting us from paying cash dividends on our common stock. As of December 31, 2008, the Company was in compliance with the covenants of the Revolving Credit Facility.

The Revolving Credit Facility provides for customary events of default, including failure to pay principal or interest when due, failure to comply with covenants, any representation proving to be incorrect, defaults relating to acceleration of certain other indebtedness of at least $10.0 million in the aggregate, certain insolvency and receivership events affecting the Company or its subsidiaries, judgments in excess of $5.0 million in the aggregate being rendered against the Company or its subsidiaries, the acquisition by any person of 40% or more of any outstanding class of capital stock having ordinary voting power in the election of Directors of the Company, and the incurrence of certain ERISA liabilities in excess of $5.0 million in the aggregate.

Obligations under the Revolving Credit Facility are secured by, among other collateral, a mortgage on Delano Miami and the pledge of equity interests in the Morgans Group LLC and certain subsidiaries of the Company, including the owners of Delano Miami, Royalton and Miami, as well as a security interest in other significant personal property (including certain trademarks and other intellectual property, reserves and deposits) relating to those hotels.

The Revolving Credit Facility is available on a revolving basis for general corporate purposes, including acquisitions. As of December 31, 2008, there were no borrowings outstanding under the Revolving Credit Facility, although there were approximately $15.3 million letters of credit posted under the Revolving Credit Facility in connection with funding commitments at the Hard Rock and Boston Ames as described in Note 5.

(g) October 2007 Convertible Notes Offering

On October 17, 2007, the Company issued $172.5 million aggregate principal amount of 2.375% Senior Subordinated Convertible Notes (the “Convertible Notes”) in a private offering. Net proceeds from the offering were approximately $166.8 million.

The Convertible Notes are senior subordinated unsecured obligations of the Company and are guaranteed on a senior subordinated basis by the Company’s operating company, Morgans Group LLC. The Convertible Notes will be convertible into shares of the Company’s common stock under certain circumstances and upon the occurrence of specified events.

F-25

Interest on the Convertible Notes is payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2008, and mature on October 15, 2014, unless previously repurchased by the Company or converted in accordance with their terms prior to such date. The initial conversion rate for each $1,000 principal amount of Convertible Notes is 37.1903 shares of the Company’s common stock, representing an initial conversion price of approximately $26.89 per share of common stock. The initial conversion rate is subject to adjustment under certain circumstances.

In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions with respect to the Company’s common stock (the “Call Options”) with Merrill Lynch Financial Markets, Inc. and Citibank, N.A. (collectively, the “Hedge Providers”). The Call Options are exercisable solely in connection with any conversion of the Convertible Notes and pursuant to which the Company will receive shares of the Company’s common stock from the Hedge Providers equal to the number of shares issuable to the holders of the Convertible Notes upon conversion. The Company paid approximately $58.2 million for the Call Options.

In connection with the sale of the Convertible Notes, the Company also entered into separate warrant transactions with Merrill Lynch Financial Markets, Inc. and Citibank, N.A., whereby the Company issued warrants (the “Warrants”) to purchase 6,415,327 shares of common stock, subject to customary anti-dilution adjustments, at an exercise price of approximately $40.00 per share of common stock. The Company received approximately $34.1 million from the issuance of the Warrants.

The Company recorded the purchase of the Call Options, net of the related tax benefit of approximately $20.3 million, as a reduction of paid-in-capital and the proceeds from the Warrants as an addition to paid-in-capital in accordance with EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company’s Own Stock, and other relevant literature.

In February 2008, the Company filed a registration statement with the Securities and Exchange Commission to cover the resale of shares of the Company’s common stock that may be issued from time to time upon the conversion of the Convertible Notes.

(h) Capital Lease Obligations

The Company has leased two condominium units at Hudson, which are reflected as capital leases. One of the leases requires the Company to make annual payments of $450,000 (subject to increases due to increases in the Consumer Price Index) from acquisition through November 2096. Effective January 1, 2003, and as of December 31, 2004, the annual lease payments under this lease increased to $506,244. This lease also allows the Company to purchase the unit at fair market value after November 2015.

The second lease requires the Company to make annual payments of $250,000 (subject to increases due to increases in the Consumer Price Index) through December 2098. Effective January 2004, payments under this lease increased to $285,337. The Company has allocated both of the leases’ payments between the land and building based on their estimated fair values. The portion of the payments allocated to building has been capitalized at the present value of the future minimum lease payments. The portion of the payments allocable to land is treated as operating lease payments. The imputed interest rate on both of these leases is 8%. The capital lease obligations related to the units amounted to approximately $6.1 million as of December 31, 2008 and 2007. Substantially all of the principal payments on the capital lease obligations are due at the end of the lease agreements.

The Company has also entered into capital lease obligations related to equipment at certain of the hotels.

Principal Maturities

The following is a schedule, by year, of principal payments on notes payable (including capital lease obligations) as of December 31, 2008 (in thousands):

			Amount
			Representing		Principal Payments
	Capital Lease		Interest on		on Capital Lease
	Obligations and		Capital Lease		Obligations and
	Debt Payable		Obligations		Debt Payable
2009	$	40,606	$	494	$	40,112
2010		10,488		488		10,000
2011		370,488		488		370,000
2012		489		488		1
2013		489		488		1
Thereafter		346,826		36,575		310,251
	$	769,386	$	39,021	$	730,365

The average interest rate on all of the Company’s debt for the years ended December 31, 2008, 2007 and 2006 was 5.6%, 5.8% and 6.1%, respectively.

F-26

8. Commitments and Contingencies

As Lessee

Future minimum lease payments for noncancelable leases in effect as of December 31, 2008 are as follows (in thousands):

	Land
	(See Note 6)		Other
2009	$	266	$	790
2010		266		814
2011		266		838
2012		266		863
2013		266		895
Thereafter		22,099		4,878
Total	$	23,429	$	9,078

Future minimum lease payments do not include amounts for renewal periods or amounts that may need to be paid to landlords for real estate taxes, electricity and operating costs.

Management Fee on Restaurants

The Company owns a 50% interest in a series of restaurant joint ventures with Chodorow Ventures LLC and affiliates (“Chodorow”) for the purpose of establishing, owning, operating and/or managing restaurants, bars and other food and beverage operations at certain of the Company’s hotels. This agreement is implemented through operating agreements and leases at each hotel which expire on various dates through [2010] and generally have one or two five-year renewal periods at the restaurant venture’s option. Chodorow or an affiliated entity manages the operations of the restaurant venture and earns a management fee typically equal to 3% of the gross revenues generated by the operation.

Additionally, the Company has license and management agreements with affiliates of Chodorow for the purpose of operating the restaurant at Mondrian Scottsdale. This restaurant is managed by Chodorow in return for a management and license fee, as defined. The agreements expire in 2017 and include an option to extend at the discretion of Chodorow. The restaurant is owned by the Company.

Multi-employer Retirement Plan

Approximately 14.3% of the Company’s employees are subject to collective bargaining agreements. The Company is a participant, through these collective bargaining agreements, in multi-employer defined contribution retirement plans in New York and multi-employer defined benefit retirement plans in California covering union employees. Plan contributions are based on a percentage of employee wages, according to the provisions of the various labor contracts. The Company’s contributions to the multi-employer retirement plans amounted to approximately $2.3 million, $1.8 million and $1.7 million for the years ended December 31, 2008, 2007 and 2006, respectively, for these plans. Under the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, an employer is liable upon withdrawal from or termination of a multiemployer plan for its proportionate share of the plan’s unfunded vested benefits liability. Based on information provided by the administrators of the majority of these multiemployer plans, the Company does not believe there is any significant amount of unfunded vested liability under these plans.

F-27

Litigation

Shore Club Litigation

In 2002, the Company, through a wholly-owned subsidiary, Shore Club Holdings, LLC, invested in the Shore Club, and the management company, Morgans Hotel Group Management LLC (“MHG Management Company”), took over management of the property. The management agreement expires in 2022.

In January 2006, an action was brought in New York state court against several defendants, including two subsidiaries of the Company and certain officers and directors of NorthStar and the Company, including David Hamamoto, the Company’s Chairman of the Board and the Co-Chairman of the Board of Directors and Co-Chief Executive Officer of NorthStar, styled Philips South Beach, LLC v. Morgans Hotel Group Management, LLC et al., Index No. 06/600147 (N.Y. Sup. Ct.), which we refer to as the Shore Club Litigation. An additional action was commenced in March 2006 in New York state court against several defendants, including the company, NorthStar, David Hamamoto, and certain other individuals and entities, styled Century Operating Associates v. NorthStar Hospitality LLC, et al., Index No. 601007/06-E (N.Y. Sup. Ct.), which we refer to as the Century Litigation (together with the Shore Club Litigation, the “Litigations”).

On April 4, 2008, the Company and certain of its subsidiaries entered into a global settlement agreement with Philips South Beach, LLC, Century Operating Associates, Philip Pilevsky and certain of his affiliates, Residual Hotel Interest LLC and certain of its affiliates, Becker-Paramount LLC, W. Edward Scheetz, David T. Hamamoto, RSA Associates, L.P., NorthStar and certain of its subsidiaries, Clark SB II LLC, Clark SB LLC, The Clark Foundation, The Scriven Foundation, Jane Clark and Kevin Moore, pursuant to which the Shore Club litigation, regarding the management of Shore Club, and the Century Litigation, regarding the structuring transactions that were part of the Company’s IPO and the IPO itself, along with related litigations and an additional litigation in which we are not involved, have been settled (the “Settlement”).

The Company was not required to make any cash payments as part of the Settlement. Under the terms of the Settlement, the management agreement pursuant to which MHG Management Company manages Shore Club was amended to provide for, among other things, a reduction beginning in 2009 in the management and chain services fees, a reduction beginning in 2012 in the termination payment to be made by the owner of Shore Club to MHG Management Company upon termination of the management agreement, and certain changes to operating procedures at Shore Club.

The Litigations have been submitted for coverage by NorthStar under certain primary and excess insurance policies (“Insurance Policies”), issued to NorthStar under which certain subsidiaries of the Company and certain individual defendants in the Litigations, including the Chairman of our Board and our Chief Investment Officer and Board member, are also insured. The insurers have paid certain amounts to NorthStar in connection with the Litigations under the Insurance Policies.

Hard Rock Financial Advisory Agreement

In July 2008, the Company received an invoice from Credit Suisse Securities (USA) LLC (“Credit Suisse”) for $9.4 million related to the Financial Advisory Agreement the Company entered into with Credit Suisse in July 2006. Under the terms of the financial advisory agreement, Credit Suisse received a transaction fee for placing DLJMB, an affiliate of Credit Suisse, in the Hard Rock joint venture. The transaction fee, which was paid by the Hard Rock joint venture at the closing of the acquisition of the Hard Rock and related assets on February 2007, was based upon an agreed upon percentage of the initial equity contribution made by DLJMB in entering into the joint venture. The invoice received in July 2008 alleges that as a result of events subsequent to the closing of the Hard Rock acquisition transactions, Credit Suisse is due additional transaction fees. The Company believes this invoice is invalid, and would otherwise be a Hard Rock joint venture liability.

Potential Litigation

The Company understands that Mr. Philippe Starck has initiated arbitration proceedings in the London Court of International Arbitration regarding an exclusive service agreement that he entered into with Residual Hotel Interest LLC (formerly known as Morgans Hotel Group LLC) in February 1998 regarding the design of certain hotels now owned by the Company. The Company is not a party to these proceedings at this time. See Note 6 of the Consolidated Financial Statements.

Other Litigation

The Company is involved in various lawsuits and administrative actions in the normal course of business. In management’s opinion, disposition of these lawsuits is not expected to have a material adverse effect on the Company’s financial positions, results of operations or liquidity.

Environmental

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

F-28

9. Income Taxes

The provision for income taxes on income from operations is comprised of the following for the years ended December 31, 2008 and 2007 (in thousands):

	Year Ended			Year Ended			Period from
	December 31,			December 31,			February 17, 2006
	2008			2007			to December 31, 2006
Current tax provision (benefit):
Federal	$	—		$	1,680		$	—
State and city		—			997			129
Foreign		826			1,035			819
		826			3,712			948
Deferred tax provision (benefit):
Federal		(22,423	)		(9,720	)		7,723
State		(10,803	)		(3,156	)		2,899
Foreign		—			104			(456	)
		(33,226	)		(12,772	)		10,166
Total tax provision	$	(32,400	)	$	(9,060	)	$	11,114

Net deferred tax asset consists of the following (in thousands):

	As of December 31,			As of December 31,
	2008			2007
Goodwill	$	(23,772	)	$	(18,115	)
Basis differential in property and equipment		(26,673	)		(10,676	)
Deferred costs and other		(351	)		—
Total deferred tax liability		(50,796	)		(28,791	)
Stock compensation		17,543			11,472
Accrued liabilities		—			399
Derivative instruments		8,753			4,917
Investment in unconsolidated subsidiaries		29,996			10,677
Foreign taxes payable		—			560
Capital lease obligation		—			915
Designer fee payable		5,570			4,109
Impairment loss		5,678			—
Other		997			591
Foreign exchange losses		200			—
Convertible bond		20,081			22,787
Net operating loss		28,257			—
Total deferred tax asset		117,075			56,427
Net deferred tax asset	$	66,279		$	27,636

The Company has Federal net operating loss carryforwards (“NOL Carryforwards”) of approximately $58.0 million at December 31, 2008. These NOL Carryforwards are available to offset future taxable income, and will expire in 2028. The Company has NOL Carryfowards in various states in the amount of approximately $66.0 million, which will expire between 2013 and 2028.

The Company has not established a reserve on its deferred tax assets based on anticipated future taxable income and/or tax strategies which may include the sale of a property or an interest therein.

F-29

A reconciliation of the statutory United States Federal tax rate to the Company’s effective income tax rate is as follows:

							Period from
							February 17,
	Year Ended			Year Ended			2006
	December 31,			December 31,			to December 31,
	2008			2007			2006
Federal statutory income tax rate		35	%		34	%		34	%
State and city taxes, net of federal tax benefit		7	%		6	%		7	%
Foreign tax benefits		0	%		(3	)%		(19	)%
Other including non deductible items		(6	)%		—			60	%
Effective tax rate		36	%		37	%		82	%

The Company accounts for certain tax positions in accordance with FIN 48. The Company does not believe it will have any material changes in its unrecognized tax positions over the next 12 months. The Company does not have any accrued interest or penalties associated with any unrecognized tax positions. The Company’s tax returns for the years 2007 and 2006 are subject to review by the Internal Revenue Service.

10. Omnibus Stock Incentive Plan

On February 9, 2006, the Board of Directors of the Company adopted the Morgans Hotel Group Co. 2006 Omnibus Stock Incentive Plan (the “2006 Stock Incentive Plan”). The 2006 Stock Incentive Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, stock appreciation rights, shares of common stock of the Company, including restricted stock units (“RSUs”) and other equity-based awards, including membership units in Morgans Group LLC which are structured as profits interests (“LTIP Units”), or any combination of the foregoing. The eligible participants in the 2006 Stock Incentive Plan included Directors, officers and employees of the Company. An aggregate of 3,500,000 shares of common stock of the Company were reserved and authorized for issuance under the 2006 Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. On April 23, 2007, the Board of Directors of the Company adopted, and at the annual meeting of stockholders on May 22, 2007, the stockholders approved, the Company’s 2007 Omnibus Incentive Plan (the “2007 Incentive Plan”), which amended and restated the 2006 Stock Incentive Plan and increased the number of shares reserved for issuance under the plan by up to 3,250,000 shares to a total of 6,750,000 shares. Awards other than options and stock appreciation rights reduce the shares available for grant by 1.7 shares for each share subject to such an award. On April 10, 2008, the Board of Directors of the Company adopted, and at the annual meeting of stockholders on May 20, 2008, the stockholders approved, an amended and restated 2007 Omnibus Incentive Plan (the “Amended 2007 Incentive Plan”) which, among other things, increased the number of shares reserved for issuance under the plan by 1,860,000 shares from 6,750,000 shares to 8,610,000 shares.

Total stock compensation expense, which is included in corporate expenses on the accompanying consolidated financial statements, was $15.9 million, $19.5 million and $7.9 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Restricted Common Stock Units

Pursuant to the 2006 Stock Incentive Plan, throughout 2006, the Company granted restricted common stock units (“RSUs”) to non-employee Directors and employees. Such non-employee director RSU grants vest one-third of the amount granted on the first anniversary of the grant date and as to the remainder in 24 equal installments at the end of each month following the first anniversary of the grant date so long as the recipient continues to be an eligible recipient. Such employee RSU grants vest one-quarter of the amount granted on each of the one-year anniversaries of the grant date so long as the recipient continues to be an eligible recipient. Such non-employee director and employee RSUs will become fully vested on the third and fourth anniversary, respectively, of the grant date. An aggregate of 195,133 shares of restricted common stock were granted during 2006 and the weighted average grant date fair value of the grants was $16.13.

During April and May 2007, the Company issued an aggregate of 216,385 RSUs to the Company’s employees and non-employee Directors pursuant to the 2007 Incentive Plan. The RSUs granted to employees vest fully on the third anniversary of the grant date so long as the recipient continues to be an eligible recipient. The RSUs granted to non-employee Directors vest one-third of the amount granted on each of the first three anniversaries of the grant date so long as the recipient continues to be an eligible participant. The fair value of each such RSU granted in April 2007 was $20.16 at the grant date and the fair value of each such RSU granted in May 2007 was $23.04 at the grant date.

F-30

Also, in April 2007, the Company issued the then named executive officers an aggregate of 121,000 performance-based RSUs pursuant to the 2007 Incentive Plan. These performance RSUs are at risk for forfeiture over the vesting period of three years and require continued employment. In addition, the RSUs are at risk based on the achievement of a 7% total stockholder return over each calendar year of a three-year performance period from 2007 through 2009 (subject to certain catch-up features). As of 12/31/2007, the achievement of the 7% shareholder return over the 2007 calendar year had been achieved. The fair value of such performance-based RSUs granted in April 2007 was $22.38 at the grant date.

Further, on November 27, 2007, the Company granted executives of the Company a one-time performance-based grant of an aggregate of 79,000 RSUs, with one-third of the amount granted vesting on each of the first three anniversaries of the grant date, subject to accelerated vesting in the event certain performance targets were met for 2007 and 2008. Had the Company achieved certain pre-established Adjusted EBITDA targets for the 2007 fiscal year, the first vesting date would have been accelerated to February 27, 2008. Similarly, had the Company achieved certain pre-established Adjusted EBITDA targets for the 2008 fiscal year, the second vesting date would have been accelerated to February 27, 2009. Because the 2007 and 2008 targets were not met, vesting of the RSUs was not accelerated. The remaining one-third of the performance-based RSUs will vest on November 27, 2010. The fair value of such performance-based RSUs granted on November 27, 2007 was $17.67 at the grant date.

In April 2008, the Company issued an aggregate of 159,432 RSUs to the Company’s executive officers and other senior executives under the 2007 Incentive Plan. All grants made to executive officers and other senior executives vest one-third of the amount granted on each of the first three anniversaries of the grant date so long as the recipient continues to be an eligible participant. The fair value of each such RSU granted in April 2008 ranged between $15.42 and $15.39 at the grant date.

In May and June 2008, the Company issued an aggregate of 329,100 RSUs to the Company’s executive officers, other senior executives and employees under the Amended 2007 Incentive Plan. All grants made to employees vest one-third of the amount granted on each of the first three anniversaries of the grant date so long as the recipient continues to be an eligible participant. The fair value of each such RSU granted in May and June 2008 ranged between $13.80 and $12.59 at the grant date.

Pursuant to the separation agreement with the Company’s former president and chief executive officer (“Former CEO”), the Former CEO retained his vested and unvested restricted stock units. To the extent that these awards are not yet vested, they will remain subject to the existing vesting provisions, but all unvested awards will be fully vested by September 19, 2009 (certain awards which are subject to performance conditions will remain subject to those conditions).

In addition to the above grants of RSUs, the Company granted newly hired or promoted employees RSUs from time to time. A summary of the status of the Company’s nonvested restricted common stock granted to non-employee Directors, named executive officers and employees as of December 31, 2008 and 2007 and changes during the years ended December 31, 2008 and 2007, are presented below:

				Weighted Average
Nonvested Shares	RSUs			Fair Value
Nonvested at January 1, 2007		184,033		$	16.13
Granted		463,085			20.72
Vested		(48,253	)		17.45
Forfeited		(41,675	)		20.38
Nonvested at December 31, 2007		557,190		$	19.64
Granted		524,748			13.74
Vested		(138,821	)		18.81
Forfeited		(109,282	)		17.29
Nonvested at December 31, 2008		833,835		$	16.42
Outstanding at December 31, 2008		873,553		$	16.50

For the year ended December 31, 2008, the Company expensed $4.3 million related to granted RSUs. For the year ended December 31, 2007, the Company expensed $3.8 million related to the granted RSUs, including $1.3 million related to the RSUs granted to the Former CEO, which the Company recognized in full in accordance with SFAS 123R. For the year ended December 31, 2006, the Company expensed $0.3 million related to granted RSUs.

As of December 31, 2008, there were 873,553 RSUs outstanding. At December 31, 2008, the Company has yet to expense approximately $8.8 million related to nonvested RSUs which is expected to be recognized over the remaining vesting period of the outstanding awards, as discussed above.

F-31

LTIP Units

Pursuant to the 2006 Stock Incentive Plan, throughout 2006, the Company granted an aggregate of 867,000 LTIP Units to the Company’s named executive officers and Chairman of the Board of Directors. On May 1, 2006, an additional 4,500 LTIP Units were granted to a newly hired executive of the Company. LTIP Units vest as to one third of the amount granted on the first anniversary of the grant date and as to the remainder in 24 equal installments at the end of each month following the first anniversary of the grant date so long as the recipient continues to be an eligible recipient. These LTIP Units will become fully vested on the third anniversary of the grant date. The fair value of each LTIP Unit granted throughout 2006 was $20.00 at the date of grant.

On April 25, 2007, the compensation committee of the Board of Directors of the Company granted an aggregate of 176,750 LTIP Units to the Company’s named executive officers. The LTIP Units are at risk for forfeiture over the vesting period of three years and require continued employment. The fair value of the LTIP Units granted on April 25, 2007 was $22.45 at the date of grant.

Further, on November 27, 2007, the Company granted executives of the Company a one-time performance-based grant of an aggregate of 75,000 LTIP Units, with one-third of the amount granted vesting on each of the first three anniversaries of the grant date, subject to accelerated vesting in the event certain performance targets were met for 2007 and 2008. Had the Company achieved certain pre-established Adjusted EBITDA targets for the 2007 fiscal year, the first vesting date would have been accelerated to February 27, 2008. Similarly, had the Company achieved certain pre-established Adjusted EBITDA targets for the 2008 fiscal year, the second vesting date would have been accelerated to February 27, 2009. Because the 2007 and 2008 targets were not met, vesting of the LTIP Units was not accelerated. The remaining one-third of the performance-based LTIP Units will vest on November 27, 2010. The fair value of the LTIP Units granted on November 27, 2007 was $17.67 at the date of grant.

On December 10, 2007, the Company granted the chief executive officer, Mr. Kleisner, 55,000 LTIP Units, which are at risk for forfeiture over the vesting period of three years and require continued employment. The fair value of the LTIP Units granted to Mr. Kleisner in December 2007 was $17.91 at the date of grant.

In April 2008, the Company issued an aggregate of 399,384 LTIP Units to the Company’s executive officers and other senior executives and newly appointed non-employee Directors under the 2007 Incentive Plan. All grants made to executive officers and other senior executives vest one-third of the amount granted on each of the first three anniversaries of the grant date so long as the recipient continues to be an eligible participant. All grants made to newly appointed non-employee Directors were immediately vested upon grant. The fair value of each such LTIP Unit granted in April 2008 ranged between $15.42 and $15.39 at the grant date.

In May and June 2008, the Company issued an aggregate of 74,913 LTIP Units to the Company’s executive officers, other senior executives, employees and non-employee Directors under the Amended 2007 Incentive Plan. All grants made to employees vest one-third of the amount granted on each of the first three anniversaries of the grant date so long as the recipient continues to be an eligible participant. All LTIP Unit grants made to non-employee Directors were immediately vested upon grant. The fair value of each such LTIP Unit granted in May and June 2008 ranged between $13.80 and $12.59 at the grant date.

Pursuant to the separation agreement with the Former CEO, the Former CEO retained his vested and unvested LTIP Units. To the extent that these awards are not yet vested, they will remain subject to the existing vesting provisions, but all unvested awards will be fully vested by September 19, 2009 (certain awards which are subject to performance conditions will remain subject to those conditions).

In addition to the above grants of LTIP Units, the Company granted newly hired or promoted employees LTIP Units from time to time. A summary of the status of the Company’s nonvested LTIP Units granted to named executive officers, other executives and non-employee Directors of the Company as of December 31, 2008 and 2007and changes during the years ended December 31, 2008 and 2007, are presented below:

				Weighted Average
Nonvested Shares	LTIP Units			Fair Value
Nonvested at January 1, 2007		867,000		$	20.00
Granted		346,750			20.66
Vested		(528,704	)		20.00
Forfeited		(2,875	)		20.00
Nonvested at December 31, 2007		682,171		$	20.34
Granted		474,297			15.13
Vested		(415,250	)		19.68
Forfeited		(14,384	)		16.98
Nonvested at December 31, 2008		726,834		$	17.33
Outstanding at December 31, 2008		1,560,788		$	18.67

F-32

For the year ended December 31, 2008, the Company expensed $7.1 million related to granted LTIP Units. For the year ended December 31, 2007, the Company expensed $10.9 million related to the granted LTIP Units, including $4.7 million related to the LTIP Units granted to the Former CEO, which the Company recognized in full in accordance with SFAS 123R. For the year ended December 31, 2006, the Company expensed $5.1 million related to granted LTIP Units.

As of December 31, 2008, there were 1,560,788 LTIP Units outstanding. At December 31, 2008, the Company has yet to expense approximately $8.2 million related to nonvested LTIP Units which is expected to be recognized over the remaining vesting period of the outstanding awards, as discussed above.

Stock Options

Pursuant to the 2006 Incentive Plan, throughout 2006, the Company granted our chairman, named executive officers and employees options to purchase common stock of the Company with an exercise price ranging from $13.05 to $20.00 per share, based on the closing market price of the stock on the grant date. Such stock options typically vest as to one-third of the amount granted on the first anniversary of the grant date and as to the remainder in 24 equal installments at the end of each month following the first anniversary of the grant date so long as the recipient continues to be an eligible recipient. These options will become fully vested on the third anniversary of the grant date and expire 10 years after the grant date. The fair value for each option granted was estimated at the date of grant using the Black-Scholes option-pricing model, an allowable valuation method under SFAS No. 123R with the following assumptions: risk-free interest rate of 4.6%, expected option lives of 5.85 years, 35% volatility, no dividend rate and 10% forfeiture rate. For the year ended December 31, 2006, the weighted average fair value of such options was $7.98.

During April and May 2007, the Company issued an aggregate of 200,500 options to purchase common stock of the Company to employees. The exercise price of each such option is equal to the closing market price of our common stock on its respective date of grant. These options vest as to one-third of the amount granted on each of the first three anniversaries of the grant date so long as the recipient continues to be an eligible recipient. These options will become fully vested on the third anniversary of the grant date and expire 10 years after the grant date. The fair value for each such option granted was estimated at the date of grant using the Black-Scholes option-pricing model, an allowable valuation method under SFAS No. 123R with the following assumptions: risk-free interest rate of approximately 4.7% for the April 2007 grants and 4.6% for the May 2007 grants, expected option lives of 5.85 years, 35% volatility, no dividend rate and 10% forfeiture rate. The fair value of each such option was $8.37 for the April 2007 grants and $9.65 for the May 2007 grants at the date of grant.

Further, on November 27, 2007, the Company granted executives and employees of the Company a one-time performance-based grant of an aggregate of 338,000 options to purchase common stock of the Company, with one-third of the amount granted vesting on each of the first three anniversaries of the grant date, subject to accelerated vesting in the event certain performance targets were met for 2007 and 2008. Had the Company achieved certain pre-established Adjusted EBITDA targets for the 2007 fiscal year, the first vesting date would have been accelerated to February 27, 2008. Similarly, had the Company achieved certain pre-established Adjusted EBITDA targets for the 2008 fiscal year, the second vesting date would have been accelerated to February 27, 2009. Because the 2007 and 2008 targets were not met, vesting of the options was not accelerated. The remaining one-third of the performance-based options will vest on November 27, 2010. All such performance-based options will be fully vested by November 27, 2010 and expire 10 years after the grant date. The fair value for each such performance-based option was estimated at the date of grant using the Black-Scholes option-pricing model, an allowable valuation method under SFAS No. 123R with the following assumptions: risk-free interest rate of approximately 3.5%, expected option lives of 5.85 years, 35% volatility, no dividend rate and 8% forfeiture rate. The fair value of each such performance-based option was $7.03.

On December 10, 2007, the Company granted the chief executive officer, Mr. Kleisner, an aggregate of 215,000 options to purchase common stock of the Company. The exercise price of 95,000 such options is equal to the closing market price of our common stock on the date of grant. The exercise price of 120,000 such options is equal to 140% of the closing market price of our common stock on the date of grant. These options vest as to one-third of the amount granted on each of the first three anniversaries of the grant date so long as Mr. Kleisner is an eligible recipient. These options will become fully vested on the third anniversary of the grant date and expire 10 years after the grant date. The fair value for each such option granted was estimated at the date of grant using the Black-Scholes option-pricing model, an allowable valuation method under SFAS No. 123R with the following assumptions: risk-free interest rate of approximately 3.7%, expected option lives of 5.85 years, 35% volatility, no dividend rate and 10% forfeiture rate. The fair value of each such option was $7.19 for the 95,000 options granted equal to the closing market price on December, 10, 2007 and $5.15 for the 120,000 options granted equal to 140% of the closing market price on December 10, 2007.

F-33

In April 2008, the Company issued an aggregate of 344,217 stock options to the Company’s executive officers and other senior executives under the 2007 Incentive Plan. All grants made to executive officers and other senior executives vest one-third of the amount granted on each of the first three anniversaries of the grant date so long as the recipient continues to be an eligible participant. The fair value for each such option granted was estimated at the date of grant using the Black-Scholes option-pricing model, an allowable valuation method under SFAS No. 123R with the following assumptions: risk-free interest rate of approximately 2.9%, expected option lives of 5.85 years, 40% volatility, no dividend rate and 10% forfeiture rate. The fair value of each such option was $6.56 at the date of grant.

Pursuant to the separation agreement with the Former CEO, the Former CEO retained his vested and unvested options. To the extent that these awards are not yet vested, they will remain subject to the existing vesting provisions, but all unvested awards will be fully vested by September 19, 2009 (certain awards which are subject to performance conditions will remain subject to those conditions).

In addition to the above grants of options to purchase common stock of the Company, the Company granted newly hired or promoted employees similar options. A summary of the Company’s outstanding and exercisable stock options granted to non-employee Directors, named executive officers and employees as of December 31, 2008 and 2007 and changes during the years ended December 31, 2008 and 2007, are presented below:

						Weighted Average
				Weighted Average		Remaining		Aggregate Intrinsic
	Shares			Exercise Price		Contractual Term		Value
Options						(in years)		(in thousands)
Outstanding at January 1, 2007		1,153,200		$	19.22
Granted		839,500			19.98
Exercised		(41,088	)		14.36
Forfeited or Expired		(77,801	)		20.31
Outstanding at December 31, 2007		1,873,811		$	19.61
Granted		344,217			15.42
Exercised		(7,085	)		14.04
Forfeited or Expired		(128,000	)		18.62
Outstanding at December 31, 2008		2,082,943		$	18.92		7.89	$	—
Exercisable at December 31, 2008		1,189,294		$	19.65		7.20	$	—

For the year ended December 31, 2008, the Company expensed $4.5 million related to granted options. For the year ended December 31, 2007, the Company expensed $4.8 million related to the granted stock options, including $1.3 million related to the options granted to the Former CEO, which the Company recognized in full in accordance with SFAS 123R. For the year ended December 31, 2006, the Company expensed $2.5 million related to granted stock options.

At December 31, 2008, the Company has yet to expense approximately $4.8 million related to outstanding stock options which is expected to be recognized over the remaining vesting period of the outstanding awards, as discussed above.

11. Related Party Transactions

The Company earned management fees, chain services fees and fees for certain technical services and has receivables from hotels it owns through investments in unconsolidated joint ventures as well as hotels owned by the Former Parent. These fees totaled approximately $18.3 million for the year ended December 31, 2008, $18.2 million for the year ended December 31, 2007, and $8.7 million (of which approximately $1.0 million was during the Predecessor period from January 1, 2006 to February 16, 2006) for the year ended December 31, 2006.

As of December 31, 2008 and 2007, the Company had receivables from these affiliates of approximately $7.9 million and $3.4 million, respectively, which are included in receivables from related parties on the accompanying consolidated balance sheets.

F-34

Insurance Proceeds Sharing Agreement

In connection with the Settlement (as defined and discussed in Note 9), the Company and NorthStar entered into an Insurance Proceeds Sharing Agreement on January 18, 2008, pursuant to which NorthStar paid the Company one-half of the aggregate insurance proceeds received by NorthStar in connection with the Litigations (as defined in Note 9) under the Insurance Policies (as defined in Note 9) as of the date of the Insurance Proceeds Sharing Agreement. The parties have also agreed that all future insurance proceeds received from the Insurance Policies in connection with the Litigations will be allocated equally among the parties. As of December 31, 2008, we have received approximately $2.1 million in such proceeds.

The Chairman of the Board and a member of the Board and the Company’s Chief Investment Officer and Executive Vice President of Capital Markets, are beneficial owners of equity interests in NorthStar and our Chairman is the Co-Chairman of the Board of Directors and Co-Chief Executive Officer of NorthStar.

Guaranty to Column Financial, Inc. for Hard Rock

On August 1, 2008, Morgans Group LLC, together with DLJMB, as guarantors, entered into a $50.0 million non-recourse carve-out guaranty which is only triggered in the event of certain “bad boy” clauses, as discussed above in Note 4. In the Company’s joint venture agreement, DLJMB has agreed to be responsible for 100% of any liability under the guaranty subject to certain conditions. The Company’s Chairman of the Board, is also Chairman of the Board, President, Chief Executive Officer and equity holder of NorthStar Realty Finance Corp., which is a participant lender in the loan. The Company believes that this guaranty does not pose a material risk to the Company’s financial position or results.

12. Restructuring, development and disposal costs

Restructuring and disposal costs consist of the following (in thousands):

					Morgans Hotel
					Group Co.		Predecessor
					February 17,		January 1,
	Year Ended		Year Ended		2006 to		2006 to
	December 31,		December 31,		December 31,		February 16,
	2008		2007		2006		2006
Severance costs		1,956		—		—		—
Loss on asset disposal		2,698		1,210		1,495		—
Development costs		6,171		2,018		122		—
	$	10,825	$	3,228	$	1,617	$	—

13. Other Non-Operating Expenses

Other non-operating expenses consist of the following (in thousands):

							Morgans Hotel
							Group Co.		Predecessor
							February 17,		January 1,
	Year Ended			Year Ended			2006 to		2006 to
	December 31,			December 31,			December 31,		February 16,
	2008			2007			2006		2006
Gain on sale of London joint venture interest (Note 5)	$	—		$	(6,058	)	$	—	$	—
Insurance proceeds (Note 11)		(2,112	)		—			—		—
Executive termination costs and severance costs		353			3,437			—		—
Litigation and settlement costs		1,806			3,925			1,456		—
Other		417			227			389		—
	$	464		$	1,531		$	1,845	$	—

F-35

14. Quarterly Financial Information (Unaudited)

The tables below reflect the Company’s selected quarterly information for the Company and the Predecessor for the years ended December 31, 2008 and 2007 (in thousands, except per share data):

	Three Months Ended
	December 31,			September 30,			June 30,			March 31,
	2008			2008			2008			2008
Total revenues	$	74,709		$	77,701		$	81,323		$	80,734
Loss before income tax expense and minority interests		(61,648	)		(15,392	)		(1,314	)		(11,144	)
Net loss		(38,640	)		(8,999	)		(731	)		(6,979	)
Net loss per share — basic/diluted	$	(1.31	)	$	(0.29	)	$	(0.02	)	$	(0.22	)
Weighted-average shares outstanding — basic and diluted		29,498			31,231			32,191			32,292

	Three Months Ended
	December 31,			September 30,			June 30,		March 31,
	2007			2007			2007		2007
Total revenues	$	89,795		$	72,098		$	82,670	$	78,422
(Loss) income before income tax expense and minority interests		(11,040	)		(17,750	)		1,557		677
Net income (loss)		(6,052	)		(10,021	)		841		436
Net income (loss) per share — basic/diluted	$	(0.18	)	$	(0.29	)	$	0.03	$	0.01
Weighted-average shares outstanding — basic & diluted		34,526			34,068			32,361		32,436

F-36

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 13, 2009.

Morgans Hotel Group Co.
By:	/s/ Fred J. Kleisner
	Name:	Fred J. Kleisner
	Title:	President and Chief Executive Officer

Date: March 13, 2009

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Fred J. Kleisner, Marc Gordon and Richard Szymanski and each of them severally, his true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his name, place and stead, in any and all capacities, to do any and all things and execute and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the United States Securities and Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below on behalf of the Registrant in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Fred J. Kleisner Fred J. Kleisner	President, Chief Executive Office and Director (Principal Executive Officer)	March 13, 2009
/s/ Richard Szymanski Richard Szymanski	Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)	March 13, 2009
/s/ David T. Hamamoto David T. Hamamoto	Chairman of the Board of Directors	March 13, 2009
/s/ Deepak Chopra Deepak Chopra	Director	March 13, 2009
/s/ Robert Friedman Robert Friedman	Director	March 13, 2009
/s/ Jeffrey M. Gault Jeffrey M. Gault	Director	March 13, 2009
/s/ Marc Gordon Marc Gordon	Director, Chief Investment Officer and Executive Vice President of Capital Markets	March 13, 2009
/s/ Thomas L. Harrison Thomas L. Harrison	Director	March 13, 2009
/s/ Edwin L. Knetzger, III Edwin L. Knetzger, III	Director	March 13, 2009
/s/ Michael D. Malone Michael D. Malone	Director	March 13, 2009
/s/ David J. Moore David J. Moore	Director	March 13, 2009

EXHIBIT INDEX

Exhibit
Number		Description
	2.1	Agreement and Plan of Merger, dated May 11, 2006, by and among Morgans Hotel Group Co., MHG HR Acquisition Corp., Hard Rock Hotel, Inc. and Peter Morton (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 17, 2006)
	2.2	First Amendment to Agreement and Plan of Merger, dated as of January 31, 2007, by and between Morgans Hotel Group Co., MHG HR Acquisition Corp., Hard Rock Hotel, Inc., (solely with respect to Section 1.6 and Section 1.8 thereof) 510 Development Corporation and (solely with respect to Section 1.7 thereof) Peter A. Morton (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 6, 2007)
	3.1	Amended and Restated Certificate of Incorporation of Morgans Hotel Group Co.(incorporated by reference to Exhibit 3.1 to Amendment No. 5 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on February 6, 2006)
	3.2	Amended and Restated By-laws of Morgans Hotel Group Co. (incorporated by reference to Exhibit 3.2 to Amendment No. 5 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on February 6, 2006)
	4.1	Specimen Certificate of Common Stock of Morgans Hotel Group Co. (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on January 17, 2006)
	4.2	Junior Subordinated Indenture, dated as of August 4, 2006, between Morgans Hotel Group Co., Morgans Group LLC and JPMorgan Chase Bank, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 11, 2006)
	4.3	Amended and Restated Trust Agreement of MHG Capital Trust I, dated as of August 4, 2006, among Morgans Group LLC, JPMorgan Chase Bank, National Association, Chase Bank USA, National Association, and the Administrative Trustees Named Therein (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 11, 2006)
	4.4	Stockholder Protection Rights Agreement, dated as of October 9, 2007, between Morgans Hotel Group Co. and Mellon Investor Services LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on October 10, 2007)
	4.5	Amendment to the Stockholder Protection Rights Agreement, dated July 25, 2008, between the Company and Mellon Investor Services LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on July 30, 2008)
	4.6	Indenture related to the Senior Subordinated Convertible Notes due 2014, dated as of October 17, 2007, by and among Morgans Hotel Group Co., Morgans Group LLC and The Bank of New York, as trustee (including form of 2.375% Senior Subordinated Convertible Note due 2014) (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on October 17, 2007)
	4.7	Registration Rights Agreement, dated as of October 17, 2007, between Morgans Hotel Group Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on October 17, 2007)
	10.1	Amended and Restated Limited Liability Company Agreement of Morgans Group LLC (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005)
	10.2	Amendment No. 1 to Amended and Restated Limited Liability Company Agreement of Morgans Group LLC, dated as of April 4, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)
	10.3	Registration Rights Agreement, dated as of February 17, 2006, by and between Morgans Hotel Group Co. and NorthStar Partnership, L.P. (incorporated by reference to Exhibit 99.9 to the Company’s Statement on Schedule 13D filed on February 27, 2006)
	10.4	Indemnification Agreement, dated as of February 17, 2006, by and among Morgans Hotel Group Co., Morgans Hotel Group LLC, NorthStar Partnership, L.P. and RSA Associates, L.P. (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005)

Exhibit
Number		Description
	10.5	Credit Agreement, dated as of October 6, 2006, by and among Morgans Group LLC, as Borrower, Beach Hotel Associates LLC, as Florida Borrower, Morgans Hotel Group Co., Wachovia Capital Markets, LLC, and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Book Runners, Wachovia Bank, National Association, as Administrative Agent, Citigroup Global Markets Inc., as Syndication Agent, and the Financial Institutions Initially Signatory Thereto and their Assignees Pursuant to Section 13.5 Thereto, as Lenders (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on October 13, 2006)
	10.6	Loan and Security Agreement, dated as of October 6, 2006, between Henry Hudson Senior Mezz LLC and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 13, 2006)
	10.7	Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing, dated October 6, 2006, between Mondrian Holdings LLC, as Borrower, and First American Title Insurance Company, as Trustee for the benefit of Wachovia Bank, National Association, as Lender (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 13, 2006)
	10.8	Agreement of Consolidation and Modification of Mortgage, Security Agreement, Assignment of Rents and Fixture Filing, dated October 6, 2006, between Henry Hudson Holdings LLC, as Borrower, and Wachovia Bank, National Association, as Lender (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 13, 2006)
	10.9	Operating Agreement of Hudson Leaseco LLC, dated as of August 28, 2000, by and between Hudson Managing Member LLC and Chevron TCI, Inc. (incorporated by reference to Exhibit 10.9 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on December 7, 2005)
	10.10	Lease, dated as of August 28, 2000, by and between Henry Hudson Holdings LLC and Hudson Leaseco LLC (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on December 7, 2005)
	10.11	Ground Lease, dated October 14, 2004, by and between Geary Hotel Holding, LLC and Clift Holdings, LLC (incorporated by reference to Exhibit 10.11 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on December 7, 2005)
	10.12	Joint Venture Agreement, dated as of February 16, 2007, by and between Royalton Europe Holdings LLC and Walton MG London Investors V, L.L.C. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 23, 2007)
	10.13	Facility Agreement, dated as of November 24, 2005, by and among Ian Schrager London Limited (to be renamed Morgans Hotel Group London Limited), Citigroup Global Markets Limited, the Financial Institutions Listed in Schedule 1 thereto and Citibank International plc (incorporated by reference to Exhibit 10.19 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on December 7, 2005)
	10.14	Lease, dated January 3, 1997, by and among Mrs. P. A. Allsopp, Messrs. M. E. R. Allsopp, W. P. Harriman and A. W. K. Merriam, and Burford (Covent Garden) Limited (incorporated by reference to Exhibit 10.12 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on December 7, 2005)
	10.15	Purchase and Sale Agreement and Joint Escrow Instructions dated May 11, 2006, by and between Morgans Group LLC and PM Realty, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 17, 2006)
	10.16	Purchase and Sale Agreement and Joint Escrow Instructions dated May 11, 2006, by and between Morgans Group LLC and Red, White and Blue Pictures, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 17, 2006)
	10.17	Purchase and Sale Agreement, dated May 11, 2006, by and between Morgans Group LLC and HR Condominium Investors (Vegas), L.L.C. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 17, 2006)
	10.18	Amended and Restated Contribution Agreement, dated December 2, 2006, by and between Morgans Hotel Group Co. and DLJ MB IV HRH, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 6, 2006)

Exhibit
Number		Description
	10.19	First Mezzanine Loan Agreement, dated as of November 6, 2007, by and among HRHH Gaming Senior Mezz, LLC, as Gaming Mezz Borrower, HRHH JV Senior Mezz, LLC, as JV Borrower, and Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
	10.20	Second Mezzanine Loan Agreement, dated as of November 6, 2007, by and HRHH Gaming Junior Mezz, LLC, as Gaming Mezz Borrower, HRHH JV Junior Mezz, LLC, as JV Borrower, and Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
	10.21	Third Mezzanine Loan Agreement, dated as of November 6, 2007, by and among HRHH Gaming Junior Mezz Two, LLC, as Gaming Mezz Borrower, and HRHH JV Junior Mezz Two, LLC, as JV Borrower, and Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
	10.22	Modification and Ratification of Guaranties, dated as of November 6, 2007, by and among Morgans Group LLC, DLJ MB IV HRH, LLC, as Guarantors, and Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
	10.23	First Mezzanine Guaranty Agreement, dated as of November 6, 2007, by Morgans Group LLC and DLJ MB IV HRH, LLC, as Guarantors, jointly and severally, for the benefit of Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
	10.24	First Mezzanine Closing Guaranty of Completion, dated as of November 6, 2007, by Morgans Group LLC and DLJ MB IV HRH, LLC, as Guarantors, jointly and severally, for the benefit of Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
	10.25	First Mezzanine Guaranty (Non-Qualified Mandatory Prepayment), dated as of November 6, 2007, by Morgans Group LLC and DLJ MB IV HRH, LLC, as Guarantors, jointly and severally, for the benefit of Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
	10.26	Second Mezzanine Guaranty Agreement, dated as of November 6, 2007, by Morgans Group LLC and DLJ MB IV HRH, LLC, as Guarantors, jointly and severally, for the benefit of Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
	10.27	Second Mezzanine Closing Guaranty of Completion, dated as of November 6, 2007, by Morgans Group LLC and DLJ MB IV HRH, LLC, as Guarantors, jointly and severally, for the benefit of Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
	10.28	Second Mezzanine Guaranty (Non-Qualified Mandatory Prepayment), dated as of November 6, 2007, by Morgans Group LLC and DLJ MB IV HRH, LLC, as Guarantors, jointly and severally, for the benefit of Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
	10.29	Third Mezzanine Guaranty Agreement, dated as of November 6, 2007, by Morgans Group LLC and DLJ MB IV HRH, LLC, as Guarantors, jointly and severally, for the benefit of Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
	10.30	Third Mezzanine Closing Guaranty of Completion, dated as of November 6, 2007, by Morgans Group LLC and DLJ MB IV HRH, LLC, as Guarantors, jointly and severally, for the benefit of Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)

Exhibit
Number		Description
	10.31	Third Mezzanine Guaranty (Non-Qualified Mandatory Prepayment), dated as of November 6, 2007, by Morgans Group LLC and DLJ MB IV HRH, LLC, as Guarantors, jointly and severally, for the benefit of Column Financial, Inc., as Lender (incorporated by reference to Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
	10.32	Joint Venture Agreement, dated as of January 3, 2006, between Morgans/LV Investment LLC and Echelon Resorts Corporation (incorporated by reference to Exhibit 10.23 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on January 17, 2006)
	10.33	First Amendment to Morgans Las Vegas, LLC Limited Liability Company Agreement, dated May 15, 2006, by and between Morgans/LV Investment LLC and Echelon Resorts Corporation (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 17, 2006)
	10.34	Second Amendment to Morgans Las Vegas, LLC Limited Liability Company Agreement, dated June 30, 2008, by and between Morgans/LV Investment LLC and Echelon Resorts Corporation (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 1, 2008)
	10.35	Third Amendment to Morgans Las Vegas, LLC Limited Liability Company Agreement, dated September 23, 2008, by and between Morgans/LV Investment LLC and Echelon Resorts Corporation (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 25, 2008)
	10.36	Letter Agreement Re: Morgans Las Vegas, LLC, dated May 15, 2006, by and between Morgans/LV Investment LLC and Echelon Resorts Corporation (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on May 17, 2006)
	10.37	Commitment Letter from Column Financial, Inc., dated May 11, 2006 (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on May 17, 2006)
	10.38	Agreement of Purchase and Sale, dated as of December 22, 2005, by and between James Hotel Scottsdale, LLC and Morgans Hotel Group LLC (incorporated by reference to Exhibit 10.21 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on January 3, 2006)
	10.39	Loan Agreement, dated as of May 19, 2006, between MHG Scottsdale Holdings LLC and Greenwich Capital Financial Products, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 25, 2006)
	10.40	Mezzanine Loan Agreement, dated as of May 19, 2006, between Mondrian Scottsdale Mezz Holding Company LLC and Greenwich Capital Financial Products, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 25, 2006)
	10.41	Purchase and Sale Agreement, dated as of August 8, 2006, between 1100 West Properties, LLC and 1100 West Realty, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)
	10.42	Operating Agreement of 1100 West Holdings, LLC dated August 8, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)
	10.43	Loan Agreement, dated as of August 8, 2006, between 1100 West Properties, LLC, the Lenders party thereto, and Eurohypo AG, New York Branch (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)
	10.44	Amended and Restated Loan Agreement, dated as of November 25, 2008, between 1100 West Properties, LLC, as borrower, and Eurohypo AG, New York Branch, as administrative agent*
	10.45	Amended and Restated Mezzanine Loan Agreement, dated as of November 25, 2008, between 1100 West Properties, LLC, as borrower, and Eurohypo AG, New York Branch, as administrative agent *
	10.46	Joint Venture Agreement, dated as of September 7, 1999, by and between Ian Schrager Hotels LLC and Chodorow Ventures LLC (incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on December 7, 2005)
	10.47	Confirmation of OTC Convertible Note Hedge, dated October 11, 2007, between Morgans Hotel Group Co. and Merrill Lynch Financial Markets, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 17, 2007)
	10.48	Confirmation of OTC Convertible Note Hedge, dated October 11, 2007, between Morgans Hotel Group Co. and Citibank, N.A. (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on October 17, 2007)

Exhibit
Number		Description
	10.49	Amended and Restated Confirmation of OTC Warrant Transaction, dated October 11, 2007, between Morgans Hotel Group Co. and Merrill Lynch Financial Markets, Inc. (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on October 17, 2007)
	10.50	Amended and Restated Confirmation of OTC Warrant Transaction, dated October 11, 2007, between Morgans Hotel Group Co. and Citibank, N.A. (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on October 17, 2007)
	10.51	Employment Agreement dated as of February 14, 2006, by and between W. Edward Scheetz and Morgans Hotel Group Co. (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005)†
	10.52	Separation Agreement and Release, dated as of September 19, 2007, between W. Edward Scheetz and Morgans Hotel Group, Inc. (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on September 20, 2007)†
	10.53	Employment Agreement, effective as of December 10, 2007, by and between Morgans Hotel Group Co. and Fred J. Kleisner (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 14, 2007)†
	10.54	Amendment No. 1 to Employment Agreement for Fred J. Kleisner, effective as of December 31, 2008, by and between Morgans Hotel Group Co. and Fred J. Kleisner (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 7, 2009)†
	10.55	Employment Agreement, dated as of February 14, 2006, by and between Marc Gordon and Morgans Hotel Group Co. (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005)†
	10.56	Amended and Restated Employment Agreement, effective as of April 1, 2008, by and between Morgans Hotel Group Co. and Marc Gordon (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 17, 2008)†
	10.57	Employment Agreement, effective as of October 1, 2007, by and between Morgans Hotel Group Co. and Richard Szymanski (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 30, 2007)†
	10.58	Amendment No. 1 to Employment Agreement for Richard Szymanski, effective as of December 31, 2008, by and between Morgans Hotel Group Co. and Richard Szymanski (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 7, 2009)†
	10.59	Morgans Hotel Group Co. Amended and Restated 2007 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 20, 2008)†
	10.60	Morgans Hotel Group Co. Annual Bonus Plan (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005)†
	10.61	Form of Morgans Hotel Group Co. RSU Award Agreement (Directors)*†
	10.62	Form of Morgans Hotel Group Co. RSU Award Agreement (Officers and Employees)*†
	10.63	Form of Morgans Hotel Group Co. Stock Option Award Agreement (Directors)*†
	10.64	Form of Morgans Hotel Group Co. Stock Option Award Agreement (Officers and Employees)*†
	10.65	Form of Morgans Hotel Group Co. LTIP Unit Vesting Agreement (Directors)*†
	10.66	Form of Morgans Hotel Group Co. LTIP Unit Vesting Agreement (Officers and Employees)*†
	14.1	Code of Ethics (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005)
	21.1	Subsidiaries of the Registrant*
	23.1	Consent of BDO Seidman, LLP*
	23.2	Consent of BDO Stoy Hayward LLP*
	24.1	Power of attorney (included on the signature page hereof)

Exhibit
Number		Description
	31.1	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
	31.2	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
	32.1	Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
	32.2	Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
	99.1	Consolidated financial statements of Morgans Hotel Group Europe Limited*
	99.2	Financial statements of SC London Limited*
	99.3	Consolidated financial statements of 1100 West Properties LLC, the entity which owns Mondrian South Beach Hotel Residences*
	99.4	Consolidated financial statements of Hard Rock Hotel Holdings, LLC (incorporated by reference to “Item 8. Financial Statements and Supplementary Data” of the Annual Report on Form 10-K of Hard Rock Hotel Holdings, LLC for the year ended December 31, 2008, filed with the Securities Exchange Commission on March 13, 2009)

*	Filed herewith.
†	Denotes a management contract or compensatory plan, contract or arrangement.

EX-10.44

Exhibit 10.44

AMENDED AND RESTATED
LOAN AGREEMENT

between

1100 West Properties, LLC,

a Delaware limited liability company

as Borrower

The Lenders Party Hereto

as Lenders

and

Eurohypo AG, New York Branch

as Administrative Agent

Date: As of November 25, 2008

TABLE OF CONTENTS

	Page
ARTICLE 1 CERTAIN DEFINITIONS		2
Section 1.1 Certain Definitions		2
Section 1.2 Types of Loans		30
ARTICLE 2 LOAN TERMS		31
Section 2.1 The Commitments, Loans and Notes		31
Section 2.2 Conversions or Continuations of Loans		32
Section 2.3 Interest Rate; Late Charge		32
Section 2.4 Terms of Payment		33
Section 2.5 Extension of Maturity Date		36
Section 2.6 Exit Fee		41
Section 2.7 Cash Management		42
Section 2.8 Payments; Pro Rata Treatment; Etc.		42
Section 2.9 Yield Protection; Etc.		46
Section 2.10 Administration Fee		51
Section 2.11 Take-Out Obligations		52
ARTICLE 3 INSURANCE, CONDEMNATION, AND IMPOUNDS		53
Section 3.1 Insurance		53
Section 3.2 Condemnation Awards		56
Section 3.3 Use and Application of Insurance Proceeds		56
Section 3.4 Disbursement of Proceeds		57
ARTICLE 4 RESERVES		60
Section 4.1 Real Estate Tax and Insurance Reserve Fund		60
Section 4.2 Seasonality Reserve Fund		61
Section 4.3 Construction Completion Fund		62
Section 4.4 Reserve Funds and Security Accounts Generally		62
ARTICLE 5 ENVIRONMENTAL MATTERS		64
Section 5.1 Certain Definitions		64
Section 5.2 Representations and Warranties on Environmental Matters		65
Section 5.3 Covenants on Environmental Matters		65
Section 5.4 Allocation of Risks and Indemnity		66
Section 5.5 No Waiver		67
ARTICLE 6 LEASING MATTERS		68
Section 6.1 Representations and Warranties on Leases		68
Section 6.2 Restaurant Lease and Future Lease		68
Section 6.3 Covenants		68

-i-

TABLE OF CONTENTS
(continued)

	Page
ARTICLE 7 REPRESENTATIONS AND WARRANTIES		68
Section 7.1 Organization and Power		68
Section 7.2 Validity of Loan Documents		68
Section 7.3 Liabilities; Litigation		69
Section 7.4 Taxes and Assessments		69
Section 7.5 Other Agreements; Defaults		69
Section 7.6 Compliance with Law		69
Section 7.7 Location of Borrower		70
Section 7.8 ERISA		70
Section 7.9 Margin Stock		70
Section 7.10 Tax Filings		70
Section 7.11 Solvency		70
Section 7.12 Full and Accurate Disclosure		70
Section 7.13 Single Purpose Entity		70
Section 7.14 Management of the Project		71
Section 7.15 No Conflicts		71
Section 7.16 Title		71
Section 7.17 Flood Zone		71
Section 7.18 Insurance		71
Section 7.19 Certificate of Occupancy; Licenses		72
Section 7.20 Physical Condition		72
Section 7.21 Boundaries		72
Section 7.22 Material Agreements		72
Section 7.23 Construction Budget		73
Section 7.24 Filing and Recording Taxes		73
Section 7.25 Investment Company Act		73
Section 7.26 Patriot Act; Foreign Assets Control Regulations		74
Section 7.27 Organizational Structure		74
Section 7.28 Property Specific Representations		74
ARTICLE 8 FINANCIAL REPORTING		75
Section 8.1 Financial Statements		75
Section 8.2 Accounting Principles		77
Section 8.3 Other Information		77
Section 8.4 Annual Operating Budget		77
Section 8.5 Audits		77
Section 8.6 Access		78

-ii-

TABLE OF CONTENTS
(continued)

	Page
ARTICLE 9 COVENANTS		78
Section 9.1 Due on Sale and Encumbrance; Transfers of Interests		78
Section 9.2 Taxes; Charges		80
Section 9.3 Control; Management		80
Section 9.4 Operation; Maintenance; Inspection		80
Section 9.5 Taxes on Security		81
Section 9.6 Legal Existence; Name, Etc.		81
Section 9.7 Affiliate Transactions		81
Section 9.8 Limitation on Other Debt		82
Section 9.9 Further Assurances		82
Section 9.10 Estoppel Certificates		82
Section 9.11 Notice of Certain Events		82
Section 9.12 Indemnification		83
Section 9.13 Size of Units		83
Section 9.14 Minimum Sales Prices		83
Section 9.15 Hedge Agreements		83
Section 9.16 No Distributions		85
Section 9.17 Condominium Covenants		85
Section 9.18 Patriot Act Compliance; Foreign Assets Control Regulations		86
Section 9.19 Payment for Labor and Materials		87
Section 9.20 Hotel Management Agreement		88
Section 9.21 Americans with Disabilities		88
Section 9.22 Zoning		89
Section 9.23 ERISA		89
Section 9.24 Property Specific Covenants		89
Section 9.25 Construction Management Contract		90
ARTICLE 10 EVENTS OF DEFAULT		90
Section 10.1 Payments		90
Section 10.2 Insurance		90
Section 10.3 Single Purpose Entity		90
Section 10.4 Taxes		90
Section 10.5 Sale, Encumbrance, Etc.; Change of Control		90
Section 10.6 Representations and Warranties		90
Section 10.7 Other Encumbrances		91
Section 10.8 Various Covenants		91
Section 10.9 Involuntary Bankruptcy or Other Proceeding		91
Section 10.10 Voluntary Petitions, Etc.		91
Section 10.11 Indebtedness		91
Section 10.12 Dissolution		91
Section 10.13 Judgments		92
Section 10.14 Security		92
Section 10.15 Guarantees		92
Section 10.16 Security Accounts		92
Section 10.17 Hedge Agreement		92
Section 10.18 Junior Loan Intercreditor Agreement		92
Section 10.19 Covenants		92

-iii-

TABLE OF CONTENTS
(continued)

	Page
ARTICLE 11 REMEDIES		93
Section 11.1 Remedies — Insolvency Events		93
Section 11.2 Remedies — Other Events		93
Section 11.3 Administrative Agent’s Right to Perform the Obligations		93
ARTICLE 12 MISCELLANEOUS		94
Section 12.1 Notices		94
Section 12.2 Amendments, Waivers, Etc		94
Section 12.3 Limitation on Interest		95
Section 12.4 Invalid Provisions		96
Section 12.5 Reimbursement of Expenses		96
Section 12.6 Approvals; Third Parties; Conditions		97
Section 12.7 Lenders and Administrative Agent Not in Control; No Partnership		97
Section 12.8 Time of the Essence		97
Section 12.9 Successors and Assigns		97
Section 12.10 Renewal, Extension or Rearrangement		98
Section 12.11 Waivers		98
Section 12.12 Cumulative Rights		98
Section 12.13 Singular and Plural		98
Section 12.14 Phrases		98
Section 12.15 Exhibits and Schedules		98
Section 12.16 Titles of Articles, Sections and Subsections		98
Section 12.17 Promotional Material		99
Section 12.18 Survival		99
Section 12.19 WAIVER OF JURY TRIAL		99
Section 12.20 Remedies of Borrower		100
Section 12.21 GOVERNING LAW		100
Section 12.22 Entire Agreement		101
Section 12.23 Counterparts		101
Section 12.24 Assignments and Participations		101
Section 12.25 Brokers		103
Section 12.26 Right of Setoff		104
Section 12.27 Cooperation with Syndication; Componentization		104

-iv-

TABLE OF CONTENTS
(continued)

	Page
ARTICLE 13 LIMITATIONS ON LIABILITY		106
Section 13.1 Limitation on Liability		106
Section 13.2 Limitation on Liability of the Administrative Agent’s and the Lenders’ Officers, Employees, etc		107
ARTICLE 14 BUILDING CONVERSION; SALE OF UNITS		107
Section 14.1 Completion of Building Conversion		107
Section 14.2 Marketing and Sales Program; Sales of Units; Deposits		109
Section 14.3 Partial Release of Units		109
Section 14.4 Application of Excess Cash Flow		110
Section 14.5 Sale of Parking Spaces		111
Section 14.6 Seller Financing Collateral		112
ARTICLE 15 THE ADMINISTRATIVE AGENT		113
Section 15.1 Appointment, Powers and Immunities		113
Section 15.2 Reliance by Administrative Agent		114
Section 15.3 Defaults		114
Section 15.4 Rights as a Lender		116
Section 15.5 Standard of Care; Indemnification		117
Section 15.6 Non Reliance on Administrative Agent and Other Lenders		117
Section 15.7 Failure to Act		117
Section 15.8 Resignation of Administrative Agent		118
Section 15.9 Consents under Loan Documents		118
Section 15.10 Authorization		118
Section 15.11 Reserved		119
Section 15.12 Defaulting Lenders		119
Section 15.13 Liability of the Administrative Agent		120
Section 15.14 Transfer of Agency Function		120
ARTICLE 16 AMENDMENT AND RESTATEMENT		120
ARTICLE 17 RELEASE		120

-v-

LIST OF EXHIBITS AND SCHEDULES

EXHIBIT A — LEGAL DESCRIPTION OF PROJECT

EXHIBIT B — RESERVED

EXHIBIT C — FORM OF NOTE

EXHIBIT D — FORM OF ASSIGNMENT AND ACCEPTANCE

EXHIBIT E — FORM OF NOTICE OF CONVERSION/CONTINUATION

SCHEDULE 1(a) — COMMITMENTS

SCHEDULE 1(b) — MINIMUM SALES PRICE SCHEDULE

SCHEDULE 1(c) — UNIT RELEASE SCHEDULE

SCHEDULE 2.1 — DISBURSEMENT AND COMPLETION CONDITIONS

SCHEDULE 2.4(1) — WIRE INSTRUCTIONS

SCHEDULE 7.19 — LICENSES

SCHEDULE 7.23 — PROJECT BUDGET

SCHEDULE 7.27 — ORGANIZATIONAL CHART

-vi-

AMENDED AND RESTATED LOAN AGREEMENT

This Amended and Restated Loan Agreement (this “Agreement”) is entered into as of November 25, 2008, among 1100 WEST PROPERTIES, LLC, a limited liability company duly organized and validly existing under the laws of the State of Delaware (“Borrower”); each of the lenders that is a signatory hereto identified under the caption “LENDERS” on the signature pages hereof and each lender that becomes a “Lender” after the date hereof pursuant to Section 12.24(2) (individually, a “Lender” and, collectively, the “Lenders”); and EUROHYPO AG, NEW YORK BRANCH (“Eurohypo”), as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the “Administrative Agent”).

RECITALS

A. Borrower, Eurohypo (as the Administrative Agent and Lender), CIT Lending Services Corporation, a Delaware corporation (“CIT”), as a Lender, and KBC Bank NV (“KBC Bank”), as Lender, are parties (or successors parties) to a Loan Agreement dated as of August 8, 2006, as amended by that certain First Amendment to Loan Agreement dated as of September 6, 2007, and that certain Second Amendment to Loan Agreement dated as of April 25, 2008 (the “Existing Loan Agreement”), which provides for, among other things, loans by the Lenders to Borrower in an aggregate principal or face amount not exceeding $124,000,000 (the “Loans” or “Existing Loans”).

B. Sole Member (as defined below) and Eurohypo, as a lender and as administrative agent (in such capacities, together with Eurohypo’s successors and assigns in each such capacity, “Existing Mezzanine Lender”), are parties to that certain Mezzanine Loan Agreement dated as of April 25, 2008 (the “Original Existing Mezzanine Loan Agreement”), which provides for, among other things, a mezzanine loan to Sole Member in an aggregate principal or face amount not exceeding $28,000,000 (the “Existing Mezzanine Loan”).

C. On the date hereof, Sole Member and Existing Mezzanine Lender are entering into that certain Amended and Restated Mezzanine Loan Agreement dated as of the date hereof, which amends, restates, supersedes and replaces the Original Existing Mezzanine Loan Agreement (as the same may be amended, modified and supplemented and in effect from time to time, the “Existing Mezzanine Loan Agreement”).

D. Additional funds are required to complete the Building Conversion (as defined below) and cause Construction Completion (as defined below) to occur and certain affiliates of Borrower and Sole Member are ready to provide such funds through a combination of additional equity investments in Borrower and the making of the Junior Mezzanine Loan (as defined below).

E. Borrower, the Lenders and the Administrative Agent desire to amend, restate and supersede the Existing Loan Agreement with this Agreement. As of the date hereof, the principal balance of the Loans is $84,080,399.11 and the amount of the Commitments have been fully funded.

1

AGREEMENT

ARTICLE 1

CERTAIN DEFINITIONS

Section 1.1 Certain Definitions. As used herein, the following terms have the meanings indicated:

(1) “Acceptable Counterparty” shall mean (1) Eurohypo and/or its Affiliates, or (2) any other counterparty to the Hedge Agreement that has and shall maintain, until the expiration of the applicable Hedge Agreement, a credit rating of not less than ‘A’ from S&P.

(2) “Access Laws” has the meaning assigned in Section 9.21(1).

(3) “Additional Costs” has the meaning assigned in Section 2.9(1)(a).

(4) “Adjusted LIBOR Rate” means, for any Interest Period for any Eurodollar Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/1000 of 1%) determined by the Administrative Agent to be equal to the LIBOR Rate for such Interest Period divided by one (1) minus the Reserve Requirement (if any) for such Interest Period.

(5) “Adjusted Operating Expenses” means Operating Expenses as determined and adjusted by the Administrative Agent in accordance with its then current audit policies and procedures.

(6) “Adjusted Operating Revenues” means Operating Revenues as determined and adjusted by the Administrative Agent in accordance with its then current audit policies and procedures.

(7) “Administration Fee” has the meaning assigned in Section 2.10.

(8) “Advance Conditions” means those conditions listed in Schedule 2.1 attached hereto and made a part hereof.

(9) “Advance Date” has the meaning assigned in Section 2.8(6).

(10) “Advanced Amount” has the meaning assigned in Section 15.12(2).

(11) “Affiliate” means with respect to any Person, another Person that directly or indirectly Controls, or is under common Control with, or is Controlled by, such Person and, if such Person is an individual, any member of the immediate family (including parents, spouse, children and siblings) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is Controlled by any such member or trust. For purposes of this definition, any Person that owns directly or indirectly securities having ten percent (10%) or more of the voting power for the election of directors or other governing body of a corporation or thirty-five percent (35%) or more of the partnership, membership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to Control such corporation or other Person. Notwithstanding the foregoing, no individual shall be an Affiliate solely by reason of his or her being a director, officer, trustee or employee of Borrower.

2

(12) “Agreement” means this Amended and Restated Loan Agreement, as amended from time to time.

(13) “Amendment Closing Date” means the date hereof.

(14) “Annual Operating Budget” has the meaning assigned in Section 8.4.

(15) “Anti-Terrorism Order” means Executive Order No. 13,224, 66 Fed. Reg. 49,079 (2001), issued by the President of the United States of America (Executive Order Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism).

(16) “Applicable Law” means collectively, all international, foreign, Federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any governmental authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authority, in each case whether or not having the force of law.

(17) “Applicable Lending Office” means, for each Lender and for each Type of Loan, the “Lending Office” of such Lender (or of an affiliate of such Lender) designated for such Type of Loan on the respective signature pages hereof or such other office of such Lender (or of an affiliate of such Lender) as such Lender may from time to time specify to the Administrative Agent and Borrower as the office by which its Loans of such Type are to be made and maintained.

(18) “Applicable Margin” has the meanings set forth in the Notes.

(19) “Appraisal” means an appraisal of the Project prepared by an appraiser reasonably satisfactory to the Administrative Agent, which appraisal must also (a) satisfy the requirements of Title XI of the Federal Institution Reform, Recovery and Enforcement Act of 1989 and the regulations promulgated thereunder (including the appraiser with respect thereto) and (b) be otherwise in form and substance reasonably satisfactory to the Administrative Agent.

(20) “Approved Fund” means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business and that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

(21) “Approved Mezzanine Loans” means, collectively, the Existing Mezzanine Loan and the Junior Mezzanine Loan.

3

(22) “Approved Sales Program” has the meaning assigned in Section 14.2.

(23) “Arranger” means Eurohypo AG, New York branch.

(24) “Assignment and Acceptance” means an Assignment and Acceptance, duly executed by the parties thereto, in substantially the form of Exhibit D hereto and consented to by the Administrative Agent in accordance with Section 12.24(2).

(25) “Assignment of Construction Management Contract and Consent to Assignment” means that certain Assignment of Construction Management Contract dated as of the date hereof made by Borrower for the benefit of the Administrative Agent (on behalf of the Lenders) and that certain Consent and Agreement of Construction Manager dated as of the date hereof made by Construction Manager in favor of the Administrative Agent (on behalf of the Lenders).

(26) “Assignment of Contracts” means that certain Collateral Assignment of Contracts, Development Rights, Licenses, Permits, Warranties and Guaranties executed by Borrower for the benefit of the Administrative Agent (on behalf of the Lenders) of even date, as the same may be modified, amended and/or supplemented from time to time.

(27) “Assignment of Rents and Leases” means the Assignment of Rents and Leases, executed by Borrower for the benefit of the Administrative Agent (on behalf of the Lenders), and pertaining to leases of space in the Project, as the same may be modified, amended and/or supplemented from time to time.

(28) “Association” means the association to be formed pursuant to the Declaration.

(29) “Authorized Officer” means with respect to Borrower or Sole Member, an officer of Sanctuary Management who has knowledge of the financial affairs of Borrower or Sole Member and with respect to Morgans LLC an officer who holds the title of controller or chief financial officer or an equivalent title.

(30) “Bankruptcy Code” means Title 11 of the United States Code, 11 U.S.C. § 101 et seq., as amended from time to time.

(31) “Bankruptcy Party” has the meaning assigned in Section 10.9.

(32) “Base Rate” means, for any day, a rate per annum equal to the Prime Rate for such day. Each change in any interest rate provided for herein based upon the Base Rate resulting from a change in the Base Rate shall take effect at the time of such change in the Base Rate.

(33) “Base Rate Loans” means Loans that bear interest at rates based upon the Base Rate.

(34) “Basel II” means that certain revised at-risk capital framework published by the Basel Committee on Banking Supervision in its paper entitled “International Convergence of Capital Measurement and Capital Standards: a Revised Framework” in June, 2004, as amended, modified and in effect from time to time.

4

(35) “Boat Slip” or “Boat Slips” means any one or more of the boat slips located adjacent to, and comprising a part of, the Project.

(36) “Borrower Party” means any Joinder Party, any Guarantor and the Sole Member.

(37) “Broker” has the meaning assigned in Section 12.25.

(38) “Building Conversion” means the conversion of the Project from a rental building to a hotel condominium building in accordance with, and as contemplated by, the Project Budget, the Plans and Specifications and the terms of this Agreement.

(39) “Business Day” means (a) any day other than a Saturday, a Sunday, or other day on which commercial banks located in New York City are authorized or required by Applicable Law to remain closed and (b) in connection with a borrowing of, a payment or prepayment of principal of or interest on, a Conversion of or into, or an Interest Period for, a Eurodollar Loan or a notice by Borrower with respect to any such borrowing, payment, prepayment or Conversion, the term “Business Day” shall also exclude a day on which banks are not open for dealings in Dollar deposits in the London interbank market.

(40) “Cash Management Account” has the meaning assigned in the Cash Management Agreement.

(41) “Cash Management Agreement” means that certain Second Amended and Restated Cash Management and Security Agreement executed, dated and delivered by Borrower, the Administrative Agent (on behalf of the Lenders) and the Depository Bank on or about the Amendment Closing Date, as the same may be modified, amended and/or supplemented from time to time.

(42) “Casualty/Taking Account” has the meaning assigned to such term in the Cash Management Agreement.

5

(43) “Change of Control” means: (a) any event, including, without limitation, the sale, transfer, issuance, assignment, pledge or encumbrance in one or more transactions, of any direct or indirect beneficial ownership interests in the Borrower, which results in (i) any Person, other than Sole Member, owning or encumbering any of the membership interests in, or rights to distributions from, Borrower; (ii) any Person other than the Sole Member having the responsibility for managing and administering the day-to-day business and affairs of, or otherwise Controlling, the Borrower, (iii) any Person other than MMI or Sanctuary West, owning or encumbering any of the membership interests in, or rights to distributions from, Sole Member, or (iv) any Person other than MMI or Sanctuary West Avenue, LLC having the responsibility for managing and administering the day-to-day business and affairs of, or otherwise Controlling, the Sole Member; or (b) Morgans Public no longer directly or indirectly (i) owning (free of any encumbrance) at least 51% of the ownership interests in and rights to distributions from the MMI and owning at least 51% of the ownership interests in and rights to distributions from the Morgans LLC, (ii) having responsibility for managing and administering the day-to-day business and affairs of MMI or Morgans LLC, or (iii) in any other respects, any Person other than Morgans Public directly or indirectly Controlling MMI or Morgans LLC; or (c) Galbut or members of his immediate family (including parents, spouse, children and siblings) no longer directly or indirectly (i) owning at least 51% of the ownership interests in and rights to distributions from Sanctuary Avenue, Sanctuary Holdings or Sanctuary Management, (ii) having responsibility for managing and administering the day-to-day business and affairs of Sanctuary Avenue, Sanctuary Holdings or Sanctuary Management, or (iii) in any other respects, any Person other than Galbut directly or indirectly Controlling Sanctuary Avenue, Sanctuary Holdings or Sanctuary Management. A “Change of Control” shall not be deemed to have occurred solely as a result of (w) the transfer of membership interests in Sole Member between MMI and Sanctuary West, so long as MMI and/or Sanctuary West continue to own 100% of the membership interests in Sole Member and to Control Sole Member; (x) transfers of ownership interests Morgans Public; or (y) transfers by Galbut of ownership interests in Sanctuary Avenue, Sanctuary Holdings or Sanctuary Management for estate planning purposes to family members of Galbut or one or more trusts of the benefit of such immediate family members, provided that after giving effect to such transfer Galbut shall continue to have responsibility for managing and administering the day-to-day business and affairs of, and otherwise continue to Control, Sanctuary Avenue, Sanctuary Holdings or Sanctuary Management; or (z) as a result of Galbut’s passing away, he no longer Controls Sanctuary Avenue, Sanctuary Holdings or Sanctuary Management, so long as Menin, Daniel Galbut, Frohlich or the personal representative of the estate of Galbut Controls Sanctuary Avenue, Sanctuary Holdings and Sanctuary Management.

(44) “CIT” has the meaning assigned in the Recitals.

(45) “Clearing Account” has the meaning assigned in the Clearing Account Agreement.

(46) “Clearing Account Agreement” means the Clearing Account Agreement among Borrower, the Administrative Agent and the Clearing Bank pertaining to the Clearing Account, as the same may be modified, amended and/or supplemented and in effect from time to time.

(47) “Clearing Bank” has the meaning assigned to such term in the Clearing Account Agreement.

(48) “Code” means the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder.

6

(49) “Commitment” means, as to each Lender, the obligation of such Lender to make a Loan in a principal amount up to but not exceeding the amount set opposite the name of such Lender on Schedule 1(a) under the caption “Commitment” or, in the case of a Person that becomes a Lender pursuant to an assignment permitted under Section 12.24(2), as specified in the respective instrument of assignment pursuant to which such assignment is effected. As of the date hereof, the amount of the Commitments have been fully funded.

(50) “Completion Guaranty” means that certain Second Amended and Restated Completion Guaranty executed by Galbut, Frohlich, Menin and Morgans LLC in favor of the Administrative Agent (on behalf of the Lenders) as the same may be modified, amended, and/or supplemented and in effect from time to time.

(51) “Condominium Act” means Chapter 718 of the Florida Statutes, as amended.

(52) “Condominium Escrow” means that certain condominium escrow held pursuant to the Condominium Escrow Agreement.

(53) “Condominium Escrow Agreement” means the condominium escrow agreement between Borrower and Escrow Agent, approved by the Administrative Agent in writing.

(54) “Constituent Documents” means (a) the Public Offering Statement submitted and approved pursuant to the Condominium Act; (b) the Declaration; and (c) the articles of incorporation and by-laws of the Association.

(55) “Construction Completion” means the satisfaction of all of the conditions set forth on Part B of Schedule 2.1 as required pursuant to the terms of this Agreement.

(56) “Construction Completion Account” has the meaning assigned in the Cash Management Agreement.

(57) “Construction Completion Deadline” means April 1, 2009.

(58) “Construction Completion Fund” has the meaning assigned in Section 4.3(1).

(59) “Construction Consultant” has the meaning assigned in Section 8.3.

(60) “Construction Management Contract” means the contract for the management of construction of the Improvements dated as of July 9, 2007, entered into between Borrower and the Construction Manager, as the same may be modified, supplemented and/or amended from time to time in accordance with the terms of this Agreement.

(61) “Construction Manager” means G.T. Construction and Development, Inc.

(62) “Continue” “Continuation” and “Continued” refer to the continuation pursuant to Section 2.2 of (a) a Eurodollar Loan from one Interest Period to the next Interest Period or (b) a Base Rate Loan at the Base Rate.

(63) “Contract Price” means the Purchase Price of a Unit as set forth in a Qualified Purchase Contract (net of any credits to the purchaser), not including any amounts for any build-out or improvements in excess of Standard Unit Finish.

7

(64) “Control” of one Person (the “controlled Person”) by another Person (the “controlling Person”) means the possession, directly or indirectly, by the controlling Person of the power or ability to direct or cause the direction of the management or policies of the controlled Person, whether through the ability to exercise voting power, by contract or otherwise (“Controlled” and “Controlling” each have the meanings correlative thereto).

(65) “Convert” “Conversion” and “Converted” means, with respect to any Type of Loan, a conversion pursuant to the terms of this Agreement of one Type of Loans into another Type of Loans, which may be accompanied by the transfer by a Lender (at its sole discretion) of a Loan from one Applicable Lending Office to another.

(66) “Debt” means, for any Person, without duplication: (a) 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, (b) 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 under the credit facility, (c) all amounts required to be paid by such Person as a guaranteed payment to partners, members (or other equity holders) or a preferred or special dividend, including any mandatory redemption of shares or interests, (d) all indebtedness guaranteed by such Person, directly or indirectly, (e) all obligations under leases that constitute capital leases for which such Person is liable, and (f) 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.

(1) “Debt Service” means, for any period of determination, the aggregate interest due with respect to the Loans and/or the Existing Mezzanine Loan, as the context so requires, during such period.

(2) “Debt Service Subaccount” has the meaning assigned in the Cash Management Agreement.

(67) “Debt Service Coverage Ratio” means, as of any date of determination, the ratio of Net Operating Income to Debt Service for the twelve (12) calendar months ending immediately prior to the date of such determination. The Debt Service Coverage Ratio shall be as determined by the Administrative Agent based upon the most recent reports required to have been submitted by Borrower under Section 8.1 (or, if no such reports have been so submitted, such other information as Administrative Agent shall determine in its discretion), which determination shall be conclusive in the absence of manifest error.

(68) “Declarant” has the meaning assigned in Section 9.17(5).

(69) “Declaration” means that certain Declaration of Condominium for Mirador 1000, dated December 30, 2004 and recorded in the Clerk of the Court, Miami-Dade County, Florida, on December 30, 2004 in OR Book 22959 at Page 1727.

8

(70) “Default Rate” means a rate per annum equal to five percent (5%) plus the Base Rate as in effect from time to time plus the Applicable Margin for Base Rate Loans, provided that, with respect to principal of a Eurodollar Loan, the “Default Rate” shall be the greater of (a) five percent (5%) plus the interest rate for such Loan as provided in Section 2.3 and (b) the rate provided for above in this definition; provided, however, that in no event shall the Default Rate exceed the maximum rate allowed by Applicable Law.

(71) “Defaulting Lender” has the meaning assigned in Section 15.12(1).

(72) “Deficiency Deposit” has the meaning assigned in Section 14.1(3).

(73) “Depository Bank” has the meaning assigned to such term in the Cash Management Agreement.

(74) “Distribution” means, other than payments which are expressly permitted to be made pursuant to this Agreement, any of the following: (a) the payment by any Person of any Distributions or other payments to its shareholders, members or partners; (b) the declaration or payment of any dividend on or in respect of shares of any class of capital stock of, membership interest in, or partnership interest in, any Person; (c) the purchase or other retirement of any shares of any class of capital stock of, membership interest in, or partnership interest in, any Person, directly or indirectly through a subsidiary or otherwise; (d) the return of capital by any Person to its shareholders, members, or partners; or (e) any other payment on or in respect of any shares of any class of capital stock of, membership interest in, or partnership interest in, any Person.

(75) “Dollars” and “$” means lawful money of the United States of America.

(76) “Eligibility Requirements” means, with respect to any Person, that such Person (a) (i) has total assets (in name or under management) in excess of $400,000,000 and (except with respect to a pension advisory firm or similar fiduciary) capital/statutory surplus or shareholders’ equity of $250,000,000, or (ii) is otherwise approved in writing by Eurohypo (which approval shall not be unreasonably withheld); and (b) is regularly engaged in the business of making or owning commercial real estate loans (including mezzanine loans and participation interests in commercial real estate loans) or operating commercial properties.

(77) “Eligible Assignee” means any of (a) a commercial bank organized under the laws of the United States, or any State thereof, and having (i) total assets in excess of $1,000,000,000 and (ii) a combined capital and surplus of at least $250,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization of Economic Cooperation and Development (“OECD”), or a political subdivision of any such country, and having (i) total assets in excess of $1,000,000,000 and (ii) a combined capital and surplus of at least $250,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of OECD; (c) a life insurance company organized under the laws of any State of the United States, or organized under the laws of any country and licensed as a life insurer by any State within the United States and having admitted assets of at least $1,000,000,000; (d) a nationally recognized investment banking company or other financial institution in the business of making loans, or an Affiliate thereof (other than any Person which is directly or indirectly a Borrower Party or directly or indirectly an Affiliate of any Borrower Party) organized under the laws of any State of the United States, and licensed or qualified to conduct such business under the laws of any such State and having (i) total assets of at least $1,000,000,000 and (ii) a net worth of at least $250,000,000; (e) an Approved Fund; or (f) or a Related Entity of Eurohypo.

9

(78) “Environmental Claim” has the meaning assigned in Section 5.1(1).

(79) “Environmental Laws” has the meaning assigned in Section 5.1(2).

(80) “Environmental Liens” has the meaning assigned in Section 5.3(4).

(81) “Environmental Losses” has the meaning assigned in Section 5.1(4).

(82) “Equity Balancing Contribution” has the meaning assigned in Section 14.1(3).

(83) “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time and any regulations promulgated thereunder.

(84) “Escrow Agent” means an escrow agent as may be reasonably approved by Administrative Agent.

(85) “Eurodollar Loan” means Loans that bear interest at rates based on rates referred to in the definition of “LIBOR Rate”.

(86) “Eurohypo” means Eurohypo AG, New York Branch.

(87) “Event of Default” has the meaning assigned in Article 10.

(88) “Excess Cash Flow” means, with respect to the applicable Unit, the Net Sales Proceeds less the Scheduled Release Price.

(89) “Existing Loans” has the meaning assigned in the Recitals.

(90) “Existing Loan Agreement” has the meaning assigned in the Recitals.

(91) “Existing Mezzanine Lender” has the meaning assigned in the Recitals.

(92) “Existing Mezzanine Loan” has the meaning assigned in the Recitals.

(93) “Existing Mezzanine Loan Agreement” has the meaning assigned in the Recitals.

(94) “Exit Fee” means a fee payable by Borrower to Administrative Agent (for the benefit of the Lenders) in an amount equal to one and one-quarter percent (1.25%) of the full amount of the Commitments evidenced by Note B, including any portion of the Commitments acquired by Eurohypo pursuant to Section 2.11.

(95) “FNMA” means the Federal National Mortgage Association.

10

(96) “Fifth Extension Notice” has the meaning assigned to such term in Section 2.5(5)(a).

(97) “Fifth Extension Period” has the meaning assigned to such term in Section 2.5(5).

(98) “First Extension Notice” has the meaning assigned to such term in Section 2.5(1)(a).

(99) “First Extension Period” has the meaning assigned to such term in Section 2.5(1).

(100) “Forward Purchase Contract” means that certain Agreement for Purchase of Condominium Units and related Amended and Restated Rider, each dated as of April 25, 2008, by and among Borrower, as seller and/or developer, and Abraham Galbut, Frohlich, Menin and Morgans, individually and collectively, as buyers and/or purchasers.

(101) “Fourth Extension Notice” has the meaning assigned to such term in Section 2.5(4)(a).

(102) “Fourth Extension Period” has the meaning assigned to such term in Section 2.5(4).

(103) “Franchise Fee” means the franchise fee payable to Hotel Manager as hotel operator upon the sale of a Unit, which shall be in the amount of one percent (1%) of the Purchase Price of such Unit up to that portion of the gross sales price attributable to a gross sales price of $800 per square foot, and ten percent (10%) of the Units’ gross sales price attributable to a sales price greater than $800 per square foot.

(104) “Frohlich” means Seth Frohlich, an individual.

(105) “Galbut” means Abraham Galbut, an individual.

(106) “Government Lists” means (a) the Specially Designated Nationals and Blocked Persons List maintained by OFAC, (b) any other list of terrorists, terrorist organizations or narcotics traffickers maintained pursuant to any of the Rules and Regulations of OFAC that is included in “Governmental Lists”, or (c) any similar list maintained by the United States Department of State, the United States Department of Commerce or any other Governmental Authority or pursuant to any Executive Order of the President of the United States of America.

(107) “Guarantee” or “Guaranty” means any instruments of guaranty (including the Joinder and the Completion Guarantee) delivered to the Administrative Agent (for the benefit of the Lenders) in connection with the Loans.

(108) “Guarantor” or “Guarantors” mean the Persons, including the Joinder Parties, executing a Guarantee.

(109) “Hazardous Materials” has the meaning assigned in Section 5.1(5).

11

(110) “Hazardous Substances Indemnity Agreement” means that certain Hazardous Substances Indemnity Agreement by Borrower and Joinder Parties in favor of the Administrative Agent and each of the Lenders, to be executed, dated and delivered to the Administrative Agent (on behalf of the Lenders) on the Original Closing Date, as the same may be modified, amended and/or supplemented and in effect from time to time.

(111) “Hedge Agreement” shall mean an interest rate cap with a maturity date of the initial Maturity Date entered into with an Acceptable Counterparty with a notional amount equal to the outstanding principal balance of the Loans for the term of the Loan and a LIBOR strike price not greater than five percent (5%). Furthermore, each Hedge Agreement shall provide for (i) the calculation of interest, (ii) the determination of the interest rate, (iii) the modification of the Interest Period, and (iv) the distribution of payments thereunder to be identical to the definition of Interest Period set forth herein.

(112) “Hedge Agreement Pledge” means that certain Assignment, Pledge and Security Agreement, to be executed, dated and delivered by Borrower and Acceptable Counterparty to the Administrative Agent (on behalf of the Lenders) in accordance with Section 9.15 and at any other time Borrower elects or is required to enter into a Hedge Agreement, covering Borrower’s right, title and interest in and to any such Hedge Agreement, as the same may be modified, amended and/or supplemented and in effect from time to time.

(113) “Hotel Improvements” means that portion of the Improvements consisting of a 335-room luxury hotel to be known as “Mondrian South Beach Hotel Residences,” consisting of a restaurant, a sunset bar, a swimming pool, a gym, a spa, the Boat Slips, on-site parking areas, and related amenities and improvements.

(114) “Hotel Management Agreement” means that certain Hotel Management Agreement dated as of August 7, 2006, between the Hotel Manager and Borrower with respect to the management of the Project as a hotel, as the same may from time to time hereafter be modified, amended or replaced in accordance with the terms of this Agreement.

(115) “Hotel Manager” means Morgans Hotel Group Management LLC, a Delaware limited liability company, or another hotel manager acceptable to the Administrative Agent.

(116) “Hotel Manager’s Consent” means the Hotel Manager’s Consent and Subordination Agreement executed, dated and delivered by (i) the Hotel Manager and Borrower to the Administrative Agent (on behalf of the Lenders) on the Original Closing Date and (ii) any successor Hotel Manager to Administrative Agent (on behalf of Lenders) prior to its appointment as Hotel Manager, as the same may be modified, amended and/or supplemented and in effect from time to time.

(117) “Hotel Opening” means that the Hotel Improvements are open for business with the public in compliance with the all Applicable Law and the majority of Units have been completed and are ready for occupancy.

(118) “Hotel Opening Deadline” means January 1, 2009.

12

(119) “Improvements” has the meaning assigned in the Mortgage.

(120) “Indemnified Party” has the meaning assigned in Section 9.12.

(121) “Initial Take-Out Amount” means the lesser of (a) $35,000,000.00; and (b) the aggregate outstanding principal balance of Note A at the time the Initial Take-Out Amount is required to be paid to the Note A Holders by Eurohypo pursuant to the Take-Out Agreement.

(122) “Initial Take-Out Interest” means the interest in Note A acquired by Eurohypo upon payment of the Initial Take-Out Amount to the Note A Holders pursuant to the Take-Out Agreement.

(123) “Initial Take-Out Right” has the meaning assigned in Section 2.11(1).

(124) “Insurance Proceeds Deficiency” has the meaning assigned in Section 3.4(5).

(125) “Interest Holdback” means that undisbursed portion of the Existing Mezzanine Loan as of the Amendment Closing Date, equal to $1,953,629.58, which has been allocated under the Existing Mezzanine Loan Agreement, for the sole purpose of paying Debt Service on the Loans and the Existing Mezzanine Loan due and accruing on, and subsequent to, the Amendment Closing Date.

(126) “Interest Period” means, with respect to any Eurodollar Loan, each period commencing on the date such Eurodollar Loan is made or Converted from a Base Rate Loan or (in the event of a Continuation) the last day of the immediately preceding Interest Period for such Loan and ending on the numerically corresponding day fourteen (14) days thereafter or in the first, second, third or sixth calendar month thereafter, as Borrower may select as provided in Section 2.8(5); provided that (a) each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month; (b) each Interest Period that would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next succeeding calendar month, on the immediately preceding Business Day); (c) except for an Interest Period having a duration of fourteen (14) days, no Interest Period shall have a duration of less than one month and, if the Interest Period for any Eurodollar Loan would otherwise be a shorter period, such Loan shall bear interest at the Base Rate plus the Applicable Margin for Base Rate Loans; (d) in no event shall any Interest Period extend beyond the Maturity Date; and (e) there may be no more than five (5) separate Interest Periods in respect of Eurodollar Loans outstanding from each Lender at any one time.

(127) “Involuntary Proceeding” has the meaning assigned in Section 10.9.

(128) “Joinder” means the Joinder attached hereto.

(129) “Joinder Party” means the Persons executing the Joinder.

13

(130) “Junior Loan Intercreditor Agreement” means that certain Subordination and Standstill Agreement dated as of the date hereof, by and among Borrower, Sole Member, Junior Mezzanine Borrower, Existing Mezzanine Lender, Junior Mezzanine Lender and the Administrative Agent, on behalf of the Lenders.

(131) “Junior Mezzanine Borrower” means 1100 West Holdings II, LLC, a Delaware limited liability company.

(132) “Junior Mezzanine Lender” means RMF Capital LLC, a Delaware limited liability company, and any assignee of RMF Capital LLC permitted under the Junior Loan Intercreditor Agreement, each in its capacity as the lender under the Junior Mezzanine Loan.

(133) “Junior Mezzanine Loan” means a loan to Junior Mezzanine Borrower in the original principal amount of at least $22,500,000 (inclusive of the sum of $16,500,000, which has been funded as of the date hereof), made pursuant to that certain Mezzanine Loan Agreement dated as of the date hereof by and between Junior Mezzanine Borrower, as borrower, and Junior Mezzanine Lender, as lender; it being agreed that, at the election of the Junior Mezzanine Borrower and the Junior Mezzanine Lender, the amount of the Junior Mezzanine Loan may be increased from time to time as necessary to pay the costs of the Building Conversion and to fund Debt Service and other payments due under the Loan Documents and the Existing Mezzanine Loan Documents (as defined in the Existing Mezzanine Loan Agreement).

(134) “KBC Bank” has the meaning assigned in the Recitals.

(135) “Lender ” or “Lenders”have the meaning assigned in the Recitals.

(136) “Lender Parties” has the meaning assigned in Section 17.

(137) “LIBOR Rate” or “Libor Rate” means, for any Interest Period for any Eurodollar Loan, the rate per annum appearing on Reuters Screen LIBOR01 (formerly operated as Page 3750 of the Dow Jones Market Service (Telerate)) (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m. London time on the date two (2) Business Days prior to the first day of such Interest Period as the rate for the offering of Dollar deposits having a term comparable to such Interest Period, provided that if such rate does not appear on such page, or if such page shall cease to be publicly available, or if the information contained on such page, in the reasonable judgment of Administrative Agent shall cease accurately to reflect the rate offered by leading banks in the London interbank market as reported by any publicly available source of similar market data selected by Administrative Agent, the LIBOR Rate for such Interest Period shall be determined from such substitute financial reporting service as Administrative Agent in its discretion shall determine.

(138) “Licenses” means any and all certifications, permits, licenses and approvals, including without limitation, certificates of completion and occupancy permits, required under Applicable Laws for the use, occupancy and operation of the Project as hotel condominium in the manner contemplated following Construction Completion.

14

(139) “Lien” means any interest, or claim thereof, in the Project securing an obligation owed to, or a claim by, any Person other than the owner of the Project, whether such interest is based on common law, statute or contract, including the lien or security interest arising from a deed of trust, mortgage, assignment, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term “Lien” shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting the Project.

(140) “Limiting Regulation” means any law or regulation of any governmental authority, or any interpretation, directive or request under any such law or regulation (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental authority or monetary authority charged with the interpretation or administration thereof, or any internal bank policy resulting therefrom (applicable to loans made in the United States of America) which would or could in any way require a Lender to have the approval right contained in Section 9.1.

(141) “Loan Documents” means, individually or collectively: (a) this Agreement (including the Joinder hereto); (b) the Notes; (c) the Mortgage; (d) the Assignment of Rents and Leases; (e) the Assignment of Contracts; (f) the Hedge Agreement Pledge; (g) the Hazardous Substance Indemnity Agreement; (h) the Completion Guarantee; (i) the Cash Management Agreement; (j) the Clearing Account Agreement; (k) the Hotel Manager’s Consent; (l) Assignment of Construction Management Contract and Consent to Assignment; (m) the Project Manager’s Consent; (n) all Uniform Commercial Code financing statements; (o) such assignments of management agreements, contracts and other rights as may be required or requested by the Administrative Agent; (p) all other documents evidencing, securing, governing or otherwise pertaining to the Loans; and (q) all amendments, modifications, renewals, substitutions and replacements of any of the foregoing.

(142) “Loan Transactions” has the meaning assigned in Section 2.8(4).

(143) “Loan Year” means the period between the date hereof and August 31, 2009, for the first Loan Year and the period between each succeeding September 1 and August 31, until the Maturity Date.

(144) “Loans” means the loans to be made by the Lenders to Borrower under this Agreement and all other amounts evidenced or secured by the Loan Documents.

(145) “Majority Lenders” means Lenders holding at least 66.67% of the aggregate outstanding principal amount of the Loans.

15

(146) “Major Modification” means any modification to a Purchase Contract which (a) modifies in any manner the purchase price set forth therein; (b) reopens, reinstates or in any manner lengthens any applicable rescission period; (c) modifies the amount and/or timing of any deposit required thereunder; (d) extends or otherwise changes in any material respect the closing date set forth therein; (e) releases or otherwise consents to an assignment or transfer of the obligations of the named purchaser thereunder; (f) increases or modifies the Standard Unit Finish (unless the purchaser agrees in writing to pay the costs of such increases or modifications); or (g) otherwise materially modifies the terms of such Purchase Contract.

(147) “Mandatory Principal Payments” means each and all of the payments required to be made by the Borrower pursuant to Section 2.4(5).

(148) “Material Adverse Effect” means a material adverse effect, as unilaterally determined by the Administrative Agent, in its reasonable judgment and discretion, on (a) the Project or the business, operations, financial condition, prospects, liabilities or capitalization of Borrower; (b) the ability of Borrower, to perform its obligations under any of the Loan Documents to which it is a party, including the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith; (c) the ability of any other Borrower Party to perform its obligations under any of the Loan Documents to which it is a party; (d) the validity or enforceability of any of the Loan Documents; or (e) the rights and remedies of the Administrative Agent and the Lenders under any of the Loan Documents.

(149) “Maturity Date” means the earlier of (a) the Original Maturity Date, as such date may extended in accordance herewith by the First Extension Period, the Second Extension Period, the Third Extension Period, the Fourth Extension Period and the Fifth Extension Period, as applicable; and (b) any earlier date on which all of the Loans are required to be paid in full, by acceleration or otherwise, under this Agreement or any of the other Loan Documents.

(150) “Menin” means Keith Menin.

(151) “Minimum Seasonality Reserve Balance” means an amount proposed by Borrower and Hotel Manager and approved by the Administrative Agent (which consent may be granted or withheld in the Administrative Agent’s sole and absolute discretion) sufficient to provide a source of funds to pay Operating Expenses during periods when Operating Revenues are insufficient for such purpose due to seasonal variations in occupancy at the Hotel Improvements, as such amount may be increased or decreased from time to time with the consent of the Administrative Agent (which consent may be granted or withheld in the Administrative Agent’s sole and absolute discretion, subject to the terms of any co-lender agreement among the Lenders).

(152) “Minimum Sales Price” means the minimum sales price for the sale of a Unit, as set forth on the Minimum Sales Price Schedule.

(153) “Minimum Sales Price Schedule” means the schedule attached hereto as Schedule 1(b).

(154) “Model Purchase Contract” means the form of purchase contract for the sale of Units which shall be received and approved by the Administrative Agent, which approval shall not be unreasonably withheld.

(155) “Mold” has the meaning assigned in Section 5.1(6).

16

(156) “MMI” means Mondrian Miami Investment LLC, a Delaware limited liability company.

(157) “Morgans LLC” means Morgans Group LLC, a Delaware limited liability company.

(158) “Morgans Public” means the Morgans Hotel Group Co., a Delaware corporation.

(159) “Mortgage” means that certain that certain Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents dated as of August 8, 2006, recorded August 8, 2006, in Official Records Book 24801, at Page 3306, of the Public Records of Miami-Dade County, Florida, as modified by that certain First Amendment to Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents, dated as of December 19, 2006, recorded December 20, 2006, in Official Records Book 25210, at Page 3790, of the Public Records of Miami-Dade County, Florida, as further modified by that certain Second Amendment to Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents dated as of September 6, 2007, recorded September 21, 2007, in Official Records Book 25944, at Pages 2682-2691, of the Public Records of Miami-Dade County, Florida, as further modified by that certain Third Amendment to Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents dated as of April 25, 2008, recorded April 28, 2008, in Official Records Book 26347, at Pages 3527-3536, of the Public Records of Miami-Dade County, Florida, and as further modified by that certain Fourth Amendment to Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents dated as of the Amendment Closing Date, to be recorded in the Public Records of Miami-Dade County, Florida on or about the Amendment Closing Date.

(160) “Net Operating Cash Flow” has the meaning assigned in the Cash Management Agreement.

(161) “Net Operating Income” means the amount by which Adjusted Operating Revenues exceed Adjusted Operating Expenses.

(162) “Net Sales Proceeds” means the Purchase Price of each Unit (and any Parking Space sold separately from a Unit, which Parking Space may only be so sold with the prior written consent of Administrative Agent) less:

(a) any sales or any brokerage commissions or fees (including fees to Borrower or any Borrower Party) actually incurred in connection with the sale of such Unit and documented to the reasonable satisfaction of the Administrative Agent;

(b) closing costs and prorations actually incurred in connection with the sale of such Unit and documented to the reasonable satisfaction of the Administrative Agent (which closing costs and prorations shall include such items as title insurance costs, real estate transfer taxes, documentary stamp taxes, intangible taxes, attorneys’ fees, property taxes and homeowner’s association fees);

17

(c) with respect to any Unit, the cost of any “above standard” improvements or upgrades to such Unit which are actually incurred and paid by Borrower, other than the costs of “above standard” improvements or upgrades to such Unit for which Borrower receives reimbursement separate from the Purchase Price, including reimbursement from the purchaser of such Unit or from sources other than the Loan or the Construction Completion Fund (but only to the extent that the foregoing costs were paid for with disbursements of the proceeds of the Loans prior to the Amendment Closing Date);

(d) with respect to any Unit which is sold at a Purchase Price equal to or greater than the Minimum Sales Price for such Unit, an allowance by Unit type for the Standard Unit Finish, which allowance shall be previously approved by Administrative Agent, not to exceed, on average, $38,000 (but only to the extent that the foregoing allowances were paid for with disbursements of the proceeds of the Loans prior to the Amendment Closing Date); and

(e) the amount of the Franchise Fee payable with respect to the sale of such Unit and any accrued and unpaid Franchise Fee payable in connection with the sale of any previously sold Unit.

In no event shall the amounts in clauses (a), (b) and (c) above be deducted from the Purchase Price unless Borrower provides evidence satisfactory to the Administrative Agent of Borrower’s payment of such amounts at the time of each closing of the Unit together with any Parking Space sold in connection with such Unit. In no event, unless approved by the Administrative Agent as provided in Section 9.7(2), shall (i) any fees or commissions be paid to Borrower or any Affiliate of Borrower from the gross sales proceeds be in excess of fees and commissions in the amount customarily charged in connection with hotel condominium unit sales in the City of Miami Beach, Miami-Dade County, Florida area, or (ii) any commissions, brokerage fees and/or closing costs exceed what is reasonable and customary in the industry.

Notwithstanding any provision of this Agreement to the contrary, for all Units in the Project, the maximum total per Unit, together with any Parking Space sold in connection with such Unit, of the amounts in (a), (b) and (e) above (collectively, the “Controlled Closing Costs”) shall be nine and one-quarter percent (9.25%) of the Purchase Price of such Unit and any Parking Space sold in connection with such Unit (the “Related Parking Space”); provided, however, that the Controlled Closing Costs for any such Unit and Related Parking Space may exceed nine and one-quarter percent (9.25%) of the Purchase Price of such Unit and Related Parking Space, so long as (i) the average of Controlled Closing Costs for such Unit and Related Parking Space and all other such Units and Related Parking Spaces previously sold and closed does not exceed nine and one-quarter percent (9.25%) of the Purchase Prices of such Units and Related Parking Spaces, and (ii) upon the sale of all remaining Units having a Purchase Price equal to or greater than the respective Minimum Sales Prices, the average of Controlled Closing Costs for all such Units and Related Parking Spaces will not exceed nine and one-quarter percent (9.25%) of the Purchase Prices of all such Units and Related Parking Spaces. Controlled Closing Costs shall not include Special Credits or other “special” or “promotional” credits or concessions granted to the purchaser of such Unit, so long as the sum of all Special Credits and such other “special” or “promotional” credits and concessions do not, in the aggregate, exceed the amount by which the Purchase Price for such Unit exceeds the Minimum Sales Price therefor.

18

No corporate overhead or developer’s fees may be paid or advanced from sales proceeds of Units.

(163) “Note A” means (collectively or individually, as the context may require) (a) that certain Amended and Restated Substitute Promissory Note A-1 in the amount of $26,078,765.93, of even date herewith made by Borrower in favor of CIT; (b) that certain Amended and Restated Substitute Promissory Note A-2 in the amount of $26,722,686.13, of even date herewith, made by Borrower in favor of KBC Bank; and (c) any promissory notes delivered in substitution or exchange for either of such Amended and Restated Substitute Promissory Note A-1 and/or Amended and Restated Substitute Promissory Note A-2, in each case as each of the same may be consolidated, replaced, severed, modified, amended or extended from time to time.

(164) “Note A Holders” means, collectively, CIT and KBC.

(165) “Note B” means that certain Amended and Restated Substitute Promissory Note B in the amount of $31,278,947.05 of even date herewith, made by Borrower in favor of Eurohypo, and all promissory notes delivered in substitution or exchange therefor, in each case as the same may be consolidated, replaced, severed, modified, amended or extended from time to time.

(166) “Notes” means, collectively, Note A and Note B.

(167) “OFAC” means the Office of Foreign Assets Control, United States Department of the Treasury, or any other office, agency or department that succeeds to the duties of OFAC.

(168) “Operating Expense Subaccount” has the meaning assigned in the Cash Management Agreement.

(169) “Operating Expenses” means, with respect to any period, all reasonable and necessary expenses of operating the Project in the ordinary course of business which are paid in cash by Borrower and which are directly associated with and fairly allocable to the Project for the such period, including ad valorem real estate taxes and assessments (to the extent not paid from the Tax and Insurance Reserve Fund), insurance premiums, maintenance costs (including common area maintenance costs), accounting, legal and other professional fees, fees relating to environmental audits, expenses incurred by the Administrative Agent and reimbursed by Borrower under this Agreement and the other Loan Documents, deposits to any capital replacement reserves required by the Administrative Agent, wages, salaries and personnel expenses, fees and expenses incurred or paid by Borrower under the Technical Services Agreement, fees and expenses incurred or paid by Borrower under the Hotel Management Agreement and deposits to any reserves required under the Hotel Management Agreement, but excluding Debt Service, capital expenditures, any of the foregoing expenses which are paid from deposits to cash reserves previously included as Operating Expenses, any payment or expense for which Borrower was or is to be reimbursed from proceeds of the Loans or insurance or by any third party, and any non-cash charges such as depreciation and amortization. Any other expense payable to Borrower or to an Affiliate of Borrower shall be included as an Operating Expense only with the Administrative Agent’s prior approval. Operating Expenses shall not include federal, state or local income taxes or legal and other professional fees unrelated to the operation of the Project and shall exclude Building Conversion, sales and marketing expenses and other costs attributable or incurred for the purpose of the Building Conversion and the sale and marketing of Units for sale to third parties.

19

(170) “Operating Revenues” means, with respect to any period after the date hereof, all cash receipts of Borrower from operation of the Project or otherwise arising in respect of the Project which are properly allocable to the Project for the such period, including receipts from leases, parking agreements and boat slip agreements, concession fees and charges and other miscellaneous operating revenues, proceeds from rental or business interruption insurance, proceeds of any loans (other than the Loans and any refinancing of the Loans) obtained by Borrower after the date hereof which are secured by any interest in the Project (less only reasonable and customary expenses incurred in procuring and closing such loan and actually paid in cash to individuals or entities other than Borrower or any Affiliate of Borrower and without implying any consent of the Administrative Agent or any Lender to the granting of any security for any such loans), withdrawals or disbursements from any cash reserves (except to the extent any operating expenses paid therewith are excluded from Operating Expenses), but excluding security deposits and earnest money deposits, advance rentals until they are earned, proceeds from a sale or other disposition of all or any portion of the Project (including any proceeds from the sale of Units), insurance proceeds (other than from business interruption insurance), condemnation awards and Net Sales Proceeds.

(171) “Organizational Documents” means, with respect to any Person who is not a natural person, the certificate or articles of incorporation, memorandum of association, articles of association, trust agreement, by-laws, partnership agreement, limited partnership agreement, certificate of partnership or limited partnership, limited liability company articles of organization, limited liability company operating agreement or any other organizational document, and all shareholder agreements, voting trusts and similar arrangements with respect to its stock, partnership interests, membership interests or other equity interests.

(172) “Original Closing Date” means August 8, 2006.

(173) “Original Maturity Date” means August 1, 2009.

(174) “Out of Balance” has the meaning assigned in Section 14.1(3).

(175) “Parking Space” or “Parking Spaces” means any one or more of the parking spaces located on the Project.

(176) “Partial Release Conditions” has the meaning assigned in Section 14.5.

(177) “Participant” has the meaning assigned in Section 12.24(3).

(178) “Parking Space Release Price” means with respect to Parking Spaces which are sold separately from a Unit, the greater of (a) ninety-five percent (95%) of the gross proceeds from the sale of such Parking Space, and (b) one hundred percent (100%) of the Net Sales Proceeds from the sale of such Parking Space (provided, however, that Net Sales Proceeds from the sale of such Parking Space shall be determined without any deduction for items described in clauses (c) and (d) of the definition of Net Sales Proceeds.

20

(179) “Patriot Act” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as the same may be amended from time to time, and corresponding provisions of future laws.

(180) “Patriot Act Offense” means any violation of the criminal laws of the United States of America or of any of the several states, or that would be a criminal violation if committed within the jurisdiction of the United States of America or any of the several states, relating to terrorism or the laundering of monetary instruments, including any offense under (a) the criminal laws against terrorism; (b) the criminal laws against money laundering; (c) the Bank Secrecy Act, as amended; (d) the Money Laundering Control Act of 1986, as amended; or (e) Patriot Act. “Patriot Act Offense” also includes the crimes of conspiracy to commit, or aiding and abetting another to comment, a Patriot Act Offense.

(181) “Payment Date” means the first Business Day of each calendar month.

(182) “Permitted Encumbrances” has the meaning set forth in the Mortgage.

(183) “Person” means any individual, corporation, partnership, joint venture, association, joint stock company, trust, trustee, estate, limited liability company, unincorporated organization, real estate investment trust, government or any agency or political subdivision thereof, or any other form of entity.

(184) “Plans and Specifications” means the plans and specifications for the Building Conversion approved by the Administrative Agent as part of the overall review and approval of the Project by the Administrative Agent on or about the Original Closing Date.

(185) “Potential Default” means the occurrence of any event or condition which, with the giving of notice, or the passage of time, or both, would constitute an Event of Default.

(186) “Prime Rate” means the rate of interest from time to time announced by Eurohypo at its principal office as its prime commercial lending rate, it being understood that such prime commercial rate is a reference rate and does not necessarily represent the lowest or best rate being charged by Eurohypo to any customer.

(187) “Project” means “Mondrian South Beach,” a luxury hotel condominium development containing 335 hotel condominium units and 177 parking spaces, located in Miami Beach, Florida, including related amenities, a restaurant, parking facilities, fixtures, and personal property owned by Borrower, the Borrower’s interest in the Boat Slips, and any Improvements now or hereafter located on the real property described in Exhibit “A”.

21

(188) “Project Budget” means the budget for the Building Conversion and all other costs and expenses of the Project, including, furniture, fixtures and equipment, interest expense, and also including the sources and uses of funds, attached hereto as Schedule 7.23.

(189) “Project Manager” means Sanctuary Management.

(190) “Project Manager’s Consent” means the Project Manager’s Consent and Subordination Agreement delivered by the Project Manager and Borrower to the Administrative Agent (on behalf of the Lenders) on the Original Closing Date, as the same may be modified, amended and/or supplemented and in effect from time to time.

(191) “Project Management Agreement” means that certain Project Management Agreement dated as of August 7, 2006 between Borrower and Project Manager.

(192) “Projected Costs” has the meaning assigned in Section 14.1(3).

(193) “Proposed Lender” has the meaning assigned in Section 2.9(7).

(194) “Public Offering Statement” means that certain “Prospectus for 1100 West, a Condominium,” as amended, having Florida Department of Business and Professional Regulation, Division of Land Sales, Condominiums and Mobile Homes Identification No. PR74541, as the same has been approved pursuant to the Condominium Act.

(195) “Purchase Contract” means a purchase and sale contract, including any addenda thereto, between a third party purchaser and Borrower with respect to the sale of a Unit (which contract may also provide for the sale of one or more Parking Spaces or Boat Slips).

(196) “Purchase Price” means the gross sales price received from a Purchase Contract.

(197) “Qualified Hotel Manager” means, in the event that the Hotel Management Agreement has been terminated, a replacement hotel manager acceptable to the Administrative Agent and the Lenders.

(198) “Qualified Purchase Contract” means a Purchase Contract which (a) is in the form of the Model Purchase Contract with all Major Modifications approved by Administrative Agent; (b) is between Borrower and a purchaser that is not an Affiliate of Borrower; (c) is a legally enforceable, unconditional contract which contains no contingencies (other than a financing contingency) or other unexpired rescission or termination provision or period; (d) is in compliance with the Condominium Act and all applicable rules and regulations; (e) is not subject to rescission or avoidance by the purchaser thereunder as a result of Borrower’s failure to comply with the disclosure requirements of the Condominium Act; (e) is not the subject of a default by Borrower or the purchaser; (f) except for such amounts which may be refundable pursuant to a contingency or failure of condition, is the subject of a paid non-refundable deposit of at least three percent (3%) of the Purchase Price (provided, however, with respect to all cash deals, such deposit must be at least 5% and for deals which will be 100% financed, such deposit must be at least $2,500) and such sum is held in the Condominium Escrow; (g) without limiting the provisions of Section 9.15, specifies a Purchase Price equal to or greater than the applicable Minimum Sales Price set forth on Schedule 1(b); and (h) if it is to be financed by a third party lending institution, then the purchaser thereunder has received “pre-approval” for a mortgage by an FNMA-approved lender. Such “pre-approval” means that such lender has reviewed and approved purchaser’s credit, income, and funds to close and final approval is contingent only upon (i) lender obtaining an appraisal, (ii) the purchaser providing documentation to evidence representations made to lender, and (iii) other typical and customary closing requirements of such FNMA approved lender.

22

(199) “Qualified Substitute Lender” means one or more of the following:

(a) 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 (a) satisfies the Eligibility Requirements;

(b) an investment company, money management firm or “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act of 1933, as amended, or an “accredited investor” within the meaning of Regulation D under the Securities Act of 1933, as amended, provided that any such Person referred to in this clause (b) satisfies the Eligibility Requirements;

(c) an institution substantially similar to any of the foregoing entities described in clauses (a) and (b) of this definition that satisfies the Eligibility Requirements;

(d) any entity Controlling, Controlled by or under common Control with one or more of any of the entities described in clauses (a), (b) and (c) of this definition;

(f) an investment fund, limited liability company, limited partnership or general partnership where an entity that is otherwise a Qualified Lender under clauses (a), (b) or (c) of this definition investing through a fund with committed capital of at least $250,000,000 acts as the general partner, managing member or fund manager and at least 50% of the equity interests in such investment vehicle are owned, directly or indirectly, by one or more entities that are otherwise Qualified Lenders under clauses (a), (b) or (c) of this definition; or

(g) any Person which is a Qualified Lender (pursuant to the foregoing clauses) but is acting in any agency capacity in connection with a lending syndicate, so long as at least fifty-one percent (51%) or more of the lenders in the lending syndicate (by then current loan balance) are Qualified Lenders (pursuant to the foregoing clauses).

(200) “Regulation D” means Regulation D of the Board of Governors of the Federal Reserve System of the United States of America (or any successor), as the same may be modified and supplemented and in effect from time to time.

(201) “Regulatory Change” means, with respect to any Lender, any change after the date hereof in Federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including such Lender of or under any Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof.

23

(202) “Rejecting Lender” has the meaning assigned in Section 9.1.

(203) “Related Entity” means, as to any Person, (a) any Affiliate of such Person; (b) any other Person into which, or with which, such Person is merged, consolidated or reorganized, or which is otherwise a successor to such Person by operation of law, or which acquires all or substantially all of the assets of such Person; (c) any other Person which is a successor to the business operations of such Person and engages in substantially the same activities; or (d) any Affiliate of the Persons described in clauses (b) and (c) of this definition.

(204) “Requesting Lender” has the meaning assigned in Section 2.9(7).

(205) “Required Payment” has the meaning assigned in Section 2.8(6).

(206) “Reserve Account Collateral” has the meaning assigned to such term in Section 4.4(1).

(207) “Reserve Funds” means, collectively, the Tax and Insurance Reserve Fund, the Seasonality Reserve Fund and the Construction Completion Fund.

(208) “Reserve Requirement” means, for any Interest Period for any Eurodollar Loan, the average maximum rate at which reserves (including, without limitation, any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding $1,000,000,000 against “Eurocurrency liabilities” (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall include any other reserves required to be maintained by such member banks by reason of any Regulatory Change with respect to (a) any category of liabilities that includes deposits by reference to which the LIBOR Rate for any Interest Period for any Eurodollar Loans is to be determined as provided in the definition of “LIBOR Rate” or (b) any category of extensions of credit or other assets that includes Eurodollar Loans. The calculation of the Reserve Requirement by Lenders shall be substantially similar to the calculation of the Reserve Requirement performed by Lenders with respect to similar classes of commercial loans or commitments made by such Lenders.

(209) “Restaurant Lease” means that certain Lease dated as of August 12, 2008 between Borrower, as landlord, and MC South Beach LLC, as tenant.

(210) “Restoration Consultant” has the meaning assigned to such term in Section 3.4(2).

(211) “Restoration Retainage” has the meaning assigned to such term in Section 3.4(3).

(212) “S&P” means Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.

24

(213) “Sanctuary Avenue” means Sanctuary West Avenue, LLC, a Delaware limited liability company.

(214) “Sanctuary Holdings” means Sanctuary West Holdings, LLC, a Delaware limited liability company.

(215) “Sanctuary Management” mean Sanctuary West Management LLC, a Delaware limited liability company.

(216) “Scheduled Release Price” means, with respect to the applicable Unit, the release price with respect thereto as set forth on the Unit Release Schedule.

(217) “Seasonality Reserve Account” has the meaning assigned in the Cash Management Agreement.

(218) “Seasonality Reserve Fund” has the meaning assigned in Section 4.2(1).

(219) “Second Extension Notice” has the meaning assigned to such term in Section 2.5(2)(a).

(220) “Second Extension Period” has the meaning assigned to such term in Section 2.5(2).

(221) “Second Take-Out Amount” means the aggregate outstanding principal balance of Note A at the time the Second Take-Out Amount is required to be paid to the Note A Holders by Eurohypo pursuant to the Take-Out Agreement.

(222) “Secured Indebtedness” has the meaning assigned in the Mortgage.

(223) “Security Accounts” means, collectively, the Tax and Insurance Reserve Subaccount, the Operating Expense Subaccount, the Casualty/Taking Account, the Seasonality Reserve Account, the Clearing Account, the Cash Management Account, the Construction Completion Account, the Debt Service Subaccount and the Reserve Funds.

(224) “Security Documents” means collectively, the Mortgage, the Assignment of Rents and Leases, the Assignment of Contracts, the Assignment of Construction Management Contract and Consent to Assignment, the Hedge Agreement Pledge, the Clearing Account Agreement, the Cash Management Agreement and all Uniform Commercial Code financing statements required by this Agreement, the Mortgage, the Clearing Account Agreement or the Cash Management Agreement to be filed with respect to the applicable security interests.

(225) “Seller Financing” means the use of a portion of Excess Cash Flow by Borrower as permitted pursuant to Section 14.4 for purposes of providing additional financing to purchasers of Units, which seller financing may be in the form of (i) a note made by the purchaser of a Unit in favor of Borrower evidencing a portion of the purchase price for such Unit; (ii) a participation interest in favor of Borrower in a note made by the purchaser of a Unit in favor of a third-party lender and evidencing all or a portion of the purchase price for such Unit; (iii) a guarantee by an Affiliate of Borrower (other than Sole Member) in favor of a third- party lender of the obligations of a the purchaser of Unit under a loan made by such third-party lender to such purchaser, which guaranty may be collateralized only by that portion of the Excess Cash Flow that Borrower may utilize for such purpose pursuant to Section 14.4(1); and (iv) any other form of seller financing approved by the Administrative Agent (such approval not to be unreasonably withheld or delayed).

25

(226) “Seller Financing Collateral” has the meaning assigned in Section 14.6(1).

(227) “Single Purpose Entity” means a corporation, limited partnership or limited liability company which at all times on and after the date hereof while the obligations hereunder and under the other Loan Documents remain outstanding, unless otherwise approved in writing by the Administrative Agent:

(a) is organized solely for the purpose of one of the following (i) acquiring, developing, owning, holding, selling, leasing, transferring, exchanging, managing and operating the Project, entering into this Agreement, refinancing the Project in connection with a permitted repayment of the Loans, and transacting any and all lawful business that is incident, necessary and appropriate to accomplish the foregoing or (ii) acting as the sole managing member of Borrower;

(b) is not engaged and will not engage in any business unrelated to (i) the acquisition, development, ownership, management or operation of the Project or (ii) acting as the sole managing member of Borrower;

(c) does not have and will not have any assets other than those related to (i) the Project, or (ii) its membership interest in Borrower;

(d) has not engaged, sought or consented to and will not engage in, seek or consent to any dissolution, winding up, liquidation, consolidation, merger, sale of all or substantially all of its assets, transfer of partnership or membership interests (if such entity is a general partner in a limited partnership or a member in a limited liability company), or any amendment of its articles of incorporation, by-laws, limited partnership certificate, limited partnership agreement, articles of organization, certificate of formation or operating agreement (as applicable) with respect to the matters set forth in this definition;

(e) shall not, without the consent of all of its managers and members: (i) dissolve, merge, liquidate or consolidate; (ii) sell all or substantially all of its assets or the assets of any other entity in which it has a direct or indirect legal or beneficial ownership interest, (iii) engage in any other business activity, other than as permitted pursuant to the Loan Documents, or amend its organizational documents with respect to the matters set forth in this definition without the consent of the Administrative Agent, or (iv) file a bankruptcy or insolvency petition or otherwise institute insolvency proceedings with respect to itself or to any other entity in which it has a direct or indirect legal or beneficial ownership interest or is the direct or indirect general partner, manager or managing member;

(f) in the case of Borrower, has only one member which is a Single Purpose Entity;

26

(g) is and will remain solvent and pay its debts and liability (including, as applicable, shared personnel and overhead expenses) from its assets as the same shall become due, and is maintaining and 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;

(h) has not failed and will not fail to correct any known misunderstanding regarding the separate identity of such entity;

(i) has maintained and will maintain its accounts, books and records separate from any other Person and will file its own tax returns, except to the extent that it is required to file consolidated tax returns by law;

(j) has not commingled and will not commingle its funds or assets with those of any other Person;

(k) has held and will hold its assets in its own name;

(l) has maintained and will maintain financial statements that properly and accurately show its separate assets and liabilities and do not show the assets or liabilities of any other Person, and has not permitted and will not permit its assets to be listed as assets on the financial statement of any other entity;

(m) has paid and will pay its own liabilities and expenses, including, but not limited to, the salaries of its own employees (if any), out of its own funds and assets, and has maintained and will maintain a sufficient number of employees in light of its contemplated business operations;

(n) has observed and will observe all corporate, partnership or limited liability company formalities, as applicable;

(o) has not incurred and will not incur any Debt other than: (i) with respect to Borrower, (A) the Loans, (B) without limiting the provisions of Section 9.2, indebtedness incurred in accordance with the Project Budget which is (1) not more than sixty (60) days past the date of invoice, (2) not evidenced by a note, and (3) paid when due, and (C) trade and operational debt which is (1) incurred in the ordinary course of business, (2) not more than ninety (90) days past the date of invoice, (3) with trade creditors, (4) in the aggregate amount of less than $500,000.00, (5) not evidenced by a note, and (6) paid when due; and (ii) with respect to Sole Member, subject to the terms of the Junior Loan Intercreditor Agreement, the Junior Mezzanine Loan (it being agreed that no Debt other than the Loans may be secured by any part of the Project);

(p) has not and will not assume or guarantee or become obligated for the debts of any other Person or hold out its credit as being available to satisfy the obligations of any other Person except as permitted pursuant to this Agreement;

27

(q) has not and will not acquire obligations or securities of its members or shareholders or any other affiliate (other than interests in the Borrower held by Sole Member);

(r) has allocated and will allocate fairly and reasonably any overhead expenses that are shared with an affiliate, including, but not limited to, paying for shared office space and services performed by any officer or employee of an affiliate;

(s) maintains and uses and will maintain and use separate invoices and checks bearing its name. The stationary, invoices, and checks utilized by the Single Purpose Entity or utilized to collect its funds or pay its expenses shall bear its own name and shall not bear the name of any other entity unless such entity is clearly designated as being the Single Purpose Entity’s agent;

(t) except in connection with the Loans, has not pledged and will not pledge its assets for the benefit of any other Person;

(u) has conducted business, held itself out and identified itself and will conduct business, hold itself out and identify itself as a separate and distinct entity under its own name or in a name franchised or licensed to it by a Person other than an affiliate of Borrower and not as a division or part of any other Person;

(v) has maintained 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 other Person;

(w) has not made and will not make loans to any Person or hold evidence of indebtedness issued by any other Person (other than cash and securities issued by an entity that is not an affiliate or subject to common ownership with such entity);

(x) has not identified and will not identify its partners, members or shareholders, or any affiliate of any of them, as a division or part of it, and has not identified itself and shall not identify itself as a division of any other Person;

(y) except as expressly permitted in the Loan Documents, has not entered into or been a party to, and will not enter into or be a party to, any transaction with its partners, members, shareholders or affiliates except in the ordinary course of its business and on terms which are intrinsically fair, commercially reasonable and are no less favorable to it than would be obtained in a comparable arm’s-length transaction with an unrelated third party;

(z) has not and will not have any obligation to indemnify its partners, officers, directors or members, as the case may be, unless such obligation is fully subordinated to the Secured Indebtedness and will not constitute a claim against it in the event that, prior to the payment of the Secured Indebtedness, cash flow is insufficient to pay such obligation;

(aa) if such entity is a corporation, it is required to consider the interests of its creditors in connection with all corporate actions; and

28

(bb) except as expressly permitted in the Loan Documents, does not and will not have any of its obligations guaranteed by any Affiliate.

(228) “Site Assessment” means an environmental engineering report for the Project prepared by an engineer engaged by the Administrative Agent at Borrower’s expense, and in a manner satisfactory to the Administrative Agent, based upon an investigation relating to and making appropriate inquiries concerning the existence of Hazardous Materials on or about the Project, and the past or present discharge, disposal, release or escape of any such substances, all consistent with good customary and commercial practice.

(229) “Sole Member” means 1100 West Holdings, LLC, a Delaware limited liability company.

(230) “Special Advance Lender” has the meaning assigned in Section 15.12(1).

(231) “Special Credits” means special credits for loan origination and closing costs extended to the purchaser of a Unit in an amount which does not, in the aggregate, exceed the amount by which the Purchase Price exceeds the Minimum Sales Price for such Unit.

(232) “Standard Unit Finish” means those standard improvements established by Borrower (with the approval of Administrative Agent), which shall be completed in any Unit prior to or after closing of the sale of such Unit.

(233) “State” means the State of Florida.

(234) “Survey” means that certain ALTA/ASCM Land Title Survey dated as of June 19, 2006, revised July 28, 2006, prepared by J. Bonfill & Associates, Inc., under Project 04-0468, Job 06-0411.

(235) “Syndication” has the meaning assigned to in Section 12.27(1).

(236) “Take-Out Agreement” means that certain Take-Out Agreement executed, dated and delivered by CIT, KBC Bank and Eurohypo, as Lenders, on the Amendment Closing Date, as the same may be modified, amended and/or supplemented from time to time.

(237) “Tax and Insurance Reserve Subaccount” has the meaning assigned in the Cash Management Agreement.

(238) “Tax and Insurance Reserve Fund” has the meaning assigned in Section 4.1(1).

(239) “Taxes” has the meaning assigned in Section 9.2.

(240) “Technical Services Agreement” means that certain Technical Services Agreement between Borrower and Hotel Manager dated as of the date hereof with respect to the delivery of certain consultation and other technical services relating to the Project.

29

(241) “Third Extension Notice” has the meaning assigned to such term in Section 2.5(3)(a).

(242) “Third Extension Period” has the meaning assigned to such term in Section 2.5(3).

(243) “Threshold Amount” means $1,000,000.00.

(244) “Type” has the meaning assigned in Section 1.2.

(245) “Unavoidable Delay” means any delay due to strikes, acts of God, fire, earthquake, floods, explosion, actions of the elements, other accidents or casualty, declared or undeclared war, riots, mob violence, acts of terrorism, inability to procure or a general shortage of labor, equipment, facilities, energy, materials or supplies in the open market, failure of transportation, lockouts, tenant delays, actions of labor unions, condemnation, court orders, laws, rules, regulations or orders of Governmental Authorities, or other cause beyond the reasonable control of Borrower; provided that, in each of the foregoing cases, (a) Borrower gives notice of such delay to the Administrative Agent within two (2) days of occurrence of the event resulting in such delay and, after the initial notification, promptly after request of the Administrative Agent, notifies the Administrative Agent of the status of such delay, (b) after giving effect to the consequences of each such delay, the Loans shall not be Out of Balance at any time despite such delay, (c) Borrower uses all commercially reasonable efforts to mitigate the delay caused by such event of Unavoidable Delay; and (d) the Administrative Agent acknowledges that such delay is due to one of the foregoing causes, which acknowledgment shall not be unreasonably withheld or delayed. For the purposes hereof, Unavoidable Delays shall not include delays caused by Borrower’s lack of or inability to procure monies to fulfill Borrower’s commitments and obligations under this Agreement or the other Loan Documents.

(246) “Unit or Units” means one or more of the 335 hotel condominium units created at the Project in connection with the Building Conversion.

(247) “Unit Release Schedule” means the schedule attached hereto as Schedule 1(c), containing the Scheduled Release Price for each Unit.

(248) “Unpaid Amount” has the meaning assigned in Section 15.12(2).

(249) “Unsold Units” means the Units which have not been conveyed to third parties by Borrower with corresponding release from the Lien of the Mortgage.

(250) “Voluntary Proceeding” has the meaning assigned in Section 10.10.

Section 1.2 Types of Loans. Loans hereunder are distinguished by “Type”. The “Type” of a Loan refers to whether such Loan is a Base Rate Loan or a Eurodollar Loan, each of which constitutes a Type.

30

ARTICLE 2

LOAN TERMS

Section 2.1 The Commitments, Loans and Notes.

(1) Outstanding Loans. As of the date hereof, the outstanding principal balance of the Loans is $84,080,399.11.

(2) Additional Loans. As of the date hereof, the Commitments have been fully funded and no additional advances shall be made thereunder.

(3) Term Loan. Amounts borrowed hereunder and repaid may not be reborrowed.

(4) Lending Offices. The Loans of each Lender have been made and shall be maintained at such Lender’s Applicable Lending Office for Loans of such Type.

(5) Intentionally Deleted.

(6) Notes.

(a) Loan Notes. The Loans made by the Lenders are and shall be evidenced by Note A and Note B, as applicable, made payable to each Lender, as applicable, in a principal amount equal to the aggregate amount of its advanced Commitment as originally in effect and otherwise duly completed.

(b) Endorsements on Notes. The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Loan made by each Lender to Borrower, and each payment made on account of the principal thereof, shall be recorded by such Lender on its books and, prior to any transfer of the Note held by it, endorsed by such Lender on the schedule attached to such Note or any continuation thereof; provided that the failure of such Lender to make any such recordation or endorsement shall not affect the obligations of Borrower to make a payment when due of any amount owing hereunder or under such Note in respect of such Loans.

(c) Substitution, Exchange and Subdivision of Notes. No Lender shall be entitled to have its Notes substituted or exchanged for any reason, or subdivided for promissory notes of lesser denominations, except in connection with a permitted assignment of all or any portion of such Lender’s Commitment, Loans and Note pursuant to Sections 12.10 and 12.24 (and, if requested by any Lender, Borrower agrees in accordance with and subject to Sections 12.10 and 12.24, to so substitute or exchange any Notes and enter into note splitter agreements in connection therewith).

(d) Loss, Theft, Destruction or Mutilation of Notes. In the event of the loss, theft or destruction of any Note, upon Borrower’s receipt of a reasonably satisfactory indemnification agreement executed in favor of Borrower by the holder of such Note, or in the event of the mutilation of any Note, upon the surrender of such mutilated Note by the holder thereof to Borrower, together with such other reasonable assurances as Borrower may require, Borrower shall execute and deliver to such holder a new replacement Note, in the form of the original Note, in lieu of the lost, stolen, destroyed or mutilated Note.

(e) Funding of Loans. Borrower acknowledges and agrees that, as of the Amendment Closing Date, the Loans have been fully funded by the Lenders.

31

Section 2.2 Conversions or Continuations of Loans.

(1) Subject to Sections 2.8(4), 2.9(2) and 2.9(3), Borrower shall have the right to Convert Loans of one Type into Loans of another Type or Continue Loans of one Type as Loans of the same Type, at any time or from time to time; provided that: (a) Borrower shall give the Administrative Agent notice of each such Conversion or Continuation as provided in Section 2.8(5); (b) Eurodollar Loans may be Converted only on the last day of an Interest Period for such Loans unless Borrower complies with the terms of Section 2.9(5); and (c) subject to Sections 2.9(1) and 2.9(3), any Conversion or Continuation of Loans shall be pro rata among the Lenders. Notwithstanding the foregoing, and without limiting the rights and remedies of the Administrative Agent and the Lenders under Article 11, in the event that any Event of Default exists, the Administrative Agent may (and at the request of the Majority Lenders shall) suspend the right of Borrower to Convert any Loan into a Eurodollar Loan, or to Continue any Loan as a Eurodollar Loan, for so long as such Event of Default exists, in which event all Loans shall be Converted (on the last day(s) of the respective Interest Periods therefor) or Continued, as the case may be, as Base Rate Loans. In connection with any such Conversion, a Lender may (at its sole discretion) transfer a Loan from one Applicable Lending Office to another.

(2) Notwithstanding anything to the contrary contained in this Agreement, at any time that a Hedge Agreement is in effect, Borrower shall not modify the Interest Period with respect to the principal amount equal to the notional amount under such Hedge Agreement.

Section 2.3 Interest Rate; Late Charge.

(1) Borrower promises to pay to the Administrative Agent for account of each Lender interest on the unpaid principal amount of each Loan (which may be the Base Rate Loans and/or Eurodollar Loans) made by such Lender for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum:

(a) during such periods as such Loan is a Base Rate Loan, the Base Rate plus the Applicable Margin; and

(b) during such periods as such Loan is a Eurodollar Loan, for each Interest Period relating thereto, the Adjusted LIBOR Rate for such Loan for such Interest Period plus the Applicable Margin.

(2) Accrued interest on each Loan shall be payable (a) monthly in arrears on each Payment Date and (b) in the case of any Loan, upon the payment or prepayment thereof or the Conversion of such Loan to a Loan of another Type (but only on the principal amount so paid, prepaid or Converted), except that interest payable at the Default Rate shall be payable from time to time on demand.

32

(3) Notwithstanding anything to the contrary contained herein, after the Maturity Date and during any period when an Event of Default exists, Borrower shall pay to the Administrative Agent for the account of each Lender interest at the applicable Default Rate on the outstanding principal amount of any Loan made by such Lender, any interest payments thereon not paid when due and on any other amount payable by Borrower hereunder, under the Notes and any other Loan Documents.

(4) Promptly after the determination of any interest rate provided for herein or any change therein, the Administrative Agent shall give notice thereof to the Lenders to which such interest is payable and to Borrower, but the failure of the Administrative Agent to provide such notice shall not affect Borrower’s obligation for the payment of interest on the Loans.

(5) In addition to any sums due under this Section 2.3, Borrower shall pay to the Administrative Agent for the account of the Lenders a late payment premium in the amount of four percent (4%) of (a) any payments of principal under the Loans made and payable after the due date thereof (other than the repayment of the outstanding principal balance on the Maturity Date), and (b) any payments of interest or other sums under the Loans made more than ten (10) days after the due date thereof, which late payment premium shall be due with any such late payment or upon demand by the Administrative Agent. Such late payment charge represents the reasonable estimate of Borrower and the Lenders of a fair average compensation for the loss that may be sustained by the Lenders due to the failure of Borrower to make timely payments. Such late charge shall be paid without prejudice to the right of the Administrative Agent and the Lenders to collect any other amounts provided herein or in the other Loan Documents to be paid or to exercise any other rights or remedies under the Loan Documents.

Section 2.4 Terms of Payment. Commencing on the Amendment Closing Date, the Loans shall be payable as follows:

(1) Interest. Beginning on December 1, 2008, and on the Payment Date of each month thereafter, Borrower shall pay interest in arrears in accordance with the wire transfer instructions set forth on Schedule 2.4(1) attached hereto (or such other instructions as the Administrative Agent may from time to time provide) until all amounts due under the Loan Documents are paid in full.

(2) Principal Amortization. Borrower shall make each of the Mandatory Principal Payments.

(3) Maturity. On the Maturity Date, Borrower shall pay to the Administrative Agent (on behalf of the Lenders) all outstanding principal, accrued and unpaid interest, and any other amounts due under the Loan Documents, and shall pay to Administrative Agent (on behalf of Eurohypo) the Exit Fee.

33

(4) Optional Prepayments. Subject to the provisions of Sections 2.4(6) and 2.9(5), Borrower shall have the right to prepay Loans in whole or in part, without premium or penalty; provided that: (a) Borrower shall give the Administrative Agent notice of each such prepayment as provided in Section 2.8(5) (and, upon the date specified in any such notice of prepayment, the amount to be prepaid shall become due and payable hereunder) and (b) partial prepayments shall be in the minimum aggregate principal amounts specified in Section 2.8(4). Loans that are prepaid cannot be reborrowed. After giving notice of prepayment as provided in Section 2.8(5), but prior to the date specified in any such notice of prepayment, such notice may be revoked by Borrower as long as Borrower pays within one (1) Business Day after notification from the Administrative Agent any amounts payable to a Lender pursuant to Section 2.9(5) as a result of any action taken by such Lender in reliance of such notice of prepayment. In addition, in the event the specified Loans subject to the prepayment revocation are Eurodollar Loans, such Eurodollar Loans may, at the Administrative Agent’s option, be converted to Base Rate Loans for the balance of the then current Interest Period.

(5) Mandatory Prepayments.

(a) Promptly upon the sale of any Unit, Borrower shall cause the Scheduled Release Price to be paid to the Administrative Agent for application to the principal balance of the Loans and the Borrower’s other obligations under the Loan Documents pursuant to and in accordance with Section 14.3.

(b) Promptly upon the sale of any Unit, Borrower shall also cause the portions of the Excess Cash Flow required to be paid to the Administrative Agent pursuant to and in accordance with Section 14.4 for application by the Administrative Agent to the principal balance of the Loans and the Borrower’s other obligations under the Loan Documents pursuant to and in accordance with Section 14.3.

(c) Promptly upon the sale of any Parking Space separate from a sale of a Unit, Borrower shall cause the Parking Space Release Price to be paid to the Administrative Agent for application to the principal balance of the Loans and the Borrower’s other obligations under the Loan Documents pursuant to and in accordance with Section 14.3.

(d) Pursuant to Section 14.6, Borrower shall promptly upon receipt cause all principal, interest and other amounts received by Borrower with respect to any Seller Financing Collateral to be deposited into the Cash Management Account for application to Borrower’s obligations under the Loan Documents.

(e) If a casualty or condemnation shall occur with respect to the Project, Borrower, upon Borrower’s or the Administrative Agent’s receipt of the applicable insurance proceeds or condemnation award, shall prepay the Loans, if required by the provisions of Article 3, on the dates and in the amounts specified therein. Nothing in this Section 2.4(5) shall be deemed to limit any obligation of Borrower under the Mortgage or any other Security Document, including any obligation to remit to a collateral or similar account maintained by the Administrative Agent pursuant to the Mortgage or any of the other Security Documents, the proceeds of insurance, condemnation award or other compensation received in respect of any casualty or condemnation.

(f) Payments made pursuant to this Section 2.4(5) shall be made without premium, but in all cases subject to the provisions of Sections 2.4(6), 2.6 and 2.9(5);

34

provided, however, that so long as no Event of Default exists, the Administrative Agent shall hold and not disburse to the Lenders any payment received pursuant to clauses 5(a), 5(b), 5(c) and 5(d) above until the end of the Interest Period in which such payment is received, at which time the Administrative Agent shall disburse such payment to the Lenders in accordance with the provisions of this Agreement; and provided, further, any payments so held by the Administrative Agent shall continue to bear interest in accordance with the terms of this Agreement and the other Loan Documents, and if an Event of Default exists, the Administrative Agent may apply such payments upon receipt in any order or manner as the Administrative Agent shall determine (subject to the terms of any co-lender agreement among the Lenders).

(6) Interest and Other Charges on Prepayment. If the Loans are prepaid, in whole or in part, pursuant to Section 2.4(4) or 2.4(5), each such prepayment shall be made on the prepayment date specified in the notice to the Administrative Agent pursuant to Section 2.8(5), and (in every case) together with (a) the accrued and unpaid interest on the principal amount prepaid, (b) the Exit Fee, (c) any amounts payable to a Lender pursuant to Section 2.9(5) as a result of such prepayment while an Adjusted LIBOR Rate is in effect and (d) any early termination amounts due under any Hedge Agreement; provided, however, that any such prepayment shall be applied first, to the prepayment of any portions of the outstanding principal amount that are Base Rate Loans and, second, to the prepayment of any portions of the outstanding principal amount that are Eurodollar Loans applying such sums first to Eurodollar Loans of the shortest maturity so as to minimize breakage costs; provided further, however, that if an Event of Default exists, the Administrative Agent may distribute such payment to the Lenders for application in such manner the Majority Lenders, subject to Section 2.8(2), may determine to be appropriate.

(7) Application of Payments.

(a) Except as provided in Section 2.4(7)(b), all payments received by the Administrative Agent under the Loan Documents shall be applied: first, to any fees and expenses due to the Administrative Agent and the Lenders under the Loan Documents; second, to any Default Rate interest or late charges; third, to accrued and unpaid interest on the Loans; fourth, to the outstanding principal balance of Note A in accordance with Section 2.4(6), until Note A is paid in full; and fifth, to the outstanding principal balance of Note B in accordance with Section 2.4(6), until Note B is paid in full; and sixth, to any other amounts due under the Loan Documents.

(b) Notwithstanding the provisions of Section 2.4(7)(a), all payments received by the Administrative Agent with respect to Scheduled Release Prices, Excess Cash Flow and Parking Space Release Prices shall be applied: first, to any actual, out-of-pocketf ees and expenses incurred by and due to the Administrative Agent and the Lenders under the Loan Documents; second, to the outstanding principal balance of Note A in accordance with Section 2.4(6), until Note A is paid in full; third, to the outstanding principal balance of Note B in accordance with Section 2.4(6), until Note B is paid in full; fourth, to accrued and unpaid interest on the Loans; fifth, to any Default Rate interest or late charges; and sixth, to any other amounts due under the Loan Documents.

(c) Notwithstanding the provisions of Sections 2.4(7)(a) and 2.4(7)(b), if an Event of Default exists the Administrative Agent may apply any payments received by the Administrative Agent under the Loan Documents in any order or manner as the Administrative Agent shall determine (subject to the terms of any co-lender agreement among the Lenders).

35

Section 2.5 Extension of Maturity Date.

(1) First Extension of Maturity Date. Borrower may, at its option, extend the term of the then outstanding principal amount for a period commencing on the Original Maturity Date and ending on August 1, 2010; provided, however, if such day is not a Business Day, such period shall be deemed to end the immediately preceding Business Day (the applicable period being, the “First Extension Period”), subject to the satisfaction of the following conditions:

(a) Borrower shall notify (the “First Extension Notice”) Administrative Agent of Borrower’s exercise of such option between thirty (30) and ninety (90) days prior to the Original Maturity Date;

(b) No Potential Default (of which Borrower has previously received notice) or Event of Default exists as of the giving of the First Extension Notice and/or as of the Original Maturity Date;

(c) Without limiting the provisions of Section 14.1(1), Construction Completion shall have occurred;

(d) Eurohypo shall have paid the Initial Take-Out Amount to the Note A Holders pursuant to and in accordance with the Take-Out Agreement;

(e) Borrower shall have either (i) paid to Eurohypo one-half of the Initial Take-Out Amount paid by Eurohypo to the Note A Holders pursuant to the Take-Out Agreement, which sum shall be applied to the amounts owing under Note A in accordance with Section 2.4(7)(a), or (ii) caused a Qualified Substitute Lender to acquire from Eurohypo, in accordance with Section 12.24(2), one-half of the Initial Take-Out Interest acquired by Eurohypo from the Note A Holders for an amount equal to one-half of the Initial Take-Out Amount paid by Eurohypo to the Note A Holders pursuant to the Take-Out Agreement;

(f) If the Hedge Agreement in effect at the time of Borrower’s giving of the First Extension Notice is scheduled to mature or expire prior to the end of the First Extension Period, Borrower shall have obtained and delivered to Administrative Agent not later than ten (10) Business Days prior to the first day of the First Extension Period one or more replacement Hedge Agreements which meet the requirements of Section 9.15 which shall be effective on or before the date the then effective Hedge Agreement is scheduled to mature or expire and shall have a maturity date not earlier than the end of the First Extension Period;

(g) Whether or not the extension becomes effective, Borrower shall pay all out-of-pocket costs and expenses incurred by Administrative Agent and the Lenders in connection with the proposed extension (pre- and post-closing), including reasonable legal fees; all such costs and expenses shall be due and payable within ten (10) days of demand, and any failure to pay such amounts shall constitute a default under this Agreement and the Loan Documents; and

36

(h) Not later than the Original Maturity Date, (i) the extension shall have been documented to the Lenders’ reasonable satisfaction and consented to by Borrower, Administrative Agent and all the Lenders, including the execution and delivery by the Guarantor of reaffirmations of its obligations under the Guaranty and (ii) if requested by the Administrative Agent, the Administrative Agent shall have been provided with an updated title report and judgment and lien searches, together with any title endorsements reasonably required by Administrative Agent.

Any such extension shall be otherwise subject to all of the other terms and provisions of this Agreement and the other Loan Documents.

(2) Second Extension of Maturity Date. In the event Borrower has previously extended the Maturity Date in accordance with Section 2.5(1), Borrower may, at its option, extend the term of the then outstanding principal amount of the Loans for a period commencing on the last day of the First Extension Period and ending on July 31, 2011; provided, however, if such day is not a Business Day, such period shall be deemed to end the immediately preceding Business Day (the applicable period being, the “Second Extension Period”), subject to the satisfaction of the following conditions:

(a) Borrower shall notify (the “Second Extension Notice”) Administrative Agent of Borrower’s exercise of such option between thirty (30) and ninety (90) days prior to end of the First Extension Period;

(b) No Potential Default (of which Borrower has previously received notice) or Event of Default exists as of the giving of the Second Extension Notice and/or as of last day of the First Extension Period;

(c) Not later than the last day of the First Extension Period, Eurohypo shall have paid the Second Take-Out Amount to the Note A Holders pursuant to and in accordance with the Take-Out Agreement;

(d) Not later than the last day of the First Extension Period, Borrower shall have either (i) paid to Eurohypo one-half of the Second Take-Out Amount, which shall be applied to the amounts owing under Note A in accordance with Section 2.4(7)(a), or (ii) caused a Qualified Substitute Lender to acquire from Eurohypo, in accordance with Section 12.24(2), one-half of the Loans evidenced by Note A which are acquired by Eurohypo pursuant to the Take-Out Agreement, for an amount equal to one-half of the Second Take-Out Amount paid by Eurohypo to the Note A Holders pursuant to the Take-Out Agreement;

(e) If the Hedge Agreement in effect at the time of Borrower’s giving of the Second Extension Notice is scheduled to mature or expire prior to the end of the Second Extension Period, Borrower shall have obtained and delivered to Administrative Agent not later than ten (10) Business Days prior to the first day of the Second Extension Period one or more replacement Hedge Agreements which meet the requirements of Section 9.15 which shall be effective on or before the date the then effective Hedge Agreement is scheduled to mature or expire and shall have a maturity date not earlier than the end of the Second Extension Period;

37

(f) Whether or not the extension becomes effective, Borrower shall pay all out-of-pocket costs and expenses incurred by Administrative Agent and the Lenders in connection with the proposed extension (pre- and post-closing), including reasonable legal fees; all such costs and expenses shall be due and payable within ten (10) days of demand, and any failure to pay such amounts shall constitute a default under this Agreement and the Loan Documents; and

(g) Not later than the last day of the First Extension Period, (i) the extension shall have been documented to the Lenders’ reasonable satisfaction and consented to by Borrower, Administrative Agent and all the Lenders, including the execution and delivery by the Guarantor of reaffirmations of its obligations under the Guaranty and (ii) if requested by the Administrative Agent, the Administrative Agent shall have been provided with an updated title report and judgment and lien searches, together with any title endorsements reasonably required by Administrative Agent.

Any such extension shall be otherwise subject to all of the other terms and provisions of this Agreement and the other Loan Documents.

(3) Third Extension of Maturity Date. Borrower may, at its option, extend the term of the then outstanding principal amount for a period commencing on the last day of the Second Extension Period and ending on July 30, 2012; provided, however, if such day is not a Business Day, such period shall be deemed to end the immediately preceding Business Day (the applicable period being, the “Third Extension Period”), subject to the satisfaction of the following conditions:

(a) Borrower shall notify (the “Third Extension Notice”) Administrative Agent of Borrower’s exercise of such option between thirty (30) and ninety (90) days prior to the end of the Second Extension Period;

(b) No Potential Default (of which Borrower has previously received notice) or Event of Default exists as of the giving of the Third Extension Notice and/or as of the last day of the Second Extension Period;

(c) Administrative Agent shall have obtained a new Appraisal dated not more than sixty (60) days prior to the last day of the Second Extension Period (which the Administrative Agent hereby agrees to timely obtain), such Appraisal to be at Borrower’s expense;

(d) The Debt Service Coverage Ratio based on the outstanding balance of the Loans for the most recently ended calendar quarter prior to the end of the Second Extension Period, shall be equal to or greater than 1.10:1.00; provided, however, in the event that the required Debt Service Coverage Ratio is not met, then Borrower may, in order to satisfy the condition in this clause, pay down the outstanding principal balance of the Loans in an amount such that the required Debt Service Coverage Ratio is achieved (in accordance with Section 2.4(4));

38

(e) If the Hedge Agreement in effect at the time of Borrower’s giving of the Third Extension Notice is scheduled to mature or expire prior to the end of the Second Extension Period, Borrower shall have obtained and delivered to Administrative Agent not later than ten (10) Business Days prior to the first day of the Third Extension Period one or more replacement Hedge Agreements which meet the requirements of Section 9.15 which shall be effective on or before the date the then effective Hedge Agreement is scheduled to mature or expire and shall have a maturity date not earlier than the end of the Third Extension Period;

(f) Whether or not the extension becomes effective, Borrower shall pay all out-of-pocket costs and expenses incurred by Administrative Agent and the Lenders in connection with the proposed extension (pre- and post-closing), including reasonable legal fees; all such costs and expenses shall be due and payable within ten (10) days of demand, and any failure to pay such amounts shall constitute a default under this Agreement and the Loan Documents;

(g) Not later than the last day of the Second Extension Period, (i) the extension shall have been documented to the Lenders’ reasonable satisfaction and consented to by Borrower, Administrative Agent and all the Lenders, including the execution and delivery by the Guarantor of reaffirmations of its obligations under the Guaranty and (ii) if requested by the Administrative Agent, the Administrative Agent shall have been provided with an updated title report and judgment and lien searches, together with any title endorsements reasonably required by Administrative Agent; and

(h) Borrower shall pay to Administrative Agent (for the benefit of the Lenders in accordance with their proportionate shares) on the last day of the Second Extension Period, a non-refundable extension fee equal to 0.25% of the outstanding principal balance of the Loans.

Any such extension shall be otherwise subject to all of the other terms and provisions of this Agreement and the other Loan Documents.

(4) Fourth Extension of Maturity Date. Borrower may, at its option, extend the term of the then outstanding principal amount for a period commencing on the last day of the Third Extension Period and ending on July 29, 2013; provided, however, if such day is not a Business Day, such period shall be deemed to end the immediately preceding Business Day (the applicable period being, the “Fourth Extension Period”), subject to the satisfaction of the following conditions:

(a) Borrower shall notify (the “Fourth Extension Notice”) Administrative Agent of Borrower’s exercise of such option between thirty (30) and ninety (90) days prior to the end of the Third Extension Period;

(b) No Potential Default (of which Borrower has previously received notice) or Event of Default exists as of the giving of the Fourth Extension Notice and/or as of the last day of the Third Extension Period;

(c) The Debt Service Coverage Ratio based on the outstanding balance of the Loans for the most recently ended calendar quarter prior to en d of the Third Extension Period, shall be equal to or greater than 1.35:1.00; provided, however, in the event that the required Debt Service Coverage Ratio is not met, then Borrower may, in order to satisfy the condition in this clause, pay down the outstanding principal balance of the Loans in an amount such that the required Debt Service Coverage Ratio is achieved (in accordance with Section 2.4(4));

39

(d) The ratio of (i) the total outstanding principal balance of the Loans to (ii) the value of the Project does not exceed eighty percent (80%) based on the “as is” value established by a new Appraisal obtained by Administrative Agent not more than sixty (60) days prior to end of the Third Extension Period, such Appraisal to be at Borrower’s expense and satisfactory to Administrative Agent in all respects; provided, however, in the event that the required loan-to-value ratio is not met, then Borrower may, in order to satisfy the condition in this clause, pay down the outstanding principal balance of the Loans in an amount such that the required loan-to-value ratio is achieved (in accordance with Section 2.4(4));

(e) If the Hedge Agreement in effect at the time of Borrower’s giving of the Fourth Extension Notice is scheduled to mature or expire prior to the end of the Third Extension Period, Borrower shall have obtained and delivered to Administrative Agent not later than ten (10) Business Days prior to the first day of the Fourth Extension Period one or more replacement Hedge Agreements which meet the requirements of Section 9.15 which shall be effective on or before the date the then effective Hedge Agreement is scheduled to mature or expire and shall have a maturity date not earlier than the end of the Fourth Extension Period;

(f) Whether or not the extension becomes effective, Borrower shall pay all out-of-pocket costs and expenses incurred by Administrative Agent and the Lenders in connection with the proposed extension (pre- and post-closing), including reasonable legal fees; all such costs and expenses shall be due and payable within ten (10) days of demand, and any failure to pay such amounts shall constitute a default under this Agreement and the Loan Documents;

(g) Not later than the last day of the Third Extension Period, (i) the extension shall have been documented to the Lenders’ reasonable satisfaction and consented to by Borrower, Administrative Agent and all the Lenders, including the execution and delivery by the Guarantor of reaffirmations of its obligations under the Guaranty and (ii) if requested by the Administrative Agent, the Administrative Agent shall have been provided with an updated title report and judgment and lien searches, together with any title endorsements reasonably required by Administrative Agent; and

(h) Borrower shall pay to Administrative Agent (for the benefit of the Lenders in accordance with their proportionate shares) on the last day of the Third Extension Period, a non-refundable extension fee equal to 0.25% of the outstanding principal balance of the Loans.

Any such extension shall be otherwise subject to all of the other terms and provisions of this Agreement and the other Loan Documents.

40

(5) Fifth Extension of Maturity Date. Borrower may, at its option, extend the term of the then outstanding principal amount for a period commencing on the last day of the Fourth Extension Period and ending on October 31, 2013; provided, however, if such day is not a Business Day, such period shall be deemed to end the immediately preceding Business Day (the applicable period being, the “Fifth Extension Period”), subject to the satisfaction of the following conditions:

(a) Borrower shall notify (the “Fifth Extension Notice”) Administrative Agent of Borrower’s exercise of such option between thirty (30) and ninety (90) days prior to the end of the Fourth Extension Period;

(b) No Potential Default (of which Borrower has previously received notice) or Event of Default exists as of the giving of the Fifth Extension Notice and/or as of last day of the Fourth Extension Period;

(c) If the Hedge Agreement in effect at the time of Borrower’s giving of the Fifth Extension Notice is scheduled to mature or expire prior to the end of the Fourth Extension Period, Borrower shall have obtained and delivered to Administrative Agent not later than ten (10) Business Days prior to the first day of the Fifth Extension Period one or more replacement Hedge Agreements which meet the requirements of Section 9.15 which shall be effective on or before the date the then effective Hedge Agreement is scheduled to mature or expire and shall have a maturity date not earlier than the end of the Fifth Extension Period;

(d) Whether or not the extension becomes effective, Borrower shall pay all out-of-pocket costs and expenses incurred by Administrative Agent and the Lenders in connection with the proposed extension (pre- and post-closing), including reasonable legal fees; all such costs and expenses shall be due and payable within ten (10) days of demand, and any failure to pay such amounts shall constitute a default under this Agreement and the Loan Documents; and

(e) Not later than the last day of the Fourth Extension Period, (i) the extension shall have been documented to the Lenders’ reasonable satisfaction and consented to by Borrower, Administrative Agent and all the Lenders, including the execution and delivery by the Guarantor of reaffirmations of its obligations under the Guaranty and (ii) if requested by the Administrative Agent, the Administrative Agent shall have been provided with an updated title report and judgment and lien searches, together with any title endorsements reasonably required by Administrative Agent.

Any such extension shall be otherwise subject to all of the other terms and provisions of this Agreement and the other Loan Documents.

Section 2.6 Exit Fee. Upon the earlier to occur of (a) the date when full prepayment of the Loan occurs, (b) the Maturity Date or (c) the date on which the Loan has been accelerated following an Event of Default, Borrower shall pay to the Administrative Agent for the benefit of Eurohypo the Exit Fee.

41

Section 2.7 Cash Management.

(1) Borrower shall and shall cause Hotel Manager to deposit all Operating Revenue into the Clearing Account in accordance with the Clearing Account Agreement and the Cash Management Agreement. Disbursements from the Clearing Account, the Cash Management Account and the other “Accounts” created pursuant to the Cash Management Agreement will be made in accordance with the terms and conditions of this Agreement and the Cash Management Agreement. The Administrative Agent shall have sole dominion and control over the Clearing Account, the Cash Management Account and the other “Accounts” referred to in the Cash Management Agreement, and, without limiting the provisions of the Cash Management Agreement whereby the Administrative Agent agrees to make disbursements therefrom, Borrower shall have no rights to make withdrawals therefrom.

(2) The insufficiency of funds on deposit in the Clearing Account or the Cash Management Account shall not absolve Borrower of the obligation to make any payments as and when due pursuant to this Agreement and the other Loan Documents, and such obligations shall be separate and independent, and not conditioned on any event or circumstance whatsoever.

Section 2.8 Payments; Pro Rata Treatment; Etc.

(1) Payments Generally.

(a) Payments by Borrower. Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by Borrower under this Agreement and the Notes, and, except to the extent otherwise provided therein, all payments to be made by Borrower under any other Loan Document, shall be made in Dollars, in immediately available funds, without deduction, setoff or counterclaim, to the Administrative Agent at an account designated by the Administrative Agent by notice to Borrower, not later than 12:00 noon, New York City time, on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day).

(b) Application of Payments. Subject to the provisions of Sections 2.4(7) and 2.8(2), Borrower shall, at the time of making each payment under this Agreement or any Note for the account of any Lender, specify to the Administrative Agent (which shall so notify the intended recipient(s) thereof) the Types of Loans or other amounts payable by Borrower hereunder to which such payment is to be applied (and in the event that Borrower fails to so specify, or if an Event of Default exists, the Administrative Agent may distribute such payment to the Lenders for application in such manner as it may determine to be appropriate, subject to Section 2.8(2) and any other agreement among the Administrative Agent and the Lenders with respect to such application).

(c) Forwarding of Payments by Administrative Agent. Except as otherwise agreed by the Administrative Agent and the Lenders, each payment received by the Administrative Agent under this Agreement or any Note for account of any Lender shall be paid by the Administrative Agent promptly to such Lender, in immediately available funds, for account of such Lender’s Applicable Lending Office for the Loan or other obligation in respect of which such payment is made.

(d) Extensions to Next Business Day. If the due date of any payment under this Agreement or any Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension.

42

(2) Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each advance of a Loan from the Lenders under Section 2.1(1) shall be made from the Lenders, pro rata according to the amounts of their respective Commitments; (b) except as otherwise provided in Section 2.9(4), Loans shall be allocated pro rata among the Lenders according to the amounts of their respective Commitments (in the case of the making of Loans) or their respective Loans (in the case of Conversions or Continuations of Loans); (c) each payment or prepayment of principal of Loans by Borrower shall be made for account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Loans held by them; and (d) each payment of interest on Loans by Borrower shall be made for account of the Lenders pro rata in accordance with the amounts of interest on such Loans then due and payable to the respective Lenders.

(3) Computations. Interest on all Loans shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable.

(4) Minimum Amounts. Except for (a) mandatory and other prepayments made pursuant to Sections 2.4(2), 2.4(5), and 14.5; (b) Conversions or prepayments made pursuant to Section 2.9(4), each Conversion and Continuation (collectively, “Loan Transactions”) of Loans shall be in an aggregate amount at least equal to $1,000,000 (Loan Transactions of or into Loans of different Types or Interest Periods at the same time hereunder shall be deemed separate Loan Transactions for purposes of the foregoing, one for each Type or Interest Period); provided that if any Loans or borrowings would otherwise be in a lesser principal amount for any period, such Loans shall be Base Rate Loans during such period. Notwithstanding the foregoing, the minimum amount of $1,000,000 shall not apply to Conversions of lesser amounts into a Type of Loan that has (or will have upon such Conversion) an aggregate principal amount exceeding such minimum amount and a duration of at least one Interest Period. The initial borrowing hereunder shall be an aggregate amount at least equal to $500,000.

(5) Certain Notices. Notices by Borrower to the Administrative Agent regarding Loan Transactions and the selection of Types of Loans and/or of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Administrative Agent not later than 12:00 noon, New York City time, on the number of Business Days prior to the date of the proposed Loan Transaction or the first day of such Interest Period specified below:

	Number of Business
Notice	Days Prior
Optional Prepayment		3
Conversions into, Continuations as, or borrowings in Base Rate Loans		3
Conversions into, Continuations as, borrowings in or changes in duration of Interest Period for, Eurodollar Loans (subject to Section 2.4(6))		3

43

Each such notice of a Loan Transaction shall specify the amount (subject to Section 2.8(4)), Type, and Interest Period of such proposed Loan Transaction, and the date (which shall be a Business Day) of such proposed Loan Transaction. Notices for Conversions and Continuations shall be in the form of Exhibit E. Each such notice specifying the duration of an Interest Period shall specify the portion of the Loans to which such Interest Period is to relate. The Administrative Agent shall promptly notify the Lenders of the contents of each such notice. If Borrower fails to select (i) the Type of Loan or (ii) the duration of any Interest Period for any Eurodollar Loan within the time period (i.e., three (3) Business Days prior to the first day of the next applicable Interest Period) and otherwise as provided in this Section 2.8(5), such Loan (if outstanding as an Eurodollar Loan) will be automatically Continued as an Eurodollar Loan with an Interest Period of one (1) month on the last day of the current Interest Period for such Loan (based on a Libor Rate determined two (2) Business Days prior to the first day of the next Interest Period) or, if outstanding as a Base Rate Loan, will remain as a Base Rate Loan.

(6) Non Receipt of Funds by the Administrative Agent. Unless the Administrative Agent shall have been notified by Borrower prior to the date on which Borrower is to make a payment to the Administrative Agent for account of any Lender hereunder (such payment being herein called the “Required Payment”), which notice shall be effective upon receipt, that Borrower does not intend to make the Required Payment to the Administrative Agent, the Administrative Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date; and, if Borrower has not in fact made the Required Payment to the Administrative Agent, the recipient(s) of such payment shall, on demand, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date (the “Advance Date”) such amount was so made available by the Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to the applicable interest rate due hereunder with respect to payments returned by Borrower to the Administrative Agent and, if such recipient(s) shall fail promptly to make such payment, the Administrative Agent shall be entitled to recover such amount, on demand, from Borrower, together with interest as aforesaid; provided that if neither the recipient(s) nor Borrower shall return the Required Payment to the Administrative Agent within three (3) Business Days of the Advance Date, then, retroactively to the Advance Date, Borrower and the recipient(s) shall each be obligated to pay interest on the Required Payment as follows: Borrower and the recipient(s) shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment at the Default Rate (without duplication of the obligation of Borrower under Section 2.3 to pay interest on the Required Payment at the Default Rate), it being understood that the return by the recipient(s) of the Required Payment to the Administrative Agent shall not limit such obligation of Borrower under Section 2.3 to pay interest at the Default Rate in respect of the Required Payment.

44

(7) Sharing of Payments, Etc.

(a) Right of Set off. Borrower agrees that, in addition to (and without limitation of) any right of set off, banker’s lien or counterclaim a Lender may otherwise have, (subject, as among the Lenders, to Section 12.26), each Lender shall be entitled, at its option (to the fullest extent permitted by law), to set off and apply any deposit (general or special, time or demand, provisional or final), or other indebtedness, held by it for the credit or account of Borrower at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Lender’s Loans or any other amount payable to such Lender hereunder, that is not paid when due (regardless of whether such deposit or other indebtedness is then due to such Borrower), in which case it shall promptly notify Borrower and the Administrative Agent thereof, provided that such Lender’s failure to give such notice shall not affect the validity thereof.

(b) Sharing. If any Lender shall obtain from Borrower payment of any principal of or interest on any Loan owing to it or payment of any other amount under this Agreement or any other Loan Document through the exercise (subject, as among the Lenders, to Section 12.26) of any right of set off, banker’s lien or counterclaim or similar right or otherwise (other than from the Administrative Agent as provided herein), and, as a result of such payment, such Lender shall have received a greater percentage of the principal of or interest on the Loans or such other amounts then due hereunder or thereunder by Borrower to such Lender than the percentage received by any other Lender, it shall promptly purchase from such other Lenders participations in (or, if and to the extent specified by such Lender, direct interests in) the Loans or such other amounts, respectively, owing to such other Lenders (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Lenders shall share the benefit of such excess payment (net of any expenses that may be incurred by such Lender in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Loans or such other amounts, respectively, owing to each of the Lenders. To such end all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored.

(c) Consent by Borrower. Borrower agrees that any Lender so purchasing such a participation (or direct interest) may exercise (subject, as among the Lenders, to Section 12.26) all rights of set off, banker’s lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans or other amounts (as the case may be) owing to such Lender in the amount of such participation.

(d) Rights of Lenders; Bankruptcy. Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of Borrower. If, under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a set off to which this Section 2.8(7) applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section 2.8(7) to share in the benefits of any recovery on such secured claim.

45

Section 2.9 Yield Protection; Etc.

(1) Additional Costs.

(a) Costs of Making or Maintaining Eurodollar Loans. Borrower shall pay directly to each Lender from time to time such amounts as such Lender may reasonably determine to be necessary to compensate such Lender for any costs that such Lender determines are attributable to its making or maintaining of any Eurodollar Loans or its obligation to make any Eurodollar Loans hereunder, or any reduction in any amount receivable by such Lender hereunder in respect of any of such Eurodollar Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called “Additional Costs”), resulting from any Regulatory Change that:

(i) shall subject any Lender (or its Applicable Lending Office for any of such Loans) to any tax, duty or other charge in respect of such Loans or its Note or changes the basis of taxation of any amounts payable to such Lender under this Agreement or its Note in respect of any of such Loans (excluding changes in the rate of tax on the overall net income of such Lender or of such Applicable Lending Office by the jurisdiction in which such Lender has its principal office or such Applicable Lending Office); or

(ii) imposes or modifies any reserve, special deposit or similar requirements (other than the Reserve Requirement used in the determination of the Adjusted Libor Rate for any Interest Period for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Lender (including, without limitation, any of such Loans or any deposits referred to in the definition of “Libor Rate”), or any commitment of such Lender (including, without limitation, the Commitment of such Lender hereunder); or

(iii) imposes any other condition affecting this Agreement or its Note (or any of such extensions of credit or liabilities) or its Commitment.

If any Lender requests compensation from Borrower under this paragraph (a), Borrower may, by notice to such Lender (with a copy to the Administrative Agent), suspend the obligation of such Lender thereafter to make or Continue Eurodollar Loans, or to Convert Loans into Eurodollar Loans, until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 2.9(4) shall be applicable), provided that such suspension shall not affect the right of such Lender to receive the compensation so requested.

46

(b) Costs Attributable to Regulatory Change or Risk-Based Capital Guidelines. Without limiting the effect of the foregoing provisions of this Section 2.9(1) (but without duplication), Borrower shall pay directly to each Lender from time to time on request such amounts as such Lender may reasonably determine to be necessary to compensate such Lender (or, without duplication, the bank holding company of which such Lender is a subsidiary) for any costs that it reasonably determines are attributable to the maintenance by such Lender (or any Applicable Lending Office or such bank holding company), pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) hereafter issued by any government or governmental or supervisory authority (excluding Basel II and any other law or regulation which implements Basel II, in each case in the form existing on the date of this Agreement), of capital in respect of its Commitment or Loans (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Lender (or any Applicable Lending Office or such bank holding company) to a level below that which such Lender (or any Applicable Lending Office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request.

(c) Notification and Certification. Each Lender shall notify Borrower of any event occurring after the date hereof entitling such Lender to compensation under paragraph (a) or (b) of this Section 2.9(1) as promptly as practicable, but in any event within forty-five (45) days, after such Lender obtains actual knowledge thereof; provided that (i) if any Lender fails to give such notice within forty-five (45) days after it obtains actual knowledge of such an event, such Lender shall, with respect to compensation payable pursuant to this Section 2.9(1) in respect of any costs resulting from such event, only be entitled to payment under this Section 2.9(1) for costs incurred from and after the date thirty (30) days prior to the date that such Lender does give such notice and (ii) each Lender will designate a different Applicable Lending Office for the Loans of such Lender affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Lender, be disadvantageous to such Lender, except that such Lender shall have no obligation to designate an Applicable Lending Office located in the United States of America. Each Lender will furnish to Borrower a certificate setting forth the basis and amount of each request by such Lender for compensation under paragraph (a) or (b) of this Section 2.9(1). Determinations and allocations by any Lender for purposes of this Section 2.9(1) of the effect of any Regulatory Change pursuant to paragraph (a) of this Section 2.9(1), or of the effect of capital maintained pursuant to paragraph (b) of this Section 2.9(1), on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Lender under this Section 2.9(1), shall be conclusive, provided that such determinations and allocations are made on a reasonable basis.

Borrower shall be obligated to pay compensation to a Lender pursuant to subsections (a) and (b) of this Section 2.9(1) only if such Lender is imposing similar compensation requirements on borrowers under commercial loans of the same type and quality as the Loan and which are similarly affected by the Regulatory Change or other guidelines or requirements for which such Lender is seeking compensation from Borrower pursuant to this Section 2.9(1).

47

(2) Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if, on or prior to the determination of the LIBOR Rate for any Interest Period for any Eurodollar Loan:

(a) the Administrative Agent determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of LIBOR Rate are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Eurodollar Loans as provided herein; or

(b) any Lender determines, which determination shall be conclusive, and notify the Administrative Agent that the relevant rates of interest referred to in the definition of LIBOR Rate upon the basis of which the rate of interest for Eurodollar Loans for such Interest Period is to be determined are not likely adequately to cover the cost to such Lenders of making or maintaining Eurodollar Loans for such Interest Period;

then the Administrative Agent shall give Borrower and each Lender prompt notice thereof and, so long as such condition remains in effect, the Lenders shall be under no obligation to make additional Eurodollar Loans, to Continue Eurodollar Loans or to Convert Loans of any other Type into Eurodollar Loans, and Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Loans, either prepay such Loans or such Loans shall be automatically Converted into Base Rate Loans.

(3) Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to honor its obligation to make or maintain Eurodollar Loans hereunder (and, in the sole opinion of such Lender, the designation of a different Applicable Lending Office would either not avoid such unlawfulness or would be disadvantageous to such Lender), then such Lender shall promptly notify Borrower thereof (with a copy to the Administrative Agent) and such Lender’s obligation to make or Continue, or to Convert Loans of any other Type into, Eurodollar Loans shall be suspended until such time as such Lender may again make and maintain Eurodollar Loans (in which case the provisions of Section 2.9(4) shall be applicable).

(4) Treatment of Affected Loans. If the obligation of any Lender to make Eurodollar Loans or to Continue, or to Convert Base Rate Loans into, Eurodollar Loans shall be suspended pursuant to Section 2.9(1) or 2.9(3), such Lender’s Loans shall be automatically Converted into Base Rate Loans on the last day(s) of the then current Interest Period(s) for Loans (or, in the case of a Conversion resulting from a circumstance described in Section 2.9(3), on such earlier date as such Lender may specify to Borrower with a copy to the Administrative Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 2.9(1) or 2.9(3) that gave rise to such Conversion no longer exist:

(a) to the extent that such Lender’s Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender’s Loans shall be applied instead to its Base Rate Loans; and

(b) all Loans that would otherwise be made or Continued by such Lender as Eurodollar Loans shall be made or Continued instead as Base Rate Loans, and all Loans of such Lender that would otherwise be Converted into Eurodollar Loans shall remain as Base Rate Loans.

48

If such Lender gives notice to Borrower with a copy to the Administrative Agent that the circumstances specified in Section 2.9(1) or 2.9(3) that gave rise to the Conversion of such Lender’s Loans pursuant to this Section 2.9(4) no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans made by other Lenders are outstanding, such Lender’s Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to the extent necessary so that, after giving effect thereto, all Base Rate Loans and Eurodollar Loans are allocated among the Lenders ratably (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments.

(5) Compensation. Borrower shall pay to the Administrative Agent for account of each Lender, upon the request of such Lender through the Administrative Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost or expense that such Lender determines is attributable to:

(a) any payment, prepayment or Conversion of a Eurodollar Loan made by such Lender for any reason (including, without limitation, the acceleration of the Loans pursuant to the Administrative Agent’s or the Lenders’ rights referred to in Article 11) on a date other than the last day of the Interest Period for such Loan; or

(b) any failure by Borrower for any reason to borrow a Eurodollar Loan from such Lender on the date for such borrowing specified in the relevant notice of borrowing given to the Administrative Agent in accordance with the terms of this Agreement.

Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest that otherwise would have accrued on the principal amount so paid, prepaid, Converted or not borrowed for the period from the date of such payment, prepayment, Conversion or failure to borrow to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein over (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate per annum equal to the interest component of the amount such Lender would have bid in the London interbank market for Dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Lender), or if such Lender shall cease to make such bids, the equivalent rate, as reasonably determined by such Lender, derived from Page 3750 of the Dow Jones Markets (Telerate) Service or other publicly available source as described in the definition of LIBOR Rate.

49

(6) U.S. Taxes.

(a) Gross-up for Deduction or Withholding of U.S. Taxes. Borrower agrees to pay to each Lender that is not a U.S. Person such additional amounts as are necessary in order that the net payment of any amount due to such non U.S. Person hereunder after deduction for or withholding in respect of any U.S. Taxes imposed with respect to such payment (or in lieu thereof, payment of such U.S. Taxes by such non U.S. Person), will not be less than the amount stated herein to be then due and payable, provided that the foregoing obligation to pay such additional amounts shall not apply:

(i) to any payment to any Lender hereunder unless such Lender is, on the date hereof (or on the date it becomes a Lender hereunder as provided in Section 12.24(2)) and on the date of any change in the Applicable Lending Office of such Lender, either entitled to submit a Form W-8BEN (relating to such Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form W-8ECI (relating to all interest to be received by such Lender hereunder in respect of the Loans), or

(ii) to any U.S. Taxes imposed solely by reason of the failure by such non U.S. Person to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections with the United States of America of such non U.S. Person if such compliance is required by statute or regulation of the United States of America as a precondition to relief or exemption from such U.S. Taxes.

For the purposes hereof, (A) “U.S. Person” means a citizen, national or resident of the United States of America, a corporation, limited liability company, partnership or other entity created or organized in or under any laws of the United States of America or any State thereof, or any estate or trust that is subject to Federal income taxation regardless of the source of its income, (B) “U.S. Taxes” means any present or future tax, assessment or other charge or levy imposed by or on behalf of the United States of America or any taxing authority thereof or therein, (C) “Form W-8BEN” means Form W-8BEN of the Department of the Treasury of the United States of America and (D) “Form W-8ECI” means Form W-8ECI of the Department of the Treasury of the United States of America. Each of the Forms referred to in the foregoing clauses (C) and (D) shall include such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates.

(b) Evidence of Deduction, Etc. Within thirty (30) days after paying any amount to the Administrative Agent or any Lender from which it is required by law to make any deduction or withholding, and within thirty (30) days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, Borrower shall deliver to the Administrative Agent for delivery to such non U.S. Person evidence satisfactory to such Person of such deduction, withholding or payment (as the case may be).

50

(7) Replacement of Lenders. If any Lender requests compensation pursuant to Section 2.9(1) or 2.9(6), or any Lender’s obligation to Continue Loans of any Type, or to Convert Loans of any Type into the other Type of Loan, shall be suspended pursuant to Section 2.9(2) or 2.9(3) (any such Lender requesting such compensation, or whose obligations are so suspended, being herein called a “Requesting Lender”), Borrower, upon three (3) Business Days notice, may require that such Requesting Lender transfer all of its right, title and interest under this Agreement and such Requesting Lender’s Note to any bank or other financial institution (a “Proposed Lender”) identified by Borrower that is satisfactory to the Administrative Agent (i) if such Proposed Lender agrees to assume all of the obligations of such Requesting Lender hereunder, and to purchase all of such Requesting Lender’s Loans hereunder for consideration equal to the aggregate outstanding principal amount of such Requesting Lender’s Loans, together with interest thereon to the date of such purchase (to the extent not paid by Borrower), and satisfactory arrangements are made for payment to such Requesting Lender of all other amounts accrued and payable hereunder to such Requesting Lender as of the date of such transfer (including any fees accrued hereunder and any amounts that would be payable under Section 2.9(5) as if all of such Requesting Lender’s Loans were being prepaid in full on such date) and (ii) if such Requesting Lender has requested compensation pursuant to Section 2.9(1) or 2.9(6), such Proposed Lender’s aggregate requested compensation, if any, pursuant to Section 2.9(1) or 2.9(6) with respect to such Requesting Lender’s Loans is lower than that of the Requesting Lender. Subject to the provisions of Section 12.24(2), such Proposed Lender shall be a “Lender” for all purposes hereunder. Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements of Borrower contained in Sections 2.9(1), 2.9(6) and 12.5 (without duplication of any payments made to such Requesting Lender by Borrower or the Proposed Lender) shall survive for the benefit of such Requesting Lender under this Section 2.9(7) with respect to the time prior to such replacement.

Section 2.10 Administration Fee. Until payment in full of all obligations under this Agreement and the other Loan Documents, Borrower shall pay to Administrative Agent on each Payment Date (commencing on December 1, 2008), for its sole account, an monthly administration fee (the “Administration Fee”) equal to $4,000.

51

Section 2.11 Take-Out Obligations.

(1) Take-Out Obligations. Borrower acknowledges and agrees that: (a) Eurohypo is obligated, pursuant to and in accordance with the Take-Out Agreement, to acquire CIT’s and KBC’s interest in Note A pursuant to and in accordance with the terms, provisions, covenants and conditions of the Take-Out Agreement; and (b) Eurohypo for purposes of such acquisition is and shall be deemed to be an Eligible Assignee, and no further consent of Borrower shall be required with respect to such acquisition. The outstanding principal balance from time to time of any of the interests in Note A purchased by Eurohypo pursuant to the Take-Out Agreement shall be added to and become a part of Note B (and shall bear interest at the rates set forth therein); provided, however, that upon payment by Eurohypo of the Second Take-Out Amount pursuant to the Take-Out Agreement, Eurohypo may elect, in its sole and absolute discretion, and notwithstanding the provisions of any co-lender agreement among the Lenders to the contrary, to cause the all or a portion of outstanding principal balance of Note A purchased by Eurohypo pursuant to the Take-Out Agreement, together with all or a portion of the outstanding principal balance of Note B held by Eurohypo, to (x) be of the same priority as any portion of Note A previously acquired by Eurohypo from CIT and KBC (whether or not the same is thereafter sold by Eurohypo to a Qualified Substitute Lender, and (y) bear interest at the rates set forth in Note B. Without limiting the provisions of Sections 2.1(6)(c) or 9.9, Borrower shall take such actions, including delivery of one or more replacement notes, as are reasonably requested by Eurohypo to effect the provisions of this Section 2.11(1). Further, as a condition to the acquisition by any Qualified Substitute Lender of any portion of Note A pursuant to Sections 2.5(1)(e) or 2.5(2)(d), such Qualified Substitute Lender shall enter into a written agreement with Eurohypo, in form and substance satisfactory to Eurohypo, whereby such Qualified Substitute Lender acknowledges and agrees to Eurohypo’s rights under this Section 2.11(1) and agrees to enter into such modifications of any co-lender agreement among the Lenders as are necessary to effect such rights (subject, however, to the approval of the Lenders to any such modifications of any co-lender agreement).

(2) Amendments to Take-Out Agreement. Eurohypo, CIT and KBC shall not amend or modify the Take-Out Agreement in a manner which would change the definitions of Take-Out Event, Initial Take-Out Amount or Second Take-Out Amount, without the consent of Borrower.

(3) No Limit on Borrower’s Obligations. Nothing in this Section 2.11 shall be construed as limiting Borrower’s obligations to repay the Loans, together with interest thereon and all other amounts due hereunder or under the other Loan Documents, in accordance with the other provisions of this Agreement and the other Loan Documents.

52

ARTICLE 3

INSURANCE, CONDEMNATION, AND IMPOUNDS

Section 3.1 Insurance. Borrower shall maintain insurance as follows:

(1) Insurance against loss customarily included under standard “All Risk” policies including flood, vandalism, and malicious mischief, boiler and machinery, and such other insurable hazards as, under good insurance practices, from time to time are insured against for other property and buildings similar to the Project in nature, use, location, height, and type of construction. Such policy shall also insure costs of demolition and increased cost of construction. The amount of such insurance shall be not less than one hundred (100%) percent of the replacement cost value of the Improvements. Each such policy shall contain an agreed amount replacement cost endorsement and shall cover, without limitation, all tenant improvements and betterments that Borrower is required to insure on a replacement cost basis. The insurance policy shall be endorsed to also provide guaranteed building replacement cost to the building and such tenant improvements in an amount to be subject to the consent of the Administrative Agent, which consent shall not be unreasonably withheld. The Administrative Agent shall be named mortgagee on a non-contributing Standard Mortgagee Endorsement providing that any loss payable thereunder shall be paid to the Administrative Agent.

(2) (A) General Public Liability insurance, including, without limitation, Commercial General Liability insurance; Owned, Hired and Non Owned Auto Liability; and coverage for Personal Injury, Bodily Injury, Death, Accident and Property Damage, providing in combination no less than $1,000,000 per occurrence and $5,000,000 in the annual aggregate, per location. The policies described in this paragraph shall cover, without limitation: elevators, escalators, independent contractors, contractual liability covering, to the maximum extent permitted by law, Borrower’s obligation to indemnify the Administrative Agent and the Lenders as required under this Agreement, Products and Completed Operations Liability coverage. All such policies shall include the Administrative Agent (for the benefit of the Lenders) as an “Additional Insured.”

(B) Umbrella liability or excess liability providing no less than $50,000,000 per occurrence and in the annual aggregate.

(3) Rental and/or business income coverage in an amount not less than the amount of rent payable annually and/or annual business income, endorsed to provide a 365-day extended period of indemnity. The Administrative Agent shall be named as loss payee with respect to this coverage.

(4) Insurance which affirmatively insures against any act of terrorism or sabotage, including, but not limited to, any series of named perils which are identical to the acts of terrorism (to the extent that such act of terrorism or sabotage may be excluded as such from coverage under the insurance required to be maintained by Borrower pursuant to subsections (1), (2), and (3) above) in an amount equal to the full replacement value of the Project.

(5) Comprehensive boiler and machinery insurance covering all mechanical and electrical equipment against physical damage, rent loss and improvements loss and covering, without limitation, all tenant improvements and betterments that Borrower is required to insure pursuant to any lease on a replacement cost basis and in the minimum amount of $50,000 and naming the Administrative Agent as Mortgagee on a non-contributing Standard Mortgagee Endorsement providing that any loss payable thereunder shall be paid to the Administrative Agent.

53

(6) At all times during which construction work is being performed at the Project, Builder’s Risk “All Risk” insurance in such amount as the Administrative Agent shall require but in no event less than one hundred (100%) percent of the replacement cost value of the completed Improvements and one hundred (100%) percent of the replacement cost value of all tenant improvements. Such policy shall be written on a Builder’s Risk Completed Value Form (100% non-reporting) or its equivalent and shall include coverage for loss by collapse, theft, flood, and earthquake. Such insurance policy shall also include coverage for:

(a) loss suffered with respect to materials, equipment, machinery, and supplies whether on-site, in transit, or stored off-site and with respect to temporary structures, hoists, sidewalks, retaining walls, and underground property;

(b) soft costs, plans, specifications, blueprints and models in connection with any restoration following a casualty;

(c) demolition and increased cost of construction, including, without limitation, increased costs arising out of changes in applicable laws and codes;

(d) law and ordinance coverage; and

(e) rental and/or business income on an actual loss sustained basis.

Such policy shall name the Administrative Agent under a non-contributing New York type of standard mortgagee clause or an equivalent endorsement satisfactory to the Administrative Agent and as “loss payee” with respect to rental/business income insurance. If the insurance required under this subsection 6 is obtained by blanket insurance policies, the insurance policy shall be endorsed to also provide guaranteed building replacement cost to the building and such tenant improvements in an amount to be subject to the consent of the Administrative Agent, which consent shall not be unreasonably withheld.

(7) Workers Compensation and Disability insurance as required by Applicable Law.

(8) Windstorm insurance satisfactory to the Administrative Agent, including, from and after the date that the hotel condominium portion of the Project has opened for business, business interruption coverage sufficient to pay debt service on the Loans, taxes and insurance after a windstorm casualty in such amount as the Administrative Agent shall require, but in no event less than twenty percent (20%) of the replacement cost value of the completed Improvements issued by a carrier that satisfies the requirements in subsection (10) below and in all other respects satisfying the requirements set forth in subsection (10) below.

(9) Such other types and amounts of insurance with respect to Borrower, the Project, the Improvements and the operation thereof that are commonly maintained by prudent owners of other property and buildings similar to the Project in nature, use, location, height, and type of construction, as may from time to time be reasonably required by the Administrative Agent. Administrative Agent acknowledges that the insurance obtained by Borrower with respect to the Project as of the date hereof, evidence of which has been provided to Administrative Agent, satisfies, as of the date hereof, the requirements set forth in this Section 3.1.

54

(10) All insurance policies shall be endorsed in form and substance acceptable to the Administrative Agent to name the Administrative Agent (on behalf of the Lenders) as an additional insured, loss payee or mortgagee thereunder, as its interest may appear, with loss payable to the Administrative Agent, without contribution, under a standard New York (or local equivalent) mortgagee clause. All such insurance policies and endorsements shall be fully paid for and contain such provisions and expiration dates and be in such form and issued by such insurance companies licensed to do business in the State, with a rating of “A-IX” or better as established by Best’s Rating Guide (or an equivalent rating approved in writing by the Administrative Agent). Each policy shall provide that such policy may not be cancelled or materially changed except upon thirty (30) days’ prior written notice of intention of non-renewal, cancellation or material change to the Administrative Agent and that no act or thing done by Borrower shall invalidate any policy as against the Administrative Agent or any Lender. If Borrower fails to maintain insurance in compliance with this Section 3.1, the Administrative Agent may obtain such insurance and pay the premium therefor and Borrower shall, on demand, reimburse the Administrative Agent for all expenses incurred in connection therewith. Borrower shall assign the policies or proofs of insurance to the Administrative Agent (on behalf of the Lenders), in such manner and form that the Administrative Agent and its successors and assigns shall at all times require and hold the same as security for the payment of the Loans. Borrower shall deliver copies of evidence of such coverage on original policies certified to the Administrative Agent by the insurance company or authorized agent as being true copies, together with the endorsements required hereunder. The proceeds of insurance policies coming into the possession of the Administrative Agent shall not be deemed trust funds, and the Administrative Agent shall be entitled to apply such proceeds as herein provided.

(11) Borrower shall give immediate written notice of any loss to the insurance carrier and to the Administrative Agent. Except as otherwise provided in Section 9.17(2), Borrower hereby irrevocably authorizes and empowers the Administrative Agent, as attorney in fact for Borrower coupled with an interest, to make proof of loss, to adjust and compromise any claim under insurance policies, to appear in and prosecute any action arising from such insurance policies, to collect and receive insurance proceeds, and to deduct therefrom the Administrative Agent’s expenses incurred in the collection of such proceeds. Notwithstanding the foregoing, so long as no Potential Default or Event of Default exits, Borrower shall have the right to adjust and compromise claims which, in the aggregate during any twelve-month period, do not exceed the Threshold Amount, provided that Borrower provide the Administrative Agent with not less than five (5) Business Days written notice of such adjustment and compromise. Nothing contained in this Section 3.1(11) shall require the Administrative Agent or any Lender to incur any expense or take any action hereunder.

55

Section 3.2 Condemnation Awards. Borrower shall immediately notify the Administrative Agent of the institution of any proceeding for the condemnation or other taking of the Project or any portion thereof. The Administrative Agent may participate in any such proceeding and Borrower will deliver to the Administrative Agent all instruments necessary or required by the Administrative Agent to permit such participation. Without the Administrative Agent’s prior consent (subject to the approval of the Majority Lenders), Borrower (1) shall not agree to any compensation or award; and (2) shall not take any action or fail to take any action which would cause the compensation to be determined. Except as otherwise provided in Section 9.17(2), all awards and compensation for the taking or purchase in lieu of condemnation of the Project or any part thereof are hereby assigned to and shall be paid to the Administrative Agent. Borrower authorizes the Administrative Agent to collect and receive such awards and compensation, to give proper receipts and acquittances therefor, and in the Administrative Agent’s sole discretion (which the Administrative Agent shall exercise at the direction of the Majority Lenders) to apply the same toward the payment of the Loans, notwithstanding that the Loans may not then be due and payable, or to the restoration of the Project; provided, however, if the award is less than or equal to the Threshold Amount and Borrower requests that such proceeds be used for non structural site improvements (such as landscape, driveway, walkway and parking area repairs) required to be made as a result of such condemnation, the Administrative Agent will apply the award to such restoration in accordance with disbursement procedures applicable to insurance proceeds set forth in Section 3.3 provided there exists no Potential Default or Event of Default. Borrower, upon request by the Administrative Agent, shall execute all instruments requested to confirm the assignment of the awards and compensation to the Administrative Agent, free and clear of all liens, charges or encumbrances.

Section 3.3 Use and Application of Insurance Proceeds. Except as otherwise provided in Section 9.17(2), the Administrative Agent shall apply insurance proceeds to costs of restoring the Project or the Loans as follows:

(1) If the loss is less than or equal to the Threshold Amount, the Administrative Agent shall apply the insurance proceeds to restoration provided (a) no Event of Default or Potential Default exists; (b) Borrower promptly commences and is diligently pursuing restoration of the Project; and (c) the Hotel Management Agreement in effect as of the date of the occurrence of such casualty or condemnation, whichever the case may be, shall (i) remain in full force and effect during such restoration and shall not otherwise terminate as a result of the casualty or condemnation or the restoration; or (ii) if terminated, shall have been replaced with a replacement Hotel Management Agreement with a Qualified Hotel Manager, prior to the opening or reopening of the Project or any portion thereof for business with the public.

(2) If the loss exceeds the Threshold Amount but is not more than ten percent (10%) of the replacement value of the improvements, the Administrative Agent shall apply the insurance proceeds to restoration provided that at all times during such restoration (a) no Event of Default or Potential Default exists; (b) the Administrative Agent determines that there are sufficient funds available to restore and repair the Project to a condition approved by the Administrative Agent; (c) the Administrative Agent determines that the Net Operating Income of the Project during restoration will be sufficient to pay Debt Service; (d) the Administrative Agent determines that restoration and repair of the Project to a condition approved by the Administrative Agent will be completed within six (6) months after the date of loss or casualty and in any event ninety (90) days prior to the Maturity Date; (e) Borrower promptly commences and is diligently pursuing restoration of the Project; and (f) the Hotel Management Agreement in effect as of the date of the occurrence of such casualty or condemnation, whichever the case may be, shall (i) remain in full force and effect during such restoration and shall not otherwise terminate as a result of the casualty or condemnation or the restoration or (ii) if terminated, shall have been replaced with a replacement Hotel Management Agreement with a Qualified Hotel Manager, prior to the opening or reopening of the Project or any portion thereof for business with the public.

56

(3) If the conditions set forth above are not satisfied or the loss exceeds the maximum amount specified in Section 3.3(2) above, in the Administrative Agent’s sole discretion, the Administrative Agent may (subject to the approval of the Majority Lenders) apply any insurance proceeds it may receive to the payment of the Loans, without any prepayment penalty or payment, or allow all or a portion of such proceeds to be used for the restoration of the Project.

Section 3.4 Disbursement of Proceeds.

(1) All insurance proceeds required to be held by the Administrative Agent in the Casualty/Taking Account in accordance with the Cash Management Agreement and, until disbursed in accordance with the provisions of this Section 3.4, shall constitute additional security for the Loans. Upon receipt of evidence reasonably satisfactory to the Administrative Agent that all the conditions precedent to such advance, including, if applicable, those set forth in Section 3.3(2) above, have been satisfied, the insurance proceeds shall be disbursed by the Administrative Agent to, or as directed by, Borrower from time to time during the course of the restoration in substantially the same manner and subject to similar conditions as if such advances were being made in connection with a construction loan, such manner of disbursement and conditions to be reasonably determined by the Administrative Agent, including the Administrative Agent’s receipt of (a) advice from a Restoration Consultant (who shall be employed by the Administrative Agent at Borrower’s sole expense) that the work completed or materials installed conform to said budget and plans, as approved by the Administrative Agent, (b) evidence that all materials installed and work and labor performed to the date of the applicable advance (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, including the receipt of waivers of lien, contractor’s certificates, surveys, receipted bills, releases, title policy endorsements and such other evidences of cost, payment and performance satisfactory to the Administrative Agent, and (c) evidence that 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 of any nature whatsoever on the Project which are not being contested or have not either been fully bonded to the reasonable satisfaction of the Administrative Agent and discharged of record or in the alternative fully insured to the reasonable satisfaction of the Administrative Agent under the title policy obtained in connection with the Loans made herein. Notwithstanding the foregoing, but subject to the other provisions of this Section 3.4, in the event of a loss which is less than or equal to the Threshold Amount, Administrative Agent shall disburse the insurance proceeds to Borrower from time to time during the course of the renovation upon written request therefor from Borrower to pay the costs of such renovation, provided that at all times (i) Borrower is diligently pursuing the completion of such renovation in a good and workmanlike manner, (ii) such advances are being used to reimburse Borrower for, or to pay directly to the third parties entitled thereto, the costs of such renovation, and (iii) upon Administrative Agent’s request from time to time, Administrative Agent shall have received evidence of the type referred to in clause (C) above.

57

(2) All plans and specifications required in connection with the restoration shall be subject to prior review and approval (such approval not to be unreasonably withheld) in all respects by the Administrative Agent and by an independent consulting engineer selected by the Administrative Agent (the “Restoration Consultant”). The Administrative Agent shall have the use of the plans and specifications and all permits, licenses and approvals required or obtained in connection with the restoration. The identity of the contractors, subcontractors and materialmen engaged in the restoration, as well as all contracts having a cost in excess of $50,000, shall be subject to prior review and approval by the Administrative Agent and the Restoration Consultant. All costs and expenses incurred by the Administrative Agent in connection with making the insurance proceeds available for the restoration including reasonable counsel fees and disbursements and the Restoration Consultant’s fees, shall be paid by Borrower. Borrower shall also obtain, at its sole cost and expense, all necessary government approvals as and when required in connection with such restoration and provide copies thereof to the Administrative Agent and Restoration Consultant.

(3) In no event shall the Administrative Agent be obligated to make disbursements of the insurance 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 Restoration Consultant, minus the Restoration Retainage. The term “Restoration Retainage” means the greater of (i) an amount equal to ten percent (10%) of the costs actually incurred for work in place as part of the restoration, as certified by the Restoration Consultant and (ii) the amount actually held back by Borrower from contractors, subcontractors and materialmen engaged in the restoration. The Restoration Retainage shall not be released until the Restoration Consultant certifies to the Administrative Agent that the restoration has been substantially completed in accordance with the provisions of this Section 3.4, subject to punch-list items and other non-material items of work and that all approvals necessary for the re-occupancy and use of the Project have been obtained from all appropriate governmental authorities, and the Administrative Agent receives evidence reasonably satisfactory to the Administrative Agent that the costs of the restoration have been paid in full or will be paid in full out of the Restoration Retainage; provided, however, that the Administrative Agent will release the portion of the Restoration Retainage being held with respect to any contractor, subcontractor or materialman engaged in the restoration as of the date upon which the Restoration Consultant certifies to the Administrative Agent that such contractor, subcontractor or materialman has satisfactorily completed all work and has supplied all materials in accordance with its contract, and the Administrative Agent receives lien waivers and evidence of payment in full of all sums due to such contractor, subcontractor or materialman as may be reasonably requested by the Administrative Agent or by the title company issuing the title policy, and the Administrative Agent receives an endorsement to the title 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 the Administrative Agent, the release of any such portion of the Restoration Retainage shall be approved by the surety company, if any, which has issued a payment or performance bond with respect to such contractor, subcontractor or materialman.

(4) The Administrative Agent shall not be obligated to make disbursements of the insurance proceeds more frequently than once per month.

58

(5) If at any time the insurance proceeds or the undisbursed balance thereof shall not, in the reasonable opinion of the Administrative Agent in consultation with the Restoration Consultant, be sufficient to pay in full the balance of the costs which are estimated by the Restoration Consultant to be incurred in connection with the completion of the restoration, Borrower shall deposit the deficiency (the “Insurance Proceeds Deficiency”) with the Administrative Agent within fifteen (15) Business Days of the Administrative Agent’s request and before any further disbursement of the insurance proceeds shall be made. The Insurance Proceeds Deficiency shall be held in the Casualty/Taking Account in accordance with the Cash Management Agreement and shall be disbursed for costs actually incurred in connection with the restoration on the same conditions applicable to the disbursement of the insurance proceeds, and, until so disbursed, shall constitute additional security for the Loans.

(6) After the Restoration Consultant certifies to the Administrative Agent that a restoration has been substantially completed in accordance with the provisions of this Section 3.4, and the receipt by the Administrative Agent of evidence satisfactory to the Administrative Agent that all costs incurred in connection with the restoration have been paid in full, the excess, if any, of the insurance proceeds and the remaining balance, if any, of the Insurance Proceeds Deficiency deposited with the Administrative Agent shall be remitted to Borrower, provided that no Potential Default or Event of Default shall exist.

(7) All insurance proceeds not required (a) to be made available for the restoration or (b) to be returned to Borrower as excess insurance proceeds pursuant to subsection (6) above may (i) be retained and applied by the Administrative Agent toward the payment of the Loans, whether or not then due and payable, in the order set forth in Section 2.4(7)(a) so long as no Event of Default exists, and, if an Event of Default exists, in such order, priority and proportions as the Administrative Agent in its sole discretion shall deem proper, or, (B) at the sole discretion of the Administrative Agent, the same may be paid, either in whole or in part, to Borrower for such purposes and upon such conditions as the Administrative Agent shall designate.

(8) Notwithstanding any casualty, Borrower shall continue to make payments with respect to the outstanding principal amount in the manner provided in the Notes, this Agreement and the other Loan Documents and the outstanding principal amount shall not be reduced unless and until (a) any insurance proceeds or condemnation award shall have been actually received by the Administrative Agent; (b) the Administrative Agent shall have deducted its reasonable expenses of collecting such proceeds; and (c) the Administrative Agent shall have applied any portion of the balance thereof to the repayment of the outstanding principal amount in accordance with Section 3.4(7). The Lenders shall not be limited to the interest paid on any condemnation award but shall continue to be entitled to receive interest as provided in Article 2.

59

ARTICLE 4

RESERVES

Section 4.1 Real Estate Tax and Insurance Reserve Fund.

(1) Deposits. As of the Amendment Closing Date, the balance of the Tax and Insurance Reserve Subaccount is $1,221,932.14. On each Payment Date occurring after the Amendment Closing Date, Borrower shall deposit with the Administrative Agent (or, at the direction of the Administrative Agent, the Depository Bank), for deposit in the Tax and Insurance Reserve Subaccount, one-twelfth of the real estate taxes on the Project and insurance premium with respect to insurance required to be maintained by Borrower under Section 3.1 hereof that the Administrative Agent estimates will be payable during the next ensuing twelve (12) months, in order to accumulate in the Tax and Insurance Reserve Subaccount thirty (30) days prior to their respective due dates sufficient funds to pay all such real estate taxes and insurance premiums (said amounts, together with the amount set forth in the first sentence of this Section 4.1(1), being, collectively, the “Tax and Insurance Reserve Fund”). If at any time the Administrative Agent reasonably determines that the Tax and Insurance Reserve Fund is not or will not be sufficient to pay real estate taxes or insurance premiums thirty (30) days prior to their respective due dates, the Administrative Agent shall notify Borrower of such determination and Borrower shall increase its monthly deposits into the Tax and Insurance Reserve Fund by the amount that the Administrative Agent reasonably estimates is sufficient to make up the deficiency thirty (30) days prior to delinquency of any such real estate taxes and/or thirty (30) days prior to expiration of the insurance policies, as the case may be. Without limiting the foregoing or Administrative Agent’s other rights and remedies hereunder, in the event that Administrative Agent determines at any time that the Tax and Insurance Reserve Fund is not or will not be sufficient to pay real estate taxes and insurance premiums thirty (30) days prior to their respective due dates, Administrative Agent may utilize funds from time to time on deposit in the Construction Completion Account to pay such real estate taxes and insurance premiums when due. Commencing with the satisfaction of the Partial Release Conditions (as set forth in Section 14.3), the amounts required to be deposited in the Tax and Insurance Reserve Fund may be adjusted on a quarterly basis by the Administrative Agent in its sole and absolute judgment.

(2) Disbursements. Borrower shall furnish the Administrative Agent with (a) bills for the charges for which such deposits are required and (b) a disbursement request (in a form reasonably satisfactory to the Administrative Agent), executed by an authorized officer of Borrower, at least fifteen (15) days prior to the date on which the charges first become payable. Provided that no Event of Default exists, the Administrative Agent will direct the Depository Bank apply the Tax and Insurance Reserve Fund to payments of insurance premiums and real estate taxes required to be made by the Borrower pursuant to Sections 3.1 and 9.2, respectively, and under the Mortgage but, in any event, not earlier than ten (10) days prior to the due dates thereof. In making any payment relating to the Tax and Insurance Reserve Fund, the Depository Bank may do so according to any bill, statement or estimate procured from the appropriate public office (with respect to real estate taxes) or insurer or agent (with respect to insurance premiums), 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 unless said bill, statement or estimate is obviously incorrect. If the amount of the Tax and Insurance Reserve Fund shall exceed the amounts due for insurance premiums and real estate taxes pursuant to Sections 3.1 and 9.2, the Administrative Agent shall, in its sole discretion, return any excess to Borrower or credit such excess against future payments to be made to the Tax and Insurance Reserve Fund. Provided that on the date that said real estate taxes are due and payable, no Event of Default exists and sufficient funds are on deposit in the Tax and Insurance Reserve Fund to pay real estate taxes, Borrower shall not be liable to pay and shall not be charged with any late charges, interest and/or penalties imposed by or payable to any governmental authority as a result of the Depository Bank’s failure to pay real estate taxes prior to the date that same become delinquent.

60

Section 4.2 Seasonality Reserve Fund.

(1) Deposits. Commencing on the first Payment Date occurring after the Amendment Closing Date and thereafter on each Payment Date occurring prior to the first anniversary of the Amendment Closing Date, Borrower shall deposit with the Administrative Agent (or, at the direction of the Administrative Agent, the Depository Bank), for deposit in the Seasonality Reserve Account, all Net Operating Cash Flow. Thereafter, on each Payment Date occurring on or after the first anniversary of the Amendment Closing Date, Borrower shall deposit with the Administrative Agent (or, at the direction of the Administrative Agent, the Depository Bank), for deposit in the Seasonality Reserve Account, all or such portion of the Net Operating Cash Flow as is necessary to cause the balance of the Seasonality Reserve Account to at all times equal the Minimum Seasonality Reserve Balance (the “Seasonality Reserve Fund”).

(2) Disbursements. Provided that no Potential Default and/or Event of Default exists (other than a Potential Default or an Event of Default which may be cured by the transfer of amounts credited to the Seasonality Reserve Fund to Borrower’s account pursuant to this Section 4.2(2)), and provided that there are insufficient Operating Revenues to pay Operating Expenses and Debt Service, the Administrative Agent will direct the Depository Bank to transfer (to the extent funds are available therein) amounts credited to the Seasonality Reserve Fund to Borrower’s account to pay or reimburse Borrower for the payment of any interest payments then due and payable with respect to the Loans and the Existing Mezzanine Loan and any Operating Expenses then due and payable in accordance with the current Annual Operating Budget approved by the Administrative Agent (or as may otherwise be approved by the Administrative Agent). Provided that no Potential Default and/or Event of Default exists, the Administrative Agent shall direct the Depository Bank to make such disbursements as requested by Borrower on a monthly basis within five (5) Business Days following receipt by the Administrative Agent of a written request for disbursement (in a form reasonably approved by the Administrative Agent) executed by an authorized officer of Borrower, which certificate shall certify, among other things, that there are insufficient Operating Revenues to pay Operating Expenses (for which such disbursement is being requested) and insufficient funds remaining to be disbursed from the Interest Holdback to pay Debt Service on the Loans and the Existing Mezzanine Loan, as well as such evidence as the Administrative Agent may reasonably require to demonstrate that any such Operating Expenses were incurred pursuant to the current Annual Operating Budget (to the extent the same are not otherwise approved by the Administrative Agent). Additionally, provided that no Potential Default and/or Event of Default exists, the Administrative Agent shall from time to time upon request of Borrower, apply all or a portion of the balance of the Seasonality Reserve Fund to the payment of the outstanding principal balance of the Loans.

61

Section 4.3 Construction Completion Fund.

(1) Funding. On the Amendment Closing Date, Borrower shall cause the remaining unfunded proceeds of the Junior Mezzanine Loan in the amount of $6,000,000 (the “Construction Completion Fund”) to be deposited in the Construction Completion Account, such that, as of the Amendment Closing Date, the balance of funds on deposit in the Construction Completion Account shall be $6,000,000.

(2) Disbursements. So long as no Potential Default and/or Event of Default exists, the Administrative Agent shall direct the Depository Bank to disburse the Construction Completion Fund to Borrower upon the satisfaction of the applicable Advance Conditions set forth in Schedule 2.1 for purposes of funding the costs of the Building Conversion pursuant to the Project Budget; provided, that no portion of the Construction Completion Fund shall be used to pay any development or other fees of Borrower or its Affiliates, nor shall the proceeds of the Construction Completion Fund be disbursed to pay any Franchise Fee. All disbursements otherwise made shall be subject to the Advance Conditions and shall be in the amounts and for purposes established in the Project Budget. Any funds remaining in the Construction Completion Fund following Construction Completion shall be applied by the Administrative Agent to the outstanding principal balance of the Loans on the Payment Date following Construction Completion.

Section 4.4 Reserve Funds and Security Accounts Generally.

(1) Grant of Security Interest. Borrower hereby grants a perfected first priority security interest in favor of the Administrative Agent for the ratable benefit of the Lenders in each Reserve Fund and Security Account established by or for it hereunder and all financial assets and other property and sums at any time held, deposited or invested therein, and all security entitlements and investment property relating thereto, together with any interest or other earnings thereon, and all proceeds thereof, whether accounts, general intangibles, chattel paper, deposit accounts, instruments, documents or securities (collectively, “Reserve Account Collateral”), together with all rights of a secured party with respect thereto (even if no further documentation is requested by the Administrative Agent or the Lenders or executed by Borrower). Borrower covenants and agrees:

(a) to do all acts that may be reasonably necessary to maintain, preserve and protect Reserve Account Collateral;

(b) to pay promptly when due all material taxes, assessments, charges, encumbrances and liens now or hereafter imposed upon or affecting any Reserve Account Collateral;

(c) to appear in and defend any action or proceeding which may materially and adversely affect Borrower’s title to or the Administrative Agent’s interest in the Reserve Account Collateral;

(d) following the creation of each Reserve Fund and Security Account established by or for Borrower and the initial funding thereof, other than to the Administrative Agent pursuant to this Agreement or the Cash Management Agreement, not to transfer, assign, sell, surrender, encumber, mortgage, hypothecate, or otherwise dispose of any of the Reserve Account Collateral or rights or interests therein, and to keep the Reserve Account Collateral free of all levies and security interests or other liens or charges except the security interest in favor of the Administrative Agent granted hereunder;

62

(e) to account fully for and promptly deliver to the Administrative Agent, in the form received, all documents, chattel paper, instruments and agreements constituting the Reserve Account Collateral hereunder, endorsed to the Administrative Agent or in blank, as requested by the Administrative Agent, and accompanied by such powers as appropriate and until so delivered all such documents, instruments, agreements and proceeds shall be held by Borrower in trust for the Administrative Agent, separate from all other property of Borrower; and

(f) from time to time upon request by the Administrative Agent, to furnish such further assurances of Borrower’s title with respect to the Reserve Account Collateral, execute such written agreements, or do such other acts, all as may be reasonably necessary to effectuate the purposes of this agreement or as may be required by law, or in order to perfect or continue the first-priority lien and security interest of the Administrative Agent in the Reserve Account Collateral.

(2) Rights on Event of Default. Upon the occurrence and during the continuance of an Event of Default, the Administrative Agent, at its option, may withdraw the Reserve Funds and the other funds in the Security Accounts and apply such funds to the items for which the Reserve Funds were established or to payment of the Loans in such order, proportion and priority as the Administrative Agent may determine in its sole discretion. The Administrative Agent’s right to withdraw and apply such funds shall be in addition to all other rights and remedies provided to the Administrative Agent on behalf of the Lenders under the Loan Documents.

(3) Prohibition Against Further Encumbrance. Borrower shall not, without the prior consent of the Administrative Agent, further pledge, assign or grant any security interest in the Reserve Funds or the Security Accounts or permit any Lien to attach.

(4) Release of Reserve Funds. Any amount remaining in the Reserve Funds and the Security Accounts after the Loans have been paid in full shall be promptly returned to Borrower.

(5) Interest. In the event that any Security Account is an interest-bearing account, the balance of any interest in such Security Account shall be deemed a part of such Security Account. Nothing herein shall be construed as requiring the Administrative Agent or the Lenders to pay interest on any Security Account.

63

ARTICLE 5

ENVIRONMENTAL MATTERS

Section 5.1 Certain Definitions. As used herein, the following terms have the meanings indicated:

(1) “Environmental Claim” means, with respect to any Person, any written notice, notification, claim, administrative, regulatory or judicial action, suit, judgment, demand or other written communication by any Person or governmental authority alleging or asserting liability with respect to Borrower or the Project, whether for damages, contribution, indemnification, cost recovery, compensation, injunctive relief, response, remediation, damages to natural resources, personal injuries, fines or penalties arising out of, based on or resulting from (a) the presence, use or release into the environment of any Hazardous Materials originating at or from, or otherwise affecting, the Project; (b) any fact, circumstance, condition or occurrence forming the basis of any violation, or alleged violation, of any Environmental Law by Borrower or otherwise affecting the health, safety or environmental condition of the Project or (iii) any alleged injury or threat of injury to the environment by Borrower or otherwise affecting the Project.

(2) “Environmental Laws” means any federal, state or local law (whether imposed by statute, or administrative or judicial order, or common law), now or hereafter enacted, governing health, safety, industrial hygiene, the environment or natural resources, or Hazardous Materials, including, such laws governing or regulating the use, generation, storage, removal, recovery, treatment, handling, transport, disposal, control, discharge of, or exposure to, Hazardous Materials.

(3) “Environmental Liens” has the meaning assigned to such term in Section 5.3(4).

(4) “Environmental Losses” means any losses, damages, costs, fees, expenses, claims, suits, judgments, awards, liabilities (including but not limited to strict liabilities), obligations, debts, diminutions in value, fines, penalties, charges, costs of remediation (whether or not performed voluntarily), amounts paid in settlement, foreseeable and unforeseeable consequential damages, litigation costs, reasonable attorneys’ fees and expenses, engineers’ fees, environmental consultants’ fees, and investigation costs (including but not limited to costs for sampling, testing and analysis of soil, water, air, building materials, and other materials and substances whether solid, liquid or gas), of whatever kind or nature, and whether or not incurred in connection with any judicial or administrative proceedings, actions, claims, suits, judgments or awards relating to Hazardous Materials, Environmental Claims, Environmental Liens and violation of Environmental Laws.

(5) “Hazardous Materials” means (a) petroleum or chemical products, whether in liquid, solid, or gaseous form, or any fraction or by product thereof; (b) asbestos or asbestos containing materials; (c) polychlorinated biphenyls (PCBs); (d) radon gas; (e) underground storage tanks; (f) any explosive or radioactive substances; (g) lead or lead-based paint; (h) Mold; or (i) any other substance, material, waste or mixture which is or shall be listed, defined, or otherwise determined by any governmental authority to be hazardous, toxic, dangerous or otherwise regulated, controlled or giving rise to liability under any Environmental Laws.

(6) “Mold” means any microbial or fungus contamination or infestation in any Project of a type which could reasonably be anticipated (after due inquiry and investigation) to pose a risk to human health or the environment or could reasonably be anticipated (after due inquiry and investigation) to negatively and materially impact the value of such Project.

64

Section 5.2 Representations and Warranties on Environmental Matters. Borrower represents and warrants to the Administrative Agent and the Lenders that, to Borrower’s knowledge, except as set forth in the Site Assessment or otherwise in conformance with all applicable laws, including Environmental Laws, (1) no Hazardous Material is now or was formerly used, stored, generated, manufactured, installed, treated, discharged, disposed of or otherwise present at or about the Project or any property adjacent to the Project (except for cleaning and other products currently used in connection with the routine maintenance or repair of the Project in full compliance with Environmental Laws), (2) all permits, licenses, approvals and filings required by Environmental Laws have been obtained, and the use, operation and condition of the Project do not, and did not previously, violate any Environmental Laws, (3) no civil, criminal or administrative action, suit, claim, hearing, investigation or proceeding has been brought or been threatened in writing, nor have any settlements been reached by or with any parties or any Liens imposed in connection with the Project concerning Hazardous Materials or Environmental Laws and (4) no underground storage tanks exist at the Project.

Section 5.3 Covenants on Environmental Matters.

(1) Borrower shall (a) comply strictly and in all respects with applicable Environmental Laws; (b) notify the Administrative Agent immediately upon Borrower’s discovery of any spill, discharge, release or presence of any Hazardous Material (unless otherwise disclosed in the Site Assessment) at, upon, under, within, contiguous to or otherwise affecting the Project; (c) promptly remove such Hazardous Materials and remediate the Project in full compliance with Environmental Laws and in accordance with the recommendations and specifications of an independent environmental consultant selected by Borrower and approved by the Administrative Agent; and (d) promptly forward to the Administrative Agent copies of all orders, notices, permits, applications or other communications and reports in connection with any spill, discharge, release or the presence of any Hazardous Material or any other matters relating to the Environmental Laws or any similar laws or regulations, as they may affect the Project or Borrower.

(2) Borrower shall not cause, and shall prohibit any other Person within the control of Borrower from causing, and shall use prudent, commercially reasonable efforts to prohibit other Persons (including tenants) from (a) causing any spill, discharge or release, or the use, storage, generation, manufacture, installation, or disposal, of any Hazardous Materials at, upon, under, within or about the Project or the transportation of any Hazardous Materials to or from the Project (except for cleaning and other products used in connection with the routine maintenance or repair of the Project in full compliance with Environmental Laws and except as done in connection with the remediation of the Project in full compliance with Environmental Laws), (e) installing any underground storage tanks at the Project, or (f) conducting any activity that requires a permit or other authorization under Environmental Laws to be conducted at the Project, except in connection with any remediation contemplated hereunder.

(3) Borrower shall provide to the Administrative Agent, at such Borrower’s expense promptly upon the written request of the Administrative Agent from time to time (but no more than once every two years), a Site Assessment or, if required by the Administrative Agent, an update to any existing Site Assessment, to assess the presence or absence of any Hazardous Materials and the potential costs in connection with abatement, cleanup or removal of any Hazardous Materials found on, under, at or within the Project. Borrower shall pay the cost of no more than one such Site Assessment or update in any twelve (12) month period, unless the Administrative Agent’s request for a Site Assessment is based on information provided under Section 5.3(1), a reasonable suspicion of Hazardous Materials at or near the Project, a breach of representations under Section 5.2, or an Event of Default, in which case any such Site Assessment or update shall be at Borrower’s expense.

65

(4) Environmental Notices. Borrower shall promptly provide notice to the Administrative Agent of:

(a) all Environmental Claims asserted or threatened against Borrower or any other party occupying the Project or any portion thereof or against the Project which become known to Borrower;

(b) the discovery by Borrower of any occurrence or condition on the Project or on any real property adjoining or in the vicinity of the Project which could reasonably be expected to lead to an Environmental Claim against Borrower, the Administrative Agent or any of the Lenders;

(c) the commencement or completion of any remediation at the Project; and

(d) any Lien or other encumbrance imposed pursuant to any Environmental Law (“Environmental Liens”).

In connection therewith, Borrower shall transmit to the Administrative Agent copies of any citations, orders, notices or other written communications received from any Person and any notices, reports or other written communications submitted to any governmental authority with respect to the matters described above.

Section 5.4 Allocation of Risks and Indemnity.

(1) Allocation and Indemnity. As between Borrower, the Administrative Agent and the Lenders, all risk of loss associated with non-compliance with Environmental Laws, or with the presence of any Hazardous Material at, upon, within, contiguous to or otherwise affecting the Project, shall lie solely with Borrower. Accordingly, Borrower shall bear all risks and costs associated with any Environmental Loss, damage or liability therefrom, including all costs of removal of Hazardous Materials or other remediation required by the Administrative Agent or by law. Borrower shall indemnify, defend and hold the Administrative Agent and the Lenders harmless from and against all loss, liabilities, damages, claims, costs and expenses (including reasonable costs of defense) arising out of or associated, in any way, with the non-compliance with Environmental Laws, or the existence of Hazardous Materials in, on, or about the Project, or a breach of any representation, warranty or covenant contained in this Article 5, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute or common law, including those arising from the joint, concurrent, or comparative negligence of the Administrative Agent and the Lenders; provided, however, Borrower shall not be liable under such indemnification to the extent such loss, liability, damage, claim, cost or expense results solely from the Administrative Agent’s or any Lender’s gross negligence or willful misconduct. Borrower’s obligations under this Section 5.4 shall arise upon the discovery of the presence of any Hazardous Material, whether or not any governmental authority has taken or threatened any action in connection with the presence of any Hazardous Material, and whether or not the existence of any such Hazardous Material or potential liability on account thereof is disclosed in the Site Assessment and shall continue notwithstanding the repayment of the Loans or any transfer or sale of any right, title and interest in the Project (by foreclosure, deed in lieu of foreclosure or otherwise).

66

(2) Possession Transfer. Notwithstanding anything to the contrary in this Agreement, Borrower’s obligations to indemnify and hold harmless the Administrative Agent and the Lenders or to remove, abate or remediate Hazardous Materials and/or cure violations of Environmental Laws shall not extend to any of the foregoing arising directly from: (a) gross negligence or willful misconduct of the Administrative Agent or the Lenders; (b) the violation of any Environmental Law by any party other than Borrower, any Affiliate of Borrower or any of their respective employees, contractors or agents, after the Administrative Agent or any purchaser from the Administrative Agent at a foreclosure sale or after a deed in lieu thereof takes title to and possession of the Project or otherwise takes actual possession and control (to the exclusion of Borrower and its Affiliates) (a “Possession Transfer”); or (c) the failure of Administrative Agent or any such purchaser in a Possession Transfer to comply with any lead based paint and asbestos operating and maintenance programs for the Project as approved by the Administrative Agent. The burden of proving items (a), (b) or (c) above shall be the obligation of Borrower.

Section 5.5 No Waiver. Notwithstanding any provision in this Article 5 or elsewhere in the Loan Documents, or any rights or remedies granted by the Loan Documents, the Administrative Agent and the Lenders do not waive and expressly reserves all rights and benefits now or hereafter accruing to the Administrative Agent and/or any Lenders under the “security interest” or “secured creditor” exception under applicable Environmental Laws, as the same may be amended. No action taken by the Administrative Agent and/or any Lender pursuant to the Loan Documents shall be deemed or construed to be a waiver or relinquishment of any such rights or benefits under the “security interest exception.”

67

ARTICLE 6

LEASING MATTERS

Section 6.1 Representations and Warranties on Leases. Borrower represents and warrants to the Administrative Agent and the Lenders that: (1) the only lease or other occupancy agreement presently affecting the Project is the Restaurant Lease; (2) the Restaurant Lease is in full force and effect, and has not been modified, supplemented or terminated in any way, and there are no oral agreements with respect thereto; (3) Borrower has delivered to the Administrative Agent a true, correct and complete copy of the Restaurant Lease; (4) neither the landlord nor the tenant is in default under the Restaurant Lease; (5) Borrower has not assigned or pledged the Restaurant Lease, the rents therefrom or any interests therein except to the Administrative Agent (on behalf of the Lenders); and (6) the tenant under the Restaurant Lease has not prepaid more than one (1) month’s rent in advance (except for bona fide security deposits not in excess of an amount equal to two (2) months rent).

Section 6.2 Restaurant Lease and Future Lease. Borrower shall not modify, supplement or terminate in any way the Restaurant Lease without the Administrative Agent’s prior written consent, and Borrower shall not enter into any other lease of all or any portion of the Project without the prior written consent of the Administrative Agent.

Section 6.3 Covenants. Borrower (1) shall perform the obligations which Borrower is required to perform under the Restaurant Lease and any other lease entered into by Borrower with respect to the Project; (2) shall enforce the obligations to be performed by the tenants such leases; (3) shall promptly furnish to the Administrative Agent any notice of monetary default or termination received by Borrower from any such tenant, and any notice of monetary default or termination given by Borrower to any such tenant; (4) shall not collect any rents under any such leases 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 (2) months rent; (5) shall not enter into any ground lease or master lease of any part of the Project; (6) shall not further assign or encumber any lease of the Project; (7) shall not, except with the Administrative Agent’s prior written consent, cancel or accept surrender or termination of any lease of the project, except in the normal course of business; (8) shall not amend any easements affecting the Project without the Administrative Agent’s prior approval; and (9) shall not, except with the Administrative Agent’s prior written consent, modify or amend any lease of the Project, and any action in violation of Sections 6.3(5), (6), (7), and (8) shall be void at the election of the Administrative Agent.

ARTICLE 7

REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants to the Administrative Agent and the Lenders that:

Section 7.1 Organization and Power. Borrower and each Borrower Party is duly organized, validly existing and in good standing under the laws of the state of its formation or existence, and is in compliance with legal requirements applicable to doing business in the State. Borrower is not a “foreign person” within the meaning of § 1445(f)(3) of the Internal Revenue Code.

Section 7.2 Validity of Loan Documents. The execution, delivery and performance by Borrower and each Borrower Party of the Loan Documents to which they are a party: (1) are duly authorized; and (2) will not violate any law. The Loan Documents constitute the legal, valid and binding obligations of Borrower and each Borrower Party, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, or similar laws generally affecting the enforcement of creditors’ rights.

68

Section 7.3 Liabilities; Litigation.

(1) The financial statements delivered by Borrower and each Borrower Party are true and correct in all material respects with no significant change since the date of preparation. Except as disclosed in such financial statements, there are no liabilities (fixed or contingent) affecting the Project, Borrower or any Borrower Party that would reasonably be expected to have an adverse effect on Borrower’s ability to fulfill its obligations hereunder. Except as disclosed in such financial statements or otherwise to Administrative Agent, there is no litigation, administrative proceeding, investigation or other legal action (including any proceeding under any state or federal bankruptcy or insolvency law) pending or, to the knowledge of Borrower, threatened, against the Project, Borrower or any Borrower Party which if adversely determined could have a material adverse effect on such party, the Project or the Loans.

(2) Neither Borrower nor any Borrower Party is contemplating either the filing of a petition by it under state or federal bankruptcy or insolvency laws or the liquidation of all or a major portion of its assets or property, and neither Borrower nor any Borrower Party has knowledge of any Person contemplating the filing of any such petition against it.

Section 7.4 Taxes and Assessments. The Project is comprised of three (3) parcels which constitute separate tax lots and do not constitute a portion of any other tax lot. There are no pending or, to Borrower’s best knowledge, proposed, special or other assessments for public improvements or otherwise affecting the Project, nor are there any contemplated improvements to the Project that may result in such special or other assessments.

Section 7.5 Other Agreements; Defaults. Neither Borrower nor any Borrower Party is a party to any agreement or instrument or subject to any court order, injunction, permit, or restriction which might adversely affect the Project or the business, operations, or condition (financial or otherwise) of Borrower or any Borrower Party. Neither Borrower nor any Borrower Party is in violation of any agreement which violation would have an adverse effect on the Project, Borrower, or any Borrower Party or Borrower’s or any Borrower Party’s business, properties, or assets, operations or condition, financial or otherwise.

Section 7.6 Compliance with Law.

(1) Borrower and each Borrower Party have (or shall timely obtain) all requisite licenses, permits, franchises, qualifications, certificates of occupancy or other governmental authorizations to own, lease and operate the Project and carry on its business, and will take all actions necessary to obtain such approvals to establish and sell condominium units at the Project. The Project is in compliance in all material respects with all applicable legal requirements, and to the best knowledge and belief of Borrower and subject to information disclosed to Administrative Agent in structural reports provided to Administrative Agent prior to closing, is free of material defects, and all building systems contained therein are generally in good working order, subject to ordinary wear and tear. The Project constitutes a legally non-conforming use under applicable legal requirements;

(2) No condemnation has been commenced or, to Borrower’s knowledge, is contemplated with respect to all or any portion of the Project or for the relocation of roadways providing access to the Project; and

69

(3) The Project has adequate rights of access to public ways and, except as would not reasonably be expected to have any Material Adverse Effect, is served by adequate water, sewer, sanitary sewer and storm drain facilities. All public utilities necessary or convenient to the full use and enjoyment of the Project are located in the public right-of-way abutting the Project, and all such utilities are connected so as to serve the Project without passing over other property, except to the extent such other property is subject to an easement for such utility benefiting the Project. All roads necessary for the full utilization of the Project for its current purpose have been completed and, dedicated to public use and accepted by all governmental authorities.

Section 7.7 Location of Borrower. Borrower’s principal place of business and chief executive offices are located at the address stated in Section 12.1.

Section 7.8 ERISA. Borrower has not established any pension plan for employees which would cause Borrower to be subject to the ERISA.

Section 7.9 Margin Stock. No part of proceeds of the Loans will be used for purchasing or acquiring any “margin stock” within the meaning of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System.

Section 7.10 Tax Filings. Borrower and each Borrower Party have filed (or have obtained effective extensions for filing) all federal, state and local tax returns required to be filed and have paid or made adequate provision for the payment of all federal, state and local taxes, charges and assessments payable by Borrower and each Borrower Party, respectively.

Section 7.11 Solvency. Giving effect to the Loans, the fair saleable value of Borrower’s assets exceeds and will, immediately following the making of the Loans, 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 Loans, 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 Loans 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 Debts and liabilities (including contingent liabilities and other commitments) beyond its ability to pay such Debts 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).

Section 7.12 Full and Accurate Disclosure. No statement of fact made by or on behalf of Borrower or any Borrower Party in this Agreement or in any of the other Loan Documents or in any certificate, statement or questionnaire prepared and delivered by Borrower or any Borrower Party in connection with the Loans contains any untrue statement of a material fact or omits to state any material fact necessary to make statements contained herein or therein not misleading. There is no fact presently known to Borrower or any Borrower Party which has not been disclosed to the Administrative Agent which adversely affects, nor as far as Borrower can foresee, might adversely affect, the Project or the business, operations or condition (financial or otherwise) of Borrower or any Borrower Party.

Section 7.13 Single Purpose Entity. Borrower is and has at all times since its formation been a Single Purpose Entity.

70

Section 7.14 Management of the Project. The Building Conversion is being managed solely by Project Manager. From and after the Hotel Opening, the Hotel Improvements shall be operated solely by the Hotel Manager pursuant to the Hotel Management Agreement.

Section 7.15 No Conflicts. The execution, delivery and performance of this Agreement and the other Loan Documents by Borrower and each Borrower Party will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any Lien (other than pursuant to the Loan Documents) upon any of the property or assets any such party pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, operating agreement or other agreement or instrument to which Borrower or any Borrower Party is a party or by which any of property or assets of Borrower or any Borrower Party is subject, nor will such action result in any violation of the provisions of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over Borrower or any Borrower Party or any properties or assets of Borrower or any Borrower Party, and any consent, approval, authorization, order, registration or qualification of or with any court or any such regulatory authority or other governmental agency or body required for the execution, delivery and performance by Borrower or any Borrower Party of this Agreement or any other Loan Documents has been obtained and is in full force and effect.

Section 7.16 Title. Borrower has good, marketable and insurable title to the Project, free and clear of all Liens whatsoever, except for the Permitted Encumbrances and such other Liens as are permitted pursuant to the Loan Documents. The Mortgage creates (and upon the recordation thereof and of any related financing statements there will be perfected) (1) a valid Lien on the Project, subject only to Permitted Encumbrances; and (2) security interests in and to, and collateral assignments of, all personality (including the leases), all in accordance with the terms thereof, in each case subject only to any applicable Permitted Encumbrances and such other Liens as are permitted pursuant to the Loan Documents. There are no claims for payment for work, labor or materials affecting the Project which are or may become a Lien prior to, or of equal priority with, the Liens created by the Loan Documents. 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 Agreement, materially and adversely affect the value of the Project, impair the use or operations of the Project or impair Borrower’s ability to pay its obligations in a timely manner.

Section 7.17 Flood Zone. Project is located in an area identified by the Secretary of Housing and Urban Development or any successor thereto as an area having special flood hazards pursuant to the National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 or the National Flood Insurance Act of 1994, as amended, or any successor law.

Section 7.18 Insurance. Borrower has obtained and has delivered to the Administrative Agent certificates of insurance or certified copies of all of the insurance policies for the Project reflecting the insurance coverages, amounts and other insurance requirements set forth in this Agreement. No claims have been made under any such policy, and no Person, including Borrower, has done, by act or omission, anything which would impair the coverage of any such policy.

71

Section 7.19 Certificate of Occupancy; Licenses. All Licenses required under Applicable Law to have been obtained on or before the date hereof have been obtained and are in full force and effect. Borrower shall also timely obtain in accordance with Applicable Law all Licenses required to be obtained subsequent to the date hereof, and shall keep and maintain all Licenses in full force and effect as required by Applicable Law.

Section 7.20 Physical Condition. As of the date hereof (except with respect to the work necessary in order to achieve Construction Completion), and thereafter upon Construction Completion, the Project, 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, shall be in good condition, order and repair in all material respects. To Borrower’s knowledge, there exists no structural or other material defects or damages in the Project, whether latent or otherwise, and Borrower has not received written notice from any insurance company or bonding company of any defects or inadequacies in the Project, 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.

Section 7.21 Boundaries. Except as disclosed on the Survey, all of the Improvements lie wholly within the boundaries and building restriction lines of the Project, and no improvements on adjoining properties encroach upon the Project, and no Improvements encroach upon or violate any easements or other encumbrances upon the Project, so as to materially adversely affect the value or marketability of the Project, except those which are insured against by title insurance.

Section 7.22 Material Agreements.

(1) Borrower has delivered to the Administrative Agent a true, correct and complete copy of the Project Management Agreement, and such agreement has not been modified, supplemented or terminated in any way and remains in full force and effect. The Project Management Agreement is the only project management agreement in existence with respect to the subject matter thereof. Neither party to such agreement is in default under such agreement and the Project Manager has no defense, offset right or other right to withhold performance under or terminate such agreement.

(2) Borrower has delivered to the Administrative Agent a true, correct and complete copy of the Hotel Management Agreement, and such agreement has not been modified, supplemented or terminated in any way and remains in full force and effect. The Hotel Management Agreement is the only hotel management agreement in existence with respect to the operation or management of the hotel to be opened at the Project. Neither party to such agreement is in default under such agreement and the Hotel Manager has no defense, offset right or other right to withhold performance under or terminate such agreement.

(3) Borrower has delivered to the Administrative Agent a true, correct and complete copy of the Technical Services Agreement, and such agreement has not been modified, supplemented or terminated in any way and remains in full force and effect. The Technical Services Agreement is the only technical services agreement in existence with respect to the Project. Neither party to such agreement is in default under such agreement and Hotel Manager has no defense, offset right or other right to withhold performance under or terminate such agreement.

72

(4) Borrower has delivered to the Administrative Agent a true, correct and complete copy of the Construction Management Contract, and such agreement has not been modified, supplemented or terminated in any way and remains in full force and effect. The Construction Management Contract is the only construction management or general contractor contract in existence with respect to the Building Conversion. Neither party to such agreement is in default under such agreement and the Construction Manager has no defense, offset right or other right to withhold performance under or terminate such agreement

(5) Borrower has delivered to the Administrative Agent a true, correct and complete copy of the Forward Purchase Contract, and such agreement has not been modified, supplemented or terminated in any way and remains in full force and effect. None of the parties to such agreement are in default under such agreement and none of the parties to such agreement has any defense, offset right or other right to withhold performance under or terminate such agreement.

Section 7.23 Project Budget. Schedule 7.23 hereto sets forth a true, correct and complete copy of the Project Budget. The amounts and allocations set forth in the Project Budget, as it may be amended in accordance with the terms of this Agreement, present a full, complete and good faith representation of all costs, expenses and fees required to achieve Construction Completion, to pay pre-opening costs associated with the Hotel Opening, to pay interest on the Loans and Operating Expenses through the Hotel Opening, and to pay costs in connection with the marketing and sale of the Units.¹ Borrower is unaware of any other such costs, expenses or fees which are material and are not included within the Project Budget.

Section 7.24 Filing and Recording Taxes. All transfer taxes, deed stamps, intangible taxes or other amounts in the nature of transfer taxes required to be paid by any Person under applicable legal requirements currently in effect in connection with the transfer of the Project to Borrower or any transfer of a controlling interest in Borrower have been paid. All mortgage, mortgage recording, stamp, intangible or other similar tax required to be paid by any Person under applicable legal requirements currently in effect 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 and, under current legal requirements, the Mortgage is enforceable in accordance with its terms by the Administrative Agent or any subsequent holder thereof (on behalf of the Lenders), subject to applicable bankruptcy, insolvency, or similar laws generally affecting the enforcement of creditors’ rights.

Section 7.25 Investment Company Act. Borrower is not (1) an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended; (2) 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 (3) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money.

¹ Eurohypo to confirm.

73

Section 7.26 Patriot Act; Foreign Assets Control Regulations. Neither the execution and delivery of this Agreement, the Notes and the other Loan Documents by Borrower or any Borrower Party nor the use of the proceeds of the Loans, will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or the Anti-Terrorism Order or any enabling legislation or executive order relating to any of the same. Without limiting the generality of the foregoing, neither Borrower, any direct or indirect owner of any interest in Borrower; (a) is listed on any Government Lists; (b) is a person who has been determined by competent authority to be subject to the prohibitions contained in Anti-Terrorism Order or any other similar prohibitions contained in the rules and regulations of OFAC or in any enabling legislation or other Executive Order of the President of the United States in respect thereof; (c) has been previously indicted for or convicted of any felony involving a crime or crimes of moral turpitude or for any Patriot Act Offenses; (d) is currently under investigation by any governmental authority for alleged criminal activity; or (e) has a reputation in the community for criminal or unethical behavior.

Section 7.27 Organizational Structure.

(1) Borrower has heretofore delivered to the Administrative Agent a true and complete copy of the Organizational Documents of Borrower and each Borrower Party. The only member of Borrower is the Sole Member, and there is no manager of Borrower other than the Sole Member. There are no outstanding equity rights with respect to Borrower.

(2) The only members of Sole Member on the date hereof are Mondrian Miami Investment LLC, a Delaware limited liability company, and Sanctuary West Avenue, LLC, a Delaware limited liability company. The Sole Member is managed by both of its members. There are no outstanding equity rights with respect to Sole Member.

(3) Schedule 7.27 contains a true and accurate chart reflecting the ownership of all of the direct and indirect equity interests in Borrower, the Sole Member and the Junior Mezzanine Borrower, including the percentage of ownership interest of the Persons shown thereon.

Section 7.28 Property Specific Representations.

(1) Neither the Project nor any part thereof is now damaged or injured as a result of any fire, explosion, accident, flood or other casualty.

(2) The Project is zoned RM-3, which permits the current operation of the Project as a 335-unit apartment facility with 177 parking spaces as a legal non-conforming use; and does not restrict conversion of the Project to a 335-unit hotel condominium project with adequate space at the Project for 177 parking spaces and 29 or more boat slips.

74

(3) There are currently 177 parking spaces located on the Project. Without limiting the representations of Borrower set forth in Sections 7.6 and 7.19, the Project complies with all applicable zoning and land use laws, rules, regulations as a legal nonconforming use and complies with all material Licenses.

(4) The repair and replacement of the exterior windows and sliding doors at the Project as required to be accomplished by Borrower under the Existing Loan Agreement has been satisfactorily completed by Borrower.

(5) The repairs to the Project as set forth on Schedule 9.24(a) of the Existing Loan Agreement as required to be completed by Borrower under the Existing Loan Agreement have been satisfactorily completed by Borrower.

(6) The Building Conversion has been effectuated through the Amendment Closing Date, in compliance with Applicable Law, including the Condominium Act.

(7) To Borrower’s knowledge, the City of Miami Beach maintains and will continue to maintain all the roadways providing access to and from the Project, including, but not limited to, access from West Avenue.

ARTICLE 8

FINANCIAL REPORTING

Section 8.1 Financial Statements.

(1) Monthly Reports. Within twenty (20) days after the end of each calendar month, Borrower shall furnish to the Lenders a current (as of the calendar month just ended) balance sheet, a detailed operating statement (showing monthly activity and year to date) stating Operating Revenues, Operating Expenses, operating income, and Net Operating Cash Flow for the calendar month just ended, a general ledger, an updated rent roll and, as requested by the Administrative Agent, copies of bank statements and bank reconciliations and other documentation supporting the information disclosed in the most recent financial statements.

(2) Quarterly Reports. Within forty-five (45) days after the end of each calendar quarter, Borrower shall furnish to the Lenders, a detailed operating statement (showing quarterly activity and year to date) stating Operating Revenues, Operating Expenses, Net Operating Cash Flow, operating income, and capital improvements for the calendar quarter just ended, and a balance sheet for such quarter for Borrower. Borrower’s quarterly statements, which shall be prepared on an accrual basis, shall be accompanied by (a) a current rent roll for the Project and a list of all sales of Units; (b) a statement of the balance in each of the Reserve Funds and Security Accounts; and (c) a certificate executed by an Authorized Officer of Borrower or the Sole Member stating that each such quarterly statement presents fairly the financial condition and the results of operations of Borrower and the Project.

75

(3) Annual Reports. Within one hundred and twenty (120) days after the end of each fiscal year of Borrower’s operation of the Project, Borrower will furnish to the Lenders a complete copy of Borrower’s and Guarantors’ annual financial statements which shall be substantially in the form provided the Administrative Agent in connection with the closing of the Loan and, in the case of Borrower’s financial statements, shall have been prepared in accordance with general accepted accounting principles (consistently applied) and certified by an independent certified public accountant reasonably acceptable to the Administrative Agent. Such financial statements shall contain a balance sheet, and in the case of Borrower, a detailed operating statement stating Operating Revenues, Operating Expenses, operating income and Net Operating Cash Flow for each of Borrower and the Project. Borrower’s and Guarantors’ annual financial statements shall be accompanied by a certificate executed by an Authorized Officer Borrower or the Sole Member, in the case of Borrower, by an Authorized Officer of Morgans LLC, in the case of Morgans LLC, and by Galbut, in the case of Galbut, stating that each such annual financial statement presents fairly the financial condition and the results of operations of Borrower and the Project, in the case Borrower, and the Guarantors, in the case of Guarantors. The annual financial statements of Borrower required to be delivered pursuant to this Section 8.1(3) may be consolidated with those of other entities owned by Morgans LLC or Sanctuary Management, provided that such financial statements contain notes clearly identifying each item on such financial statements which is attributable to the Borrower and the Project.

(4) Certification; Supporting Documentation. Each such financial statement shall be in scope and detail satisfactory to the Lenders and certified by an Authorized Officer of Borrower.

(5) Unit Sales Reporting Requirements. Borrower shall also furnish to the Lenders:

(a) by the twentieth (20th) day of each month, monthly reports certifying the Units sold to date, the number of Qualified Purchase Contracts outstanding as of the last day of the preceding month, the names and addresses of the purchasers thereunder, the Contract Prices for each Unit, the Units under contract, the aggregate amount deposited into the Condominium Escrow pursuant to each such Qualified Purchase Contract, whether there are any defaults by either Borrower or any purchaser under any such Qualified Purchase Contract and whether any event has occurred or is likely to occur which would cause a default to occur or give the purchaser a right to terminate or rescind its obligations thereunder; the number of sales closed in the number and designation of the Units conveyed; the price paid for each such Unit; and the reports and matters set forth at (c) below;

(b) within twenty (20) days of the last day of each calendar quarter (and at such other times as the Lenders may reasonably request), report of the escrow agent setting forth all deposits in, withdrawals from, and the current balance of, the Condominium Escrow; and

76

(c) a copy of each material report, statement, certification, claim, data, notice or other communication received, made or delivered by Borrower or a purchaser under a Qualified Purchase Contract which relates to events that may materially negatively affect Borrower’s or such purchaser’s obligations and/or performance under the terms of a Qualified Purchase Contract, or Borrower’s or any Borrower Party’s obligations and/or performance under the Loan Documents, including, without limitation, the imposition of any penalties or damages, the exercise of any termination or cancellation rights, the filing of any dispute or litigation or the failure of Borrower or such purchaser to comply with any of the requirements of a Qualified Purchase Contract. Any of the foregoing which affects the Qualified Purchase Contracts or a material portion thereof shall be supplied by Borrower to the Lenders within five (5) days of occurrence or receipt.

(d) a copy of all budgets and accounting reports recorded and to be filed with the Division of Florida Land Sales, Condominiums and Mobile Homes.

Section 8.2 Accounting Principles. All financial statements shall be prepared substantially in the form of the financial statements provided to the Lenders and shall otherwise be reasonably acceptable to the Lenders.

Section 8.3 Other Information. Borrower shall deliver to the Administrative Agent such additional information as Administrative Agent may reasonably request regarding Borrower, its subsidiaries, its business, any Borrower Party, the Sole Member, and the Project within thirty (30) days after the Administrative Agent’s request therefor.

Section 8.4 Annual Operating Budget.

(1) At least thirty (30) days prior to the commencement of each calendar year, Borrower will provide to the Administrative Agent their proposed annual operating and capital improvements budget for such fiscal year for review and approval by the Administrative Agent, which approval shall not be unreasonably withheld (as so approved for any fiscal year, the “Annual Operating Budget”).

(2) Borrower shall promptly advise the Administrative Agent and the Lenders of any proposed changes to the Project Budget to be made from and after the date hereof. Except to the extent expressly provided in Section 14.1(2), any changes to the Project Budget shall be subject to the review and approval of the Administrative Agent and the Lenders.

Section 8.5 Audits. The Administrative Agent shall have the right to choose and appoint a certified public accountant to perform financial audits as it deems necessary. The costs of such audits shall be paid by Borrower; provided, however, that so long no Event of Default exists, Borrower shall not be required to pay the cost of more than one such audit in any Loan Year. Borrower shall permit the Administrative Agent to examine such records, books and papers of Borrower which reflect upon its financial condition and the income and expense relative to the Project.

77

Section 8.6 Access. The Administrative Agent, any of the Lenders and any of their respective officers, employees and/or agents shall have the right, exercisable as frequently as the Administrative Agent reasonably determines to be appropriate, during normal business hours (or at such other times as may reasonably be requested by the Administrative Agent and/or any of the Lenders), to inspect the Project and (on twenty-four (24) hours prior notice, which may be oral) to inspect, audit and make extracts from all of Borrower’s records, files and books of account. Borrower shall deliver any document or instrument reasonably necessary for the Administrative Agent and/or any of the Lenders, as the Administrative Agent or any of the Lender’s may request, to obtain records from any service bureau maintaining records for Borrower, and shall maintain duplicate records or support documentation on media, including, without limitation, computer tapes and discs owned by Borrower relating to the use or operation of the Project. At the Administrative Agent’s request, Borrower shall instruct its banking and other financial institutions to make available to the Administrative Agent and/or any of the Lenders such information and records concerning the Project as the Administrative Agent and/or any of the Lenders may reasonably request. Without limiting the generality of the foregoing, Administrative Agent (on behalf of the Lenders) reserves the right to employ a construction consultant (the “Construction Consultant”) and any other consultants necessary, in Administrative Agent’s reasonable judgment, to, review requests for disbursements from the Construction Completion Fund and inspect all construction and the periodic progress of the same, the reasonable cost therefor to be borne by Borrower as a loan expense. Borrower shall make available to Administrative Agent (and/or any of the Lenders) and the Construction Consultant on reasonable notice during business hours, all documents and other information (including, without limitation, receipts, invoices, lien waivers and other supporting documentation to substantiate the costs to be paid with the proceeds of any request for loan advance) which any contractor or other Person entitled to payment for construction work is required to deliver to Borrower and shall use its best efforts to obtain any further documents or information reasonably requested by Administrative Agent (and/or any of the Lenders) or the Construction Consultant in connection with any Loan or the administration of this Agreement. Borrower acknowledges and agrees that the Construction Consultant shall have no responsibilities or duties to Borrower, and shall be employed solely for the benefit of Administrative Agent and the Lenders. No default of Borrower will be waived by an inspection by Administrative Agent (and/or any of the Lenders) or the Construction Consultant. In no event will any inspection by Administrative Agent (and/or any of the Lenders) or the Construction Consultant be a representation that there has been or will be compliance with the Plans and Specifications or that the construction work is free from defective materials or workmanship. Any and all provisions of this Agreement in respect of the Construction Consultant shall be enforceable solely by, and at the option of, Administrative Agent, and Borrower shall not be a third-party beneficiary thereof. Any and all reports, advice or other information provided by the Construction Consultant to Administrative Agent and/or any of the Lenders or otherwise produced by or in the possession of the Construction Consultant shall be confidential and Borrower shall have no right to obtain or review same.

ARTICLE 9

COVENANTS

Borrower covenants and agrees with the Administrative Agent and the Lenders as follows:

Section 9.1 Due on Sale and Encumbrance; Transfers of Interests. Without the prior written consent of the Administrative Agent and the Lenders (to the extent required under Section 12.2):

(1) Borrower nor any other Person having an ownership or beneficial interest in Borrower shall not (a) directly or indirectly lease (except as expressly provided herein), sell, transfer, convey, mortgage, pledge, assign, encumber or permit any Lien on the Project, whether voluntarily, involuntarily, by operation of law or otherwise; or (b) enter into any easement or other agreement granting rights in or restricting the use or development of the Project;

78

(2) No new member shall be admitted to or created in Borrower or Sole Member (nor shall any existing member withdraw from Borrower or Sole Member), and no change in Borrower’s or the Sole Member’s Organizational Documents shall be effected; and

(3) Borrower shall not allow any Change of Control to occur, or permit any transfer to occur (whether of equity interests or through any pledge or encumbrance of equity interests, or of the economic or other benefits therefrom, whether voluntary, involuntary, by operation of law or otherwise), if any such transfer would result in a Change of Control.

As used in this Section 9.1, “transfer” shall include the sale, transfer, conveyance, mortgage, pledge, assignment of any legal or beneficial ownership.

Without limiting the foregoing provisions of this Section 9.1, any transfer of a direct or indirect ownership interest in Borrower or Sole Member shall be further subject to (w) Borrower providing not less than ten (10) Business Days’ written notice to Administrative Agent of any such transfer; (x) no Potential Default or Event of Default then existing; (y) the proposed transferee being a limited liability company, corporation, partnership, joint venture, joint-stock company, trust or individual approved in writing by each Lender subject to a Limiting Regulation in its discretion; and (z) payment to the Administrative Agent on behalf of the Lenders of all costs and expenses incurred by the Administrative Agent or any Lenders in connection with such transfer. Each Lender at the time subject to a Limiting Regulation shall, within ten (10) Business Days after receiving such Borrower’s notice of a proposed transfer subject to this Section 9.1, furnish to Borrower a certificate (which shall be conclusive absent manifest error) stating that it is subject to a Limiting Regulation, whereupon such Lender shall have the approval right contained in clause (y) above. Each Lender which fails to furnish such a certificate to Borrower during such ten (10) Business Day period shall be automatically and conclusively deemed not to be subject to a Limiting Regulation with respect to such transfer. If any Lender subject to a Limiting Regulation fails to approve a proposed transferee under clause (y) above (any such Lender being herein called a “Rejecting Lender”), Borrower, upon three (3) Business Days notice (which may be delivered at any time within ninety (90) days following delivery to Borrower of a such a certificate from a Rejecting Lender), may (A) notwithstanding the terms of Section 2.4(4), prepay such Rejecting Lender’s outstanding Loans, or (B) require that such Rejecting Lender transfer all of its right, title and interest under this Agreement and such Rejecting Lender’s Note to any Eligible Assignee or Proposed Lender selected by Borrower that is reasonably satisfactory to the Administrative Agent if such Eligible Lender or Proposed Lender (x) agrees to assume all of the obligations of such Rejecting Lender hereunder, and to purchase all of such Rejecting Lender’s Loans hereunder for consideration equal to the aggregate outstanding principal amount of such Rejecting Lender’s Loans, together with interest thereon to the date of such purchase (to the extent not paid by Borrower), and satisfactory arrangements are made for payment to such Rejecting Lender of all other amounts accrued and payable hereunder to such Rejecting Lender as of the date of such transfer (including any fees accrued hereunder and any amounts that would be payable under Section 2.4(4) as if all such Rejecting Lender’s Loans were prepaid in full on such date); and (y) approves the proposed transferee. Subject to the provisions of Section 12.24, such Eligible Assignee or Proposed Lender shall be a “Lender” for all purposes hereunder. Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements of Borrower contained in Section 2.9(5) shall survive for the benefit of such Rejecting Lender with respect to the time period prior to such replacement.

79

Section 9.2 Taxes; Charges. Borrower shall pay before any fine, penalty, interest or cost may be added thereto, and shall not enter into any agreement to defer, any real estate taxes and assessments, franchise taxes and charges, and other governmental charges that may become a Lien upon the Project or become payable during the term of the Loans (collectively, the “Taxes”), and will promptly furnish the Administrative Agent with evidence of such payment; provided, however, such Borrower’s compliance with Section 4.1 of this Agreement relating to impounds for taxes and assessments shall, with respect to payment of such taxes and assessments, be deemed compliance with this Section 9.2. Borrower shall not suffer or permit the joint assessment of the Project with any other real property constituting a separate tax lot or with any other real or personal property. Borrower shall pay when due all claims and demands of mechanics, materialmen, laborers and others which, if unpaid, might result in a Lien on the Project; however, Borrower may contest the validity of such claims and demands so long as (1) Borrower notifies the Administrative Agent that it intends to contest such claim or demand, (2) Borrower provides the Administrative Agent with an indemnity, bond or other security satisfactory to the Administrative Agent (including an endorsement to the Administrative Agent’s title insurance policy insuring against such claim or demand) assuring the discharge of Borrower’s obligations for such claims and demands, including interest and penalties, and (3) Borrower is diligently contesting the same by appropriate legal proceedings in good faith and at its own expense and concludes such contest prior to the tenth (10th) day preceding the earlier to occur of the Maturity Date or the date on which the Project is scheduled to be sold for non payment.

Section 9.3 Control; Management. Except as provided in Section 9.14 and without limiting the provisions of Section 9.1, there shall be no change in the day-to-day management and control of Borrower or any Borrower Party without the prior written consent of the Administrative Agent. Borrower shall manage the sale of Units at the Project and, from and after Construction Completion, the Hotel Improvements shall be managed solely by Hotel Manager pursuant to and subject to the terms of the Hotel Management Agreement. Borrower shall not enter into any other property management or hotel management agreement with respect to the Project, or engage any property management or hotel manager with respect to the Project, in each case without the Administrative Agent’s prior written consent, which consent may be withheld in the Administrative Agent’s sole and absolute discretion. If at any time the Administrative Agent consents to the appointment or replacement of a property or hotel manager, such Person and Borrower shall, as a condition of the Administrative Agent’s consent, execute a Manager’s Consent and Subordination of Management Agreement in the form then used by the Administrative Agent.

Section 9.4 Operation; Maintenance; Inspection. Borrower shall observe and comply with all Applicable Laws relating to the ownership, use and operation of the Project. Borrower shall maintain the Project in good condition and promptly repair any damage or casualty. Borrower shall permit the Administrative Agent and the Lenders and their respective agents, representatives and employees, upon reasonable prior notice to Borrower, to inspect the Project and conduct such environmental and engineering studies as the Administrative Agent may reasonably require, provided such inspections and studies do not materially interfere with the use and operation of the Project.

80

Section 9.5 Taxes on Security. Borrower shall pay all taxes, charges, filing, registration and recording fees, excises and levies payable with respect to the Notes or the Liens created or secured by the Loan Documents, other than income, franchise and doing business taxes imposed on the Administrative Agent or any Lender. If there shall be enacted any law (1) deducting the Loans from the value of the Project for the purpose of taxation, (2) affecting any Lien on the Project, or (3) 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 the Administrative Agent, on demand, all taxes, costs and charges for which the Administrative Agent or any Lender is or may be liable as a result thereof; however, if such payment would be prohibited by law or would render the Loans usurious, then instead of collecting such payment, the Administrative Agent may (and on the request of the Majority Lenders shall) declare all amounts owing under the Loan Documents to be immediately due and payable.

Section 9.6 Legal Existence; Name, Etc. Borrower shall preserve and keep in full force and effect its existence as a Single Purpose Entity, and each of Borrower and Sole Member shall preserve and keep in full force and effect its entity status, franchises, rights and privileges under the laws of the state of its formation, and all qualifications, licenses and permits applicable to the ownership, use and operation of the Project. In the event there is a conflict between the Single Purpose Entity requirements contained in this Agreement and the terms of the Organizational Documents of Borrower and the Sole Member, the Single Purpose Entity requirements contained in this Agreement shall control. Neither Borrower nor Sole Member shall wind up, liquidate, dissolve, reorganize, merge, or consolidate with or into, or convey, sell, assign, transfer, lease, or otherwise dispose of all or substantially all of its assets, or acquire all or substantially all of the assets of the business of any Person, or permit any subsidiary of Borrower to do so. Each of Borrower and Sole Member shall conduct business only in its own name and shall not change its name, identity, or organizational structure, or the location of its chief executive office or principal place of business unless Borrower (a) shall have obtained the prior written consent of the Administrative Agent to such change, and (b) shall have taken all actions necessary or requested by the Administrative Agent to file or amend any financing statement or continuation statement to assure perfection and continuation of perfection of security interests under the Loan Documents.

Section 9.7 Affiliate Transactions.

(1) In General. Except as provided in this Section 9.7, Borrowers shall not engage in any other transaction affecting the Project with an Affiliate of Borrower without the Administrative Agent’s prior written consent except on arm’s length, market terms. Without limiting the foregoing, all transactions with Affiliates shall be at arms length and shall be for a price and terms that are no greater than market terms for similar services.

(2) Sales Commission and Franchise Fee. With respect to the sale of a Unit, Borrower may pay up to a seven percent (7%) sale commission to Borrower or an Affiliate of Borrower upon the sale of such Unit. Borrower may pay the Franchise Fee to Morgans Hotel Group Management LLC.

81

(3) Approved Mezzanine Loans. Sole Member is permitted to obtain the Existing Mezzanine Loan and, subject to the terms of the Junior Loan Intercreditor Agreement, the Junior Mezzanine Borrower is permitted to obtain the Junior Mezzanine Loan.

(4) Other Arrangements. The Administrative Agent acknowledges that Borrower has entered into the following arrangements with Affiliates of Borrower and that are hereby approved by the Administrative Agent under the following conditions:

(a) Borrower may use a title insurance agency that is an Affiliate of Sanctuary and an agent for a national title insurance company; and

(b) An Affiliate of Borrower or Sanctuary Management may serve as a mortgage broker or mortgage originator for the placement of loans to purchasers of Units, provided that all fees and other amounts payable in connection with such services shall be paid by the purchasers of such Units or credited by Borrower to the purchasers of such Units as Special Credits and paid by Borrower.

Section 9.8 Limitation on Other Debt. Borrower shall not, without the prior written consent of the Administrative Agent (which consent may be withheld in the Administrative Agent’s sole and absolute discretion), incur any Debt other than the Loans and the trade and operational debt described in subsection (o) of the definition of Single Purpose Entity (in the case of Borrower). Sole Member Borrower shall not, without the prior written consent of the Administrative Agent (which consent may be withheld in the Administrative Agent’s sole and absolute discretion), incur any Debt other than the Approved Mezzanine Loans.

Section 9.9 Further Assurances. Borrower shall promptly (1) cure any defects in the execution and delivery of the Loan Documents, and (2) execute and deliver, or cause to be executed and delivered, all such other documents, agreements and instruments as the Administrative Agent may reasonably request to further evidence and more fully describe the collateral for the Loans, 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.

Section 9.10 Estoppel Certificates. Borrower, within ten (10) Business Days after request, shall furnish to the Administrative Agent a written statement, duly acknowledged, setting forth or confirming, as applicable, the amount due on the Loans, the terms of payment of the Loans, the date to which interest has been paid, whether any offsets or defenses exist against the Loans and, if any are alleged to exist, the nature thereof in detail, and such other matters as the Administrative Agent reasonably may request.

Section 9.11 Notice of Certain Events. Borrower shall promptly notify the Administrative Agent of (1) any Potential Default or Event of Default, together with a detailed statement of the steps being taken to cure such Potential Default or Event of Default; (2) any notice of default received by Borrower or any Borrower Party under other obligations relating to the Project or otherwise material to Borrower’s business; and (3) any threatened or pending legal, judicial or regulatory proceedings, including any dispute between Borrower and any governmental authority, affecting Borrower or the Project.

82

Section 9.12 Indemnification. Borrower hereby agrees to indemnify, defend, protect and hold harmless the Administrative Agent, each Lender and their respective shareholders, officers, employees, attorneys, agents, representatives and affiliates (each, an “Indemnified Party”) from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever, including the reasonable fees and actual expenses of each Indemnified Party’s counsel, which may be imposed upon, asserted against or incurred by any of them relating to or arising out of third-party claims relating to (1) the Project; or; (2) any of the Loan Documents or the transactions contemplated thereby, including, without limitation, (a) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about any of the Project or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (b) any inspection, review or testing of or with respect to the Project; (c) any investigative, administrative, mediation, arbitration, or judicial proceeding, whether or not the Administrative Agent or any Lender is designated a party thereto, commenced or threatened at any time (including after the repayment of the Loans) in any way related to the execution, delivery or performance of any Loan Document or to the Project; (d) any proceeding instituted by any Person claiming a Lien; and (e) any brokerage commissions or finder’s fees claimed by any broker or other party in connection with the Loans, the Project, or any of the transactions contemplated in the Loan Documents, including those arising from the joint, concurrent, or comparative negligence of the Administrative Agent or any Lender, except to the extent any of the foregoing is caused by the Administrative Agent’s or any Lender’s gross negligence or willful misconduct, in which case the party to whom the gross negligence or willful misconduct is attributable (but not any other party) shall not be entitled to the indemnification provided for hereunder to the extent of such gross negligence or willful misconduct.

Section 9.13 Size of Units. Borrower agrees that the net sellable area as set forth in the Unit Release Schedule shall constitute and be deemed to be the square footage for each Unit and shall be used for all purposes under this Agreement.

Section 9.14 Minimum Sales Prices. Borrower shall not permit the sale of any Unit at a Purchase Price less than the applicable Minimum Sales Price for such Unit.

Section 9.15 Hedge Agreements.

(1) The Borrower shall at all times maintain in full force and effect a Hedge Agreement satisfactory to the Administrative Agent in its sole and absolute discretion with an Acceptable Counterparty, which shall be effective on or before the Amendment Closing Date, and shall be coterminous with the Loan.

(2) Borrower shall collaterally assign to Administrative Agent pursuant to the Hedge Agreement Pledge all of its right, title and interest to receive any and all payments under the Hedge Agreement or any replacement Hedge Agreement, as additional security for the Loan Agreement, and shall deliver to Administrative Agent counterparts of such Hedge Agreement Pledge executed by the Borrower and by the Acceptable Counterparty and notify the Acceptable Counterparty of such collateral assignment (either in such Hedge Agreement or by separate instrument).

83

(3) Acceptable Counterparty must enter into a written agreement with the Administrative Agent (i) whereby such Acceptable Counterparty acknowledges the collateral assignment of such Hedge Agreement to Administrative Agent as additional security for the Loan pursuant to the Hedge Agreement Pledge, (ii) whereby such Acceptable Counterparty agrees that Administrative Agent shall have the ability to cure any defaults by the Acceptable Counterparty under the Hedge Agreement and to maintain the Hedge Agreement in full force and effect after the occurrence of any default by the Borrower thereunder, (iii) which provides that in no event shall the Administrative Agent be obligated to perform any of the Borrower’s obligations under the Hedge Agreement, and (iv) which is otherwise in form and substance acceptable to the Administrative Agent in its sole and absolute discretion.

(4) If the provider of the Hedge Agreement or any replacement Hedge Agreement ceases to be an Acceptable Counterparty, for any reason (including in the event of any downgrade, withdrawal or qualification of the rating of the Acceptable Counterparty below “A” by S&P), Borrower shall obtain a replacement Hedge Agreement at Borrower’s sole cost and expense within twenty (20) days of receipt of notice from Administrative Agent or Borrower’s obtaining knowledge that the provider is no longer an Acceptable Counterparty.

(5) In the event that Borrower fails to purchase and deliver to Administrative Agent the Hedge Agreement or any replacement Hedge Agreement as and when required hereunder, or fails to maintain such agreement in accordance with the terms and provisions of this Agreement, Administrative Agent may purchase the Hedge Agreement or any replacement Hedge Agreement, as applicable, and the cost incurred by Administrative Agent in purchasing the Hedge Agreement or any replacement Hedge Agreement, as applicable, shall be paid by Borrower to Administrative Agent with interest thereon at the Default Rate from the date such cost was incurred by Administrative Agent until such cost is reimbursed by Borrower to Administrative Agent.

(6) Borrower shall comply with all of its obligations under the terms and provisions of the Hedge Agreement and any replacement Hedge Agreement. All amounts paid by the Acceptable Counterparty under any Hedge Agreement to Borrower or Administrative Agent shall be deposited immediately into the Cash Management Account. Borrower shall take all actions reasonably requested by Administrative Agent to enforce Administrative Agent’s rights under the Hedge Agreement and any replacement Hedge Agreement in the event of a default by the Acceptable Counterparty and shall not waive, amend or otherwise modify any of its rights thereunder.

(7) At such time as the Loan is repaid in full, all of Administrative Agent’s right, title and interest in the Hedge Agreement and any replacement Hedge Agreement shall terminate and Administrative Agent shall execute and deliver at Borrower’s sole cost and expense, such documents as may be required to evidence Administrative Agent’s release of the Hedge Agreement and any replacement Hedge Agreement and to notify the Acceptable Counterparty of such release.

84

(8) In connection with any Hedge Agreement, Borrower shall obtain and deliver to the Administrative Agent an opinion from counsel (which counsel may be in-house counsel for the Acceptable Counterparty) for the Acceptable Counterparty (in form reasonably satisfactory to the Administrative Agent and upon which the Administrative Agent, the Lenders and their respective successors and assigns may rely) which shall provide, in relevant part, that:

(a) the Acceptable Counterparty is duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation or organization and has the organizational power and authority to execute and deliver, and to perform its obligations under, the Hedge Agreement;

(b) the execution and delivery of the Hedge Agreement by the Acceptable Counterparty, and any other agreement which the Acceptable Counterparty has executed and delivered pursuant thereto, and the performance of its obligations thereunder have been and remain duly authorized by all necessary action and do not contravene any provision of its certificate of incorporation or by-laws (or equivalent organizational documents) or any law, regulation or contractual restriction binding on or affecting it or its property;

(c) all consents, authorizations and approvals required for the execution and delivery by the Acceptable Counterparty of the Hedge Agreement, and any other agreement which the Acceptable Counterparty has executed and delivered pursuant thereto, and the performance of its obligations thereunder have been obtained and remain in full force and effect, all conditions thereof have been duly complied with, and no other action by, and no notice to or filing with any governmental authority or regulatory body is required for such execution, delivery or performance; and

(d) the Hedge Agreement, and any other agreement which the Acceptable Counterparty has executed and delivered pursuant thereto, has been duly executed and delivered by the Acceptable Counterparty and constitutes the legal, valid and binding obligation of the Acceptable Counterparty, enforceable against the Acceptable Counterparty in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).

Section 9.16 No Distributions. Except as expressly provided in Section 14.4, Borrower shall not make any Distributions to any members of Borrower without the Administrative Agent’s prior consent.

Section 9.17 Condominium Covenants. In addition to the covenants and agreements made in this Agreement, Borrower and the Administrative Agent further covenant and agree as follows:

(1) Condominium Obligations. Borrower shall perform or cause to be performed all of Borrower’s obligations and the obligations of the Association under the Constituent Documents and the Condominium Act. Borrower shall promptly pay when due, all dues and assessments imposed pursuant to the Constituent Documents.

85

(2) Hazard Insurance. So long as the Association maintains casualty insurance through a “master” or “blanket” policy on the Project which satisfies the requirements of Section 3.1 of this Agreement and is otherwise satisfactory to the Administrative Agent, Borrower’s obligation under Article 3 to maintain such casualty insurance coverage on the Project shall be satisfied to the extent that the required coverage is provided by the Association. In the event of an insured casualty to all or a portion of the Project, insurance proceeds shall be distributed and utilized in the manner required by the Constituent Documents. In the event of a distribution of hazard insurance proceeds in lieu of restoration or repair following a loss to the Project, whether to the unit(s) or to common elements, any proceeds payable to Borrower is hereby assigned and shall be paid to the Administrative Agent for application to the Loans in accordance with Article 3 hereof.

(3) Public Liability Insurance. Borrower shall take such actions as may be reasonable to insure that the Association maintains a public liability insurance policy acceptable in form, amount and extent of coverage to the Administrative Agent.

(4) Condemnation. The proceeds of any award or claim for damages, direct or consequential, payable to Borrower in connection with any condemnation or other taking of all or any part of the Project, whether of the unit(s) or of common elements, or for any conveyance in lieu of condemnation, are hereby assigned and shall be paid to the Administrative Agent. Such proceeds shall be applied by the Administrative Agent in accordance with Article 3 of this Agreement.

(5) Declaration. Borrower hereby represents, warrants, and covenants as follows as to the Declaration:

(a) Borrower is the Declarant under the Declaration and the owner without encumbrance (other than under the Loan Documents) of all voting rights under the Declaration, other than the voting rights associated with Units which have been conveyed prior to the date hereof;

(b) Borrower is the owner of all of the rights granted to the Unsold Units pursuant to the Constituent Documents, and Borrower has not encumbered any such rights by pledge, hypothecation, mortgage, deed to secure debt or other security interest, lien or judgment whatsoever except pursuant to the Security Documents;

(c) Borrower shall at all times collaterally assign its rights as “Declarant” under the Declaration to the Administrative Agent and upon an Event of Default shall provide proxy rights to the Administrative Agent; and

(d) None of the Units will be omitted from coverage by the Declaration without the prior written consent of the Administrative Agent.

Section 9.18 Patriot Act Compliance; Foreign Assets Control Regulations.

(1) Borrower shall comply with the Patriot Act and all applicable legal requirements of governmental authorities having jurisdiction of Borrower, including those relating to money laundering and terrorism. The Administrative Agent shall have the right to audit Borrower’s compliance with the Patriot Act and all applicable legal requirements of governmental authorities having jurisdiction of Borrower, including those relating to money laundering and terrorism. In the event that Borrower fails to comply with the Patriot Act or any such legal requirements of governmental authorities, then the Administrative Agent may, at its option, declare an Event of Default.

86

(2) Without limiting the provisions of Section 9.18(1), neither Borrower nor any Borrower Party shall use the proceeds of the Loans in any manner that will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or the Anti-Terrorism Order or any enabling legislation or executive order relating to any of the same. Without limiting the foregoing, neither Borrower nor any Borrower Party will permit itself nor any of its subsidiaries to (a) become a blocked person described in Section 1 of the Anti-Terrorism Order or (b) knowingly engage in any dealings or transactions or be otherwise associated with any person who is known by Borrower or such Borrower Party or who (after such inquiry as may be required by Applicable Law) should be known by Borrower or such Borrower Party to be a blocked person.

(3) Borrower shall execute and deliver to the Administrative Agent from time to time upon request a certificate stating that neither Borrower, any Borrower Party, any direct or indirect owner of any interest in Borrower nor any Borrower Party (a) is listed on any Government Lists, (b) is a person who has been determined by competent authority to be subject to the prohibitions contained in the Anti-Terrorism Order or any other similar prohibitions contained in the rules and regulations of OFAC or in any enabling legislation or other Presidential Executive Orders in respect thereof, (c) has been previously indicted for or convicted of any felony involving a crime or crimes of moral turpitude or for any Patriot Act Offenses, (d) is currently under investigation by any governmental authority for alleged criminal activity, or (e) has a reputation in the community for criminal or unethical behavior.

Section 9.19 Payment for Labor and Materials. Borrower will promptly pay when due all bills and costs for labor, materials, and specifically fabricated materials incurred in connection with the Project and never permit to exist beyond the due date thereof in respect of the Project or any part thereof any Lien, even though inferior to the Liens of the Loan Documents, and in any event never permit to be created or exist in respect of the Project or any part thereof any other or additional Lien other than the Liens or security of the Loan Documents, except for the Permitted Encumbrances. Notwithstanding the foregoing provisions of this Section 9.19, Borrower may contest in the validity of any bills and costs for labor, materials, and specifically fabricated materials incurred in connection with the Project. Any such contest shall be in good faith, be at Borrower’s own expense and be made by appropriate legal proceedings which shall operate to prevent the collection thereof or other realization thereon and the sale or forfeiture of the Project or any part thereof to satisfy the same. As a condition to pursuing any such contest, Borrower shall, at the Administrative Agent’s option, provide security reasonably satisfactory to the Administrative Agent, assuring the discharge of Borrower’s obligations thereunder and of any additional charge, penalty or expense arising from or incurred as a result of such contest.

87

Section 9.20 Hotel Management Agreement.

(1) Borrower shall (a) perform and observe in all material respects all of its covenants and agreements contained in the Hotel Management Agreement to which it is a party; (b) take all reasonable and necessary action to prevent the termination of the Hotel Management Agreement in accordance with the terms thereof or otherwise; (c) enforce each material covenant or obligation of the Hotel Management Agreement in accordance with its terms; (d) promptly give the Administrative Agent copies of any default or other material notices given by or on behalf of Borrower or received by or on behalf of Borrower from the Hotel Manager; and (e) take all such action to achieve the purposes described in clauses (a), (b) and (c) of this Section 9.20 as may from time to time be reasonably requested by the Administrative Agent.

(2) Borrower shall not, without the Administrative Agent’s prior written consent (which may be withheld in the Administrative Agent’s sole and absolute discretion) (a) take any action to (i) cancel or terminate the Hotel Management Agreement, (ii) replace the Hotel Manager or (iii) appoint a new hotel manager; (b) sell, assign, pledge, transfer, mortgage, hypothecate or otherwise dispose of (by operation of law or otherwise) or encumber any part of its interest in the Hotel Management Agreement; (c) waive any material default under or breach of any material provisions of the Hotel Management Agreement or waive, fail to enforce, forgive or release any material right, interest or entitlement, howsoever arising, under or in respect of any material provisions of the Hotel Management Agreement or vary or agree to the variation in any material way of any material provisions of the Hotel Management Agreement or of the performance of the Hotel Manager under the Hotel Management Agreement; (d) petition, request or take any other legal or administrative action that seeks, or may reasonably be expected, to rescind, terminate or suspend the Hotel Management Agreement.

(3) Any change in day-to-day management and control of the Hotel Manager shall be cause for Administrative Agent to re-approve the Hotel Manager and the Hotel Management Agreement (which approval may be withheld in the Administrative Agent’s sole and absolute discretion). If at any time the Administrative Agent consents to the appointment of a new hotel manager, such new manager and Borrower shall, as a condition of Administrative Agent’s consent, execute a Hotel Manager’s Consent and Subordination of Management Agreement in the form then used by Administrative Agent. Borrower shall cause the Hotel Manager shall hold and maintain all necessary licenses, certifications and permits required by law to carry on its duties under the Hotel Management Agreement. Borrower shall fully perform all of its covenants, agreements and obligations under the Hotel Management Agreement.

(4) For purposes of this Section 9.20, all references to the Hotel Management Agreement shall be deemed to include the Technical Services Agreement.

Section 9.21 Americans with Disabilities.

(1) Borrower (a) agrees that it shall use commercially reasonable efforts to ensure that the Project shall at all times comply 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”); and (b) has no actual knowledge as to the Project’s non-compliance with any Access Laws where, in the case of (a) or (b) above, the failure to so comply could have a material adverse effect on the Project or on Borrower’s ability to repay the Loans in accordance with the terms hereof.

88

(2) Notwithstanding any provisions set forth herein or in any other document regarding the Administrative Agent’s approval of alterations of the Project, Borrower shall not alter the Project in any manner which would materially increase Borrower’s responsibilities for compliance with the applicable Access Laws without the prior written approval of the Administrative Agent. The foregoing shall apply to tenant improvements constructed by Borrower or by any of its tenants. The Administrative Agent may condition any such approval upon receipt of a certificate of Access Law compliance from an architect, engineer, or other person reasonably acceptable to the Administrative Agent.

(3) Borrower agrees to give prompt notice to the Administrative Agent of the receipt by Borrower of any written complaints related to violation of any Access Laws with respect to the Project and of the commencement of any proceedings or investigations which relate to compliance with applicable Access Laws.

Section 9.22 Zoning. Borrower shall not, without the Administrative Agent’s prior consent, seek, make, suffer or acquiesce in any change or variance in any zoning or land use laws or other conditions of use of the Project or any portion thereof. Borrower shall not use or permit the use of any portion of the Project in any manner that could result in such use becoming an illegal non-conforming use under any zoning or land use law or any other Applicable Law or modify any agreements relating to zoning or land use matters or with the joinder or merger of lots for zoning, land use or other purposes, without the prior written consent of the Administrative Agent. Without limiting the foregoing, in no event shall Borrower take any action that would reduce or impair below applicable requirements (a) the number of parking spaces at the Improvements or (b) access to the Project from adjacent public roads.

Section 9.23 ERISA. Borrower shall not take any action, or omit to take any action, which would (a) cause Borrower’s assets to constitute “plan assets” for purposes of ERISA or the Code or (b) cause the Transactions to be a nonexempt prohibited transaction (as such term is defined in Section 4975 of the Code or Section 406 of ERISA) that could subject the Administrative Agent and/or the Lenders, on account of any Loan or execution of the Loan Documents hereunder, to any tax or penalty on prohibited transactions imposed under Section 4975 of the Code or Section 502(i) of ERISA.

Section 9.24 Property Specific Covenants.

(1) Borrower shall pay to the title company any fees or charges imposed by the title company in connection with amending the mortgagee title policy issued in favor of Administrative Agent as a result of the Building Conversion, including, but not limited to the costs of obtaining updated title searches, date-down endorsement, a “condominium” endorsement and an endorsement modifying the insured legal description.

89

(2) Without the prior written consent of Administrative Agent, Borrower shall not amend, modify or terminate its Organizational Documents or the Project Management Agreement or the Technical Services Agreement, replace the Project Manager or Hotel Manager or appoint a new project manager or technical services advisor.

(3) The renovations at the Project shall not constitute a “Level 3” alteration as defined in the Florida Building Code nor violate what is commonly known as the “50% Rule.”

Section 9.25 Construction Management Contract. Borrower shall not, without Administrative Agent’s prior consent: (a) take any action to cancel or terminate any material right under the Construction Management Contract; (b) waive any material default under or breach of any material provisions of the Construction Management Contract, or waive, forgive, release or fail to enforce any material right thereunder; (c) amend or modify any material provision of, or give any consent under, the Construction Management Contract; or (d) enter into any other construction management or general contractor contract with respect to the Building Conversion or the Project.

ARTICLE 10

EVENTS OF DEFAULT

Each of the following shall constitute an “Event of Default” under the Loans:

Section 10.1 Payments. Borrower’s failure to (1) pay any regularly scheduled installment of principal or interest or other amount within five (5) days of (and including) the date when due as required under the Loan Documents or (2) make a deposit of cash or pay any other amount due hereunder within five (5) days of (and including) the date when due as required under the Loan Documents; or (3) pay the Loans at the Maturity Date, whether by acceleration or otherwise.

Section 10.2 Insurance. Borrower’s failure to maintain insurance as required under Section 3.1 of this Agreement.

Section 10.3 Single Purpose Entity. If Borrower (i) violates any of the provisions set forth in clauses (a), (b), (c), (d), (e), (g), (j), (o), (p), (q), (t), (w), (z) or (bb) of the definition of “Single Purpose Entity”; or (2) violates any of the provisions clauses (f), (h), (i), (k), (l), (m), (n), (r), (s), (u), (v), (x), (y) or (aa) of the definition of “Single Purpose Entity” and, in the case of this clause (ii) such violation is not cured with thirty (30) days of the date that any officer of Borrower or any Borrower Party obtains knowledge of such violation.

Section 10.4 Taxes. If any of the Taxes are not paid when the same are due and payable.

Section 10.5 Sale, Encumbrance, Etc.; Change of Control. The sale, transfer, conveyance, pledge, mortgage or assignment of any part or all of the Project, or any interest therein, or of any interest in Borrower, in violation of Section 9.1 of this Agreement, or the occurrence of any Change of Control in violation of Section 9.1.

Section 10.6 Representations and Warranties. Any representation or warranty made in any Loan Document proves to be untrue in any material respect when made or deemed made.

90

Section 10.7 Other Encumbrances. Any default (beyond applicable cure periods) under any document or instrument, other than the Loan Documents, evidencing or creating a Lien on the Project or any part thereof.

Section 10.8 Various Covenants. Any default of Borrower under any of its obligations under any of Sections 6.2 (pertaining to lease approvals), 9.3 (management of the Project), 9.8 (limitations on debt), 9.18 (Patriot Act compliance), 9.22 (zoning and use changes), 9.23 (ERISA), 14.1(1) (Completion of Building Conversion), 14.1(3) (Completion of Building Conversion) or 14.4 (Application of Net Cash Sales Proceeds) of this Agreement.

Section 10.9 Involuntary Bankruptcy or Other Proceeding. Commencement of an involuntary case or other proceeding against Borrower or any other Borrower Party or any other Person having an ownership or security interest in the Project (each, a “Bankruptcy Party”) which seeks liquidation, reorganization or other relief with respect to such Person or its Debts or other liabilities under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeks the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any of its property, and such involuntary case or other proceeding shall remain undismissed or unstayed for a period of sixty (60) days, or an order for relief against a Bankruptcy Party shall be entered in any such case under the Bankruptcy Code (an “Involuntary Proceeding”).

Section 10.10 Voluntary Petitions, Etc. Commencement by a Bankruptcy Party of a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its Debts or other liabilities under any bankruptcy, insolvency or other similar law or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or any of its property, or consent by a Bankruptcy Party to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or the making by a Bankruptcy Party of a general assignment for the benefit of creditors, or the failure by a Bankruptcy Party, or the admission by a Bankruptcy Party in writing of its inability, to pay its Debts generally as they become due, or any action by a Bankruptcy Party to authorize or effect any of the foregoing (a “Voluntary Proceeding”).

Section 10.11 Indebtedness. Any of Borrower or Sole Member, or any combination thereof, shall default in the payment when due of any principal of or interest on any of its other Debt aggregating $500,000 or more and such default shall not be cured within any applicable notice or cure period provided with respect thereto; or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Debt shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Debt to cause, such Debt to become due or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise) prior to its stated maturity.

Section 10.12 Dissolution. Any Borrower Party shall be terminated, dissolved or liquidated (as a matter of law or otherwise) or proceedings shall be commenced by any Person (including any Borrower Party) seeking the termination, dissolution or liquidation of any Borrower Party, which, in the case of actions by Persons other than a Borrower Party or any of their Affiliates, shall continue unstayed and in effect for a period of sixty (60) or more days.

91

Section 10.13 Judgments. One or more (a) final, non-appealable judgments for the payment of money (exclusive of judgment amounts fully covered by insurance where the insurer has admitted liability in respect of such judgment) shall be rendered against Borrower or Sole Member in an amount aggregating in excess of $1,000,000; or (b) non-monetary judgments, orders or decrees shall be entered against Borrower or Sole Member which have or would reasonably be expected to have a Material Adverse Effect, and, in either case, the same shall remain undischarged for a period of sixty (60) consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of such Borrower or Sole Member, as the case may be, to enforce any such judgment.

Section 10.14 Security. The Liens created by the Security Documents shall at any time not constitute a valid and perfected first priority Lien (subject to the Permitted Encumbrances) on the collateral intended to be covered thereby in favor of the Administrative Agent, free and clear of all other Liens (other than the Permitted Encumbrances and Liens being contested in accordance with the terms of Section 9.19), or, except for expiration in accordance with its terms, any of the Security Documents shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by Borrower or any Borrower Party or any of their Affiliates;

Section 10.15 Guarantees. Any Guarantee shall (1) default under any Guarantee beyond any applicable notice and grace period provided for therein, or (2) revoke or attempt to revoke, contest or commence any action against its obligations under any Guarantee.

Section 10.16 Security Accounts. Borrower uses, or permits the use of, funds from the Security Accounts for any purpose other than the purpose for which such funds were disbursed from the Security Accounts.

Section 10.17 Hedge Agreement. The Acceptable Counterparty shall default under any Hedge Agreement and such default is not cured within the applicable notice and cure periods provided therein.

Section 10.18 Junior Loan Intercreditor Agreement. Any failure by any of Borrower, Sole Member, Junior Mezzanine Borrower or Junior Mezzanine Lender to perform or observe any the agreements and covenants contained in the Junior Loan Intercreditor Agreement.

Section 10.19 Covenants. Borrower’s failure to perform or observe any of the agreements and covenants contained in this Agreement or in any of the other Loan Documents and not specified above, and the continuance of such failure for ten (10) days after notice by the Administrative Agent to Borrower; provided, however, subject to any shorter period for curing any failure by Borrower as specified in any of the other Loan Documents, Borrower shall have an additional thirty (30) days to cure such failure if (1) such failure does not involve the failure to make payments on a monetary obligation; (2) such failure cannot reasonably be cured within ten (10) days; (3) Borrower is diligently undertaking to cure such default, and (4) Borrower has provided the Administrative Agent with security reasonably satisfactory to the Administrative Agent against any interruption of payment or impairment of collateral as a result of such continuing failure.

92

ARTICLE 11

REMEDIES

Section 11.1 Remedies – Insolvency Events. Upon the occurrence of any Event of Default described in Section 10.9 or 10.10, all amounts due under the Loan Documents immediately shall become due and payable, all without written notice and without presentment, demand, protest, notice of protest or dishonor, notice of intent to accelerate the maturity thereof, notice of acceleration of the maturity thereof, or any other notice of default of any kind, all of which are hereby expressly waived by Borrower and each Borrower Party; provided, however, if the Bankruptcy Party under Section 10.9 or 10.10 is other than Borrower, then all amounts due under the Loan Documents shall become immediately due and payable at the Administrative Agent’s election, in the sole discretion of the Lenders.

Section 11.2 Remedies – Other Events. Except as set forth in Section 11.1 above, while any Event of Default exists, the Administrative Agent may (1) by written notice to Borrower, declare the entire amount of the Loans to be immediately due and payable without presentment, demand, protest, notice of protest or dishonor, notice of intent to accelerate the maturity thereof, notice of acceleration of the maturity thereof, or other notice of default of any kind, all of which are hereby expressly waived by Borrower and each Borrower Party; (2) terminate the obligation, if any, of the Lenders to advance amounts hereunder; and (3) exercise all rights and remedies therefore under the Loan Documents and at law or in equity.

Section 11.3 Administrative Agent’s Right to Perform the Obligations. If Borrower shall fail, refuse or neglect to make any payment or perform any act required by the Loan Documents, then while any Event of Default exists, and without notice to or demand upon Borrower and without waiving or releasing any other right, remedy or recourse the Administrative Agent or any Lender may have because of such Event of Default, the Administrative Agent may (but shall not be obligated to) make such payment or perform such act for the account of and at the expense of Borrower, and shall have the right to enter upon the Project for such purpose and to take all such action thereon and with respect to the Project as it may deem necessary or appropriate. If the Administrative Agent shall elect to pay any sum due with reference to the Project, the Administrative Agent may do so in reliance on any bill, statement or assessment procured from the appropriate governmental authority or other issuer thereof without inquiring into the accuracy or validity thereof. Similarly, in making any payments to protect the security intended to be created by the Loan Documents, the Administrative Agent shall not be bound to inquire into the validity of any apparent or threatened adverse title, Lien, encumbrance, claim or charge before making an advance for the purpose of preventing or removing the same. Additionally, if any Hazardous Materials affect or threaten to affect the Project, the Administrative Agent may (but shall not be obligated to) give such notices and take such actions as it deems necessary or advisable in order to abate the discharge of any Hazardous Materials or remove the Hazardous Materials. Borrower shall indemnify, defend and hold the Administrative Agent and the Lenders harmless from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever, including reasonable attorneys’ fees and disbursements, incurred or accruing by reason of any acts performed by the Administrative Agent or any Lender pursuant to the provisions of this Section 11.3, including those arising from the joint, concurrent, or comparative negligence of the Administrative Agent and any Lender, except as a result of the Administrative Agent’s or any Lender’s gross negligence or willful misconduct. All sums paid by the Administrative Agent pursuant to this Section 11.3, and all other sums expended by the Administrative Agent or any Lender to which it shall be entitled to be indemnified, together with interest thereon at the Default Rate from the date of such payment or expenditure until paid, shall constitute additions to the Loans, shall be secured by the Loan Documents and shall be paid by Borrower to the Administrative Agent upon demand.

93

ARTICLE 12

MISCELLANEOUS

Section 12.1 Notices. Any notice required or permitted to be given under this Agreement shall be in writing and either shall be (1) mailed by certified mail, postage prepaid, return receipt requested; (2) sent by overnight air courier service; (3) personally delivered to a representative of the receiving party; or (4) sent by telecopy (provided an identical notice is also sent simultaneously by mail, overnight courier, or personal delivery as otherwise provided in this Section 12.1) to the intended recipient at the “Address for Notices” specified below its name on the signature pages hereof. Any communication so addressed and mailed shall be deemed to be given on the earliest of (a) when actually delivered; (b) on the first Business Day after deposit with an overnight air courier service; or (c) on the third Business Day after deposit in the United States mail, postage prepaid, in each case to the address of the intended addressee, and any communication so delivered in person shall be deemed to be given when receipted for by, or actually received by the Administrative Agent, a Lender or Borrower, as the case may be. If given by telecopy, a notice shall be deemed given and received when the telecopy is transmitted to the party’s telecopy number specified above, and confirmation of complete receipt is received by the transmitting party during normal business hours or on the next Business Day if not confirmed during normal business hours, and an identical notice is also sent simultaneously by mail, overnight courier, or personal delivery as otherwise provided in this Section 12.1. Any party may designate a change of address by written notice to each other party by giving at least ten (10) days’ prior written notice of such change of address.

Section 12.2 Amendments, Waivers, Etc.

(1) Subject to any consents required pursuant to this Section 12.2 and any other provisions of this Agreement and any other Loan Document which expressly require the consent, approval or authorization of the Majority Lenders, this Agreement and any other Loan Document may be modified or supplemented only by an instrument in writing signed by Borrower and the Administrative Agent; provided that, the Administrative Agent may (without any Lender’s consent) give or withhold its agreement to any amendments of the Loan Documents or any waivers or consents in respect thereof or exercise or refrain from exercising any other rights or remedies which the Administrative Agent may have under the Loan Documents or otherwise provided that such actions do not, in the Administrative Agent’s judgment reasonably exercised, materially adversely affect the value of any collateral, taken as a whole, or represent a departure from Administrative Agent’s standard of care described in Section 15.5 (and the assignment or granting of a participation by Eurohypo shall not limit or otherwise affect its discretion in

94

respect of any of the foregoing), except that the Administrative Agent will not, without the consent of each Lender, agree to the following (provided that no Lender’s consent shall be required for any of the following which are otherwise required or contemplated under the Loan Documents): (a) reduce the principal amount of the Loans or reduce the interest rate thereon; (b) extend any stated payment date for principal of or interest on the Loans payable to such Lender; (c) release Borrower, any Joinder Party, any Guarantor or any other party from liability under the Loan Documents (except for any assigning Lender pursuant to Section 12.24 and any resigning Administrative Agent pursuant to Section 15.8); (d) release or subordinate in whole or in part any material portion of the collateral given as security for the Loans; (e) modify any of the provisions of this Section 12.2, the definition of “Majority Lenders” or any other provision in the Loan Documents specifying the number or percentage of Lenders required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder; (f) modify the terms of any Event of Default; or (g) consent to (i) the sale, transfer or encumbrance of any portion of the Project (or any interest therein) or any direct or indirect ownership interest therein and (ii) the incurrence by Borrower of any additional indebtedness secured by the Project, in each case to the extent (and subject to any standard of reasonability) such consent is required under the Loan Documents. Notwithstanding the foregoing provisions of this Section 12.2, as between Borrower and Lenders, notification by Administrative Agent to Borrower of Administrative Agent’s consent to any of the matters set forth in clauses (a) through and including (g) of the preceding sentence shall be deemed to be the consent of each Lender to such matter.

(2) Notwithstanding anything to contrary contained in this Agreement, any modification or supplement of Article 15, or of any of the rights or duties of the Administrative Agent hereunder, shall require the consent of the Administrative Agent.

Section 12.3 Limitation on Interest. It is the intention of the parties hereto to conform strictly to applicable usury laws. Accordingly, all agreements between Borrower, the Administrative Agent and the Lenders with respect to the Loans are hereby expressly limited so that in no event, whether by reason of acceleration of maturity or otherwise, shall the amount paid or agreed to be paid to the Administrative Agent or any Lender or charged by any Lender for the use, forbearance or detention of the money to be lent hereunder or otherwise, exceed the maximum amount allowed by law. If the Loans would be usurious under Applicable Law (including the laws of the State, the laws of the State of New York and the laws of the United States of America), then, notwithstanding anything to the contrary in the Loan Documents: (1) the aggregate of all consideration which constitutes interest under Applicable Law that is contracted for, taken, reserved, charged or received under the Loan Documents shall under no circumstances exceed the maximum amount of interest allowed by Applicable Law, and any excess shall be credited on the Notes by the holders thereof (or, if the Notes have been paid in full, refunded to Borrower); and (2) if maturity is accelerated by reason of an election by the Administrative Agent in accordance with the terms hereof, or in the event of any prepayment, then any consideration which constitutes interest may never include more than the maximum amount allowed by Applicable Law. In such case, excess interest, if any, provided for in the Loan Documents or otherwise, to the extent permitted by Applicable Law, shall be amortized, prorated, allocated and spread from the date of advance until payment in full so that the actual rate of interest is uniform through the term hereof. If such amortization, proration, allocation and spreading is not permitted under Applicable Law, then such excess interest shall be cancelled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited on the Notes (or, if the Notes have been paid in full, refunded to Borrower). The terms and provisions of this Section 12.3 shall control and supersede every other provision of the Loan Documents. The Loan Documents are contracts made under and shall be construed in accordance with and governed by the laws of the State of New York, except that if at any time the laws of the United States of America permit the Lenders to contract for, take, reserve, charge or receive a higher rate of interest than is allowed by the laws of the State of New York (whether such federal laws directly so provide or refer to the law of any state), then such federal laws shall to such extent govern as to the rate of interest which the Lenders may contract for, take, reserve, charge or receive under the Loan Documents.

95

Section 12.4 Invalid Provisions. If any provision of any Loan Document is held to be illegal, invalid or unenforceable, such provision shall be fully severable; the Loan Documents shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part thereof; the remaining provisions thereof shall remain in full effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom; and in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part of such Loan Document a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible to be legal, valid and enforceable.

Section 12.5 Reimbursement of Expenses. Borrower shall pay or reimburse the Administrative Agent and/or the Lenders on demand of the applicable party for: (1) all expenses incurred by the Administrative Agent in connection with the Loans, including fees and expenses of the Administrative Agent’s attorneys, environmental, engineering and other consultants, and fees, charges or taxes for the negotiation, recording or filing of Loan Documents, (2) all expenses of the Administrative Agent in connection with the administration of the Loans, including audit costs, inspection fees, attorneys’ fees and disbursement, settlement of condemnation and casualty awards, and premiums for title insurance and endorsements thereto, (3) all of the Administrative Agent’s reasonable costs and expenses (including reasonable fees and disbursements of the Administrative Agent’s external counsel) incurred in connection with the syndication of the Loans to the Lenders and the actions taken pursuant to Section 12.10 (provided, however, that Borrower’s obligation to reimburse the Administrative Agent’s costs and expenses incurred in the Syndication of the Loans or the splitting, modification, componentization or other severance of the Loans pursuant to Section 12.27(2) shall not exceed $15,000), and (4) the Administrative Agent and the Lenders for all amounts expended, advanced or incurred by the Administrative Agent and the Lenders to collect the Notes, or to enforce the rights of the Administrative Agent and the Lenders under this Agreement or any other Loan Document, or to defend or assert the rights and claims of the Administrative Agent and the Lenders under the Loan Documents or with respect to the Project (by litigation or other proceedings), which amounts will include all court costs, attorneys’ fees and expenses, fees of auditors and accountants, and investigation expenses as may be incurred by the Administrative Agent and the Lenders in connection with any such matters (whether or not litigation is instituted), together with interest at the Default Rate on each such amount from the date of disbursement until the date of reimbursement to the Administrative Agent and the Lenders, all of which shall constitute part of the Loans and shall be secured by the Loan Documents.

96

Section 12.6 Approvals; Third Parties; Conditions. All approval rights retained or exercised by the Administrative Agent and the Lenders with respect to leases, contracts, plans, studies and other matters are solely to facilitate the Lenders’ credit underwriting, and shall not be deemed or construed as a determination that the Lenders have passed on the adequacy thereof for any other purpose and may not be relied upon by Borrower or any other Person. This Agreement is for the sole and exclusive use of the Administrative Agent, the Lenders and Borrower and may not be enforced, nor relied upon, by any Person other than the Administrative Agent, the Lenders and Borrower. All conditions of the obligations of the Administrative Agent and the Lenders hereunder, including the obligation to make advances, are imposed solely and exclusively for the benefit of the Administrative Agent and the Lenders, their successors and assigns, and no other Person shall have standing to require satisfaction of such conditions or be entitled to assume that the Lenders 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 the Administrative Agent and the Lenders at any time in their sole discretion.

Section 12.7 Lenders and Administrative Agent Not in Control; No Partnership. None of the covenants or other provisions contained in this Agreement shall, or shall be deemed to, give the Administrative Agent or any Lender the right or power to exercise control over the affairs or management of Borrower, the power of the Administrative Agent and the Lenders being limited to the rights to exercise the remedies referred to in the Loan Documents. The relationship between Borrower and the Lenders is, and at all times shall remain, solely that of debtor and creditor. No covenant or provision of the Loan Documents is intended, nor shall it be deemed or construed, to create a partnership, joint venture, agency or common interest in profits or income between the Administrative Agent, the Lenders and Borrower or to create an equity in the Project in the Administrative Agent or any Lender. The Administrative Agent and the Lenders neither undertake nor assume any responsibility or duty to Borrower or to any other person with respect to the Project or the Loans, except as expressly provided in the Loan Documents; and notwithstanding any other provision of the Loan Documents: (1) neither the Administrative Agent nor any Lender is, nor shall be construed as, a partner, joint venturer, alter ego, manager, controlling person or other business associate or participant of any kind of Borrower or its stockholders, members, or partners and neither the Administrative Agent nor any Lender intends to ever assume such status; (2) no Lender or the Administrative Agent shall in any event be liable for any Debts, expenses or losses incurred or sustained by Borrower; and (3) no Lender or the Administrative Agent shall be deemed responsible for or a participant in any acts, omissions or decisions of Borrower or its stockholders, members, or partners. The Administrative Agent, the Lenders and Borrower disclaim any intention to create any partnership, joint venture, agency or common interest in profits or income between the Administrative Agent, the Lenders and Borrower, or to create an equity in the Project in the Administrative Agent or any Lender, or any sharing of liabilities, losses, costs or expenses.

Section 12.8 Time of the Essence. Time is of the essence with respect to this Agreement.

Section 12.9 Successors and Assigns. Subject to the provisions of Section 12.24, this Agreement shall be binding upon and inure to the benefit of the Administrative Agent, the Lenders and Borrower and the respective successors and permitted assigns.

97

Section 12.10 Renewal, Extension or Rearrangement. All provisions of the Loan Documents shall apply with equal effect to each and all promissory notes and amendments thereof hereinafter executed which in whole or in part represent a renewal, extension, increase or rearrangement of the Loans. For portfolio management purposes, the Lenders may elect to divide the Loans into two or more separate loans evidenced by separate promissory notes with the same or different interest rates, so long as the aggregate payment and other obligations of Borrower are not effectively increased or otherwise modified. Borrower agrees to cooperate with the Administrative Agent and the Lenders and to execute such documents as the Administrative Agent reasonably may request to effect such division of the Loans.

Section 12.11 Waivers. No course of dealing on the part of the Administrative Agent or any Lender, their respective officers, employees, consultants or agents, nor any failure or delay by the Administrative Agent or any Lender with respect to exercising any right, power or privilege of the Administrative Agent or any Lender under any of the Loan Documents, shall operate as a waiver thereof.

Section 12.12 Cumulative Rights. Rights and remedies of the Administrative Agent and the Lenders under the Loan Documents shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy.

Section 12.13 Singular and Plural. Words used in this Agreement and the other Loan Documents in the singular, where the context so permits, shall be deemed to include the plural and vice versa. The definitions of words in the singular in this Agreement and the other Loan Documents shall apply to such words when used in the plural where the context so permits and vice versa.

Section 12.14 Phrases. When used in this Agreement and the other Loan Documents, the phrase “including” means “including, but not limited to,” the phrases “satisfactory to any Lender” or “satisfactory to the Administrative Agent” means in form and substance satisfactory to such Lender or the Administrative Agent, as the case may be, in all respects, the phrases “with Lender’s consent”, “with Lender’s approval”, “with the Administrative Agent’s consent” or “with the Administrative Agent’s approval” means such consent or approval at Lender’s or the Administrative Agent’s, as the case may be, discretion, and the phrases “acceptable to Lender” or “acceptable to the Administrative Agent” means acceptable to Lender or the Administrative Agent, as the case may be, at such party’s reasonable discretion acting in good faith.

Section 12.15 Exhibits and Schedules. The exhibits and schedules attached to this Agreement are incorporated herein and shall be considered a part of this Agreement for the purposes stated herein.

Section 12.16 Titles of Articles, Sections and Subsections. All titles or headings to articles, sections, subsections or other divisions of this Agreement and the other Loan Documents or the exhibits hereto and thereto are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto.

98

Section 12.17 Promotional Material. Borrower authorizes the Administrative Agent and each of the Lenders to issue press releases, advertisements and other promotional materials in connection with the Administrative Agent’s or such Lender’s own promotional and marketing activities, and describing the Loans and the Project in general terms and the Administrative Agent’s or such Lender’s participation in the Loans subject, in each case, to Borrower’s approval, which approval shall not be unreasonably withheld, conditioned or delayed. All references to the Administrative Agent or any Lender contained in any press release, advertisement or promotional material issued by Borrower or Borrower shall be approved in writing by the Administrative Agent and such Lender in advance of issuance.

Section 12.18 Survival. In the event that any Lender that may assign any interest in its Commitment or Loans hereunder in accordance with the terms of this Agreement, all of the representations, warranties, covenants, and indemnities of Borrower hereunder and under the other Loan Documents shall survive for the benefit of such assigning Lender the making of such assignment, notwithstanding that such assigning Lender may cease to be a “Lender” hereunder. Without limiting the foregoing, all indemnities of Borrower hereunder and under the other Loan Documents shall survive indefinitely, notwithstanding (1) the repayment in full of the Loans and the release of the Liens evidencing or securing the Loans; or (2) the transfer (by sale, foreclosure, conveyance in lieu of foreclosure or otherwise) of any or all right, title and interest in and to the Project to any party. The representations, warranties and covenants of Borrower, other than those imposing indemnification obligations on Borrower (which shall survive indefinitely), shall survive for a period of two (2) years following the repayment in full of the Loans and the release of the Liens evidencing or securing the Loans (notwithstanding that prior to the end of such two-year period, Borrower may have transferred (by sale, foreclosure, conveyance in lieu of foreclosure or otherwise) any or all its right, title and interest in and to the Project to any other party).

Section 12.19 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER, THE ADMINISTRATIVE AGENT AND EACH LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTION OF EITHER PARTY OR ANY EXERCISE BY ANY PARTY OF THEIR RESPECTIVE RIGHTS UNDER THE LOAN DOCUMENTS OR IN ANY WAY RELATING TO THE LOANS OR THE PROJECT (INCLUDING, WITHOUT LIMITATION, ANY ACTION TO RESCIND OR CANCEL THIS AGREEMENT, AND ANY CLAIM OR DEFENSE ASSERTING THAT THIS AGREEMENT WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR VOIDABLE). THIS WAIVER IS A MATERIAL INDUCEMENT FOR THE ADMINISTRATIVE AGENT AND EACH LENDER TO ENTER THIS AGREEMENT.

99

Section 12.20 Remedies of Borrower. In the event that a claim or adjudication is made that the Administrative Agent, any of the Lenders, or their agents, acted unreasonably or unreasonably delayed acting in any case where by Applicable Law or under this Agreement or the other Loan Documents, the Administrative Agent, any Lender or any such agent, as the case may be, has an obligation to act reasonably or promptly, or otherwise violated this Agreement or the Loan Documents, Borrower agrees that none of the Administrative Agent, the Lenders or their agents shall be liable for any incidental, indirect, special, punitive, consequential or speculative damages or losses resulting from such failure to act reasonably or promptly in accordance with this Agreement or the other Loan Documents.

Section 12.21 GOVERNING LAW.

(1) THIS AGREEMENT WAS NEGOTIATED IN THE STATE OF NEW YORK AND MADE BY THE ADMINISTRATIVE AGENT AND LENDERS AND ACCEPTED BY BORROWER IN THE STATE OF NEW YORK, AND THE PROCEEDS OF THE NOTES 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. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THE OTHER LOAN DOCUMENTS, THE PARTIES HEREBY AGREE THAT 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 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 ON REAL PROPERTY CREATED PURSUANT HERETO AND PURSUANT TO THE MORTGAGE AND ASSIGNMENT OF RENTS AND LEASES SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE IN WHICH THE PROJECT IS LOCATED, 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, EACH OF BORROWER, THE ADMINISTRATIVE AGENT AND EACH LENDER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT AND THE NOTES, AND THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

100

(2) ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST THE ADMINISTRATIVE AGENT, ANY LENDER OR BORROWER ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS MAY AT THE ADMINISTRATIVE AGENT’S OPTION (WHICH DECISION SHALL BE MADE BY THE MAJORITY LENDERS) BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN THE CITY OF NEW YORK, COUNTY OF NEW YORK, PURSUANT TO SECTION 5-1401 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 MORGANS GROUP LLC, 475 TENTH AVENUE, NEW YORK, NEW YORK 10018 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 (A) SHALL GIVE PROMPT NOTICE TO THE ADMINISTRATIVE AGENT OF ANY CHANGED ADDRESS OF ITS AUTHORIZED AGENT HEREUNDER, (B) 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 (C) 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 12.22 Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement and understanding between the Administrative Agent, the Lenders and Borrower and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. Accordingly, the Loan Documents may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.

Section 12.23 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall constitute an original, but all of which shall constitute one document.

Section 12.24 Assignments and Participations.

(1) Assignments by Borrower. Borrower may not assign any of its rights or obligations hereunder, or under the Notes or under the other Loan Documents without the prior consent of all of the Lenders and the Administrative Agent.

101

(2) Assignments by the Lenders. Each Lender may assign any of its Loans, its Note and its Commitment (but only with the consent of the Administrative Agent); provided that:

(a) no such consent by the Administrative Agent shall be required in the case of any assignment by any Lender to another Lender or an Affiliate of such Lender or such other Lender (provided that in the case of an assignment to any such Affiliate, the assigning Lender will not be released from its obligations under the Loan Documents and the Administrative Agent may continue to deal only with such assigning Lender, unless such Affiliate is also an Eligible Assignee);

(b) except to the extent the Administrative Agent shall otherwise consent, any such partial assignment (other than to another Lender or an affiliate of a Lender) shall be in an amount at least equal to $10,000,000;

(c) each such assignment (including an assignment to another Lender or an affiliate of a Lender) by a Lender of its Loans or Commitment shall be made in such manner so that the same portion of its Loans and Commitment is assigned to the respective assignee;

(d) subject to the applicable Lender’s compliance with the provisions of clauses (b) and (c) above, the Administrative Agent’s consent to an assignment shall not be unreasonably withheld, delayed or conditioned if (i) such assignment is made to an Eligible Assignee, and (ii) the provisions of clause (e) have been satisfied; and

(e) upon execution and delivery by the assignee (even if already a Lender) to Borrower and the Administrative Agent of an Assignment and Acceptance pursuant to which such assignee agrees to become a “Lender” hereunder (if not already a Lender) having the Commitment and Loans specified in such instrument, and upon consent thereto by the Administrative Agent to the extent required above, the assignee shall have, to the extent of such assignment (unless otherwise consented to by the Administrative Agent), the obligations, rights and benefits of a Lender hereunder holding the Commitment and Loans (or portions thereof) assigned to it (in addition to the Commitment and Loans, if any, theretofore held by such assignee) and, except as provided in Section 12.24(2)(a), the assigning Lender shall, to the extent of such assignment, be released from the Commitment (or portion thereof) so assigned. Upon each such assignment the assigning Lender shall pay the Administrative Agent a processing and recording fee of $3,500 and the reasonable fees and disbursements of the Administrative Agent’s counsel incurred in connection therewith.

(3) Participations.

(a) A Lender may sell or agree to sell to one or more other Persons (each a “Participant”) a participation in all or any part of any Loans held by it, or in its Commitment, provided (i) such Lender’s obligations under this Agreement and the other Loan Documents (and the Take-Out Agreement) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other applicable parties hereto for the performance of such obligations and (iii) Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement and the other Loan Documents. In no event shall a Lender that sells a participation agree with the Participant to take or refrain from taking any action hereunder or under any other Loan Document except that such Lender may agree with the Participant that it will not, without the consent of the Participant, agree to (A) increase or extend the term of such Lender’s Commitment, (B) extend the date fixed for the payment of principal of or interest on the related Loan or Loans or any portion of any fee hereunder payable to the Participant, (C) reduce the amount of any such payment of principal, (D) reduce the rate at which interest is payable thereon, or any fee hereunder payable to the Participant, to a level below the rate at which the Participant is entitled to receive such interest or fee or (E) consent to any modification, supplement or waiver hereof or of any of the other Loan Documents to the extent that the same, under Section 12.2, requires the consent of each Lender. Subject to subsection (3)(b) of this Section 12.24, Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.9(1), 2.9(5), and 2.9(6) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (2) of this Section 12.24. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 12.24 as though it were a Lender; provided that such Participant agrees to be subject to Section 12.24 as though it were a Lender.

102

(b) A Participant shall not be entitled to receive any greater payment under Section 2.9(1) or 2.9(6) than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with Borrower’s prior written consent. A Participant that is a non-U.S. Person that would become a Lender shall not be entitled to the benefits of Section 2.9(6) unless Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of Borrower, to comply with Section 2.9(6) as though it were a Lender.

(4) Certain Pledges. In addition to the assignments and participations permitted under the foregoing provisions of this Section 12.24 (but without being subject thereto), any Lender may (without notice to Borrower, the Administrative Agent or any other Lender and without payment of any fee) assign and pledge all or any portion of its Loans and its Note to any Federal Reserve Bank as collateral security pursuant to Regulation A and any operating circular issued by such Federal Reserve Bank, and such Loans and Note shall be fully transferable as provided therein. No such assignment shall release the assigning Lender from its obligations hereunder.

(5) Provision of Information to Assignees and Participants. A Lender may furnish any information concerning Borrower, any Borrower Party or any of their respective Affiliates or the Project in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants).

(6) No Assignments to Borrower or Affiliates. Anything in this Section 12.24 to the contrary notwithstanding, no Lender may assign or participate any interest in any Loan held by it hereunder to Borrower or any of its Affiliates without the prior consent of each Lender.

Section 12.25 Brokers. Borrower hereby represents to the Administrative Agent and each Lender Borrower has not dealt with any broker, underwriters, placement agent, or finder in connection with the transactions contemplated by this Agreement and the other Loan Documents. Borrower hereby agrees to indemnify and hold the Administrative Agent and each Lender harmless from and against any and all claims, liabilities, costs and expenses of any kind in any way relating to or arising from a claim by any Person that such Person acted on behalf of such Borrower in connection with the transactions contemplated herein.

103

Section 12.26 Right of Setoff.

(1) Upon the occurrence and during the continuance of any Event of Default, each of the Lenders is, subject (as between the Lenders) to the provisions of subsection (3) of this Section 12.26, hereby authorized at any time and from time to time, without notice to Borrower (any such notice being expressly waived by Borrower) and to the fullest extent permitted by law, to setoff and apply any and all deposits (general or special, time or demand, provisional or final) at any time held, and other indebtedness at any time owing, by such Lender in any of its offices, in Dollars or in any other currency, to or for the credit or the account of Borrower against any and all of the respective obligations of Borrower now or hereafter existing under the Loan Documents, irrespective of whether or not such Lender or any other Lender shall have made any demand hereunder and although such obligations may be contingent or unmatured and such deposits or indebtedness may be unmatured. Each Lender hereby acknowledges that the exercise by any Lender of offset, setoff, banker’s lien, or similar rights against any deposit or other indebtedness of Borrower whether or not located in California or any other state with certain laws restricting lenders from pursuing multiple collection methods, could result under such laws in significant impairment of the ability of all the Lenders to recover any further amounts in respect of the Loan. Therefore, each Lender agrees that no Lender shall exercise any such right of setoff, banker’s lien, or otherwise, against any assets of Borrower (including all general or special, time or demand, provisional or other deposits and other indebtedness owing by such Lender to or for the credit or the account of Borrower) without the prior written consent of the Administrative Agent and the Majority Lenders.

(2) Each Lender shall promptly notify Borrower and the Administrative Agent after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights of the Lenders under this Section 12.26 are in addition to other rights and remedies (including other rights of setoff) which the Lenders may have.

(3) If an Event of Default has resulted in the Loans becoming due and payable prior to the stated maturity thereof, each Lender agrees that it shall turn over to the Administrative Agent any payment (whether voluntary or involuntary, through the exercise of any right of setoff or otherwise) on account of the Loans held by it in excess of its ratable portion of payments on account of the Loans obtained by all the Lenders.

Section 12.27 Cooperation with Syndication; Componentization.

(1) Without limiting the provisions of Section 12.24, Borrower acknowledges that Arranger intends to syndicate a portion of the Commitments to one or more Lenders (the “Syndication”) and in connection therewith, Borrower will take all actions as Arranger may reasonably request to assist Arranger in its Syndication effort. Without limiting the generality of the foregoing, Borrower shall, at the request of Arranger (i) facilitate the review of the Loan and the Project by any prospective Lender; (ii) assist Arranger and otherwise cooperate with Arranger in the preparation of information offering materials (which assistance may include reviewing and commenting on drafts of such information materials and drafting portions thereof); (iii) deliver updated information on Borrower and the Project; (iv) make representatives of Borrower available to meet with prospective Lenders at tours of the Project and bank meetings; (v) facilitate direct contact between the senior management and advisors of Borrower and any prospective Lender; and (vi) provide Arranger with all information reasonably deemed necessary by it to complete the Syndication successfully. Borrower agrees to take such further action, in connection with documents and amendments to the Loan Documents, as may reasonably be required to effect such Syndication. Borrower shall not be responsible for any costs or expenses incurred by the Administrative Agent, the Arranger, any Lender or any other Person in connection with such Syndication, other than to the extent provided in Section 12.5(3).

104

(2) Without limiting the provisions of Sections 12.24 or 12.27(1), Arranger shall have the right, at any time, to direct the Administrative Agent, with respect to all or any portion of the Loan, to (i) cause the Notes, the Mortgage and the other Security Documents to be severed and/or split into two or more separate notes, mortgages and other security agreements, so as to evidence and secure one or more senior and subordinate mortgage loans; (ii) create one more senior and subordinate notes (i.e., an A/B or A/B/C structure) secured by the Mortgage and the other Security Documents; (iii) create multiple components of the Notes (and allocate or reallocate the outstanding principal amount of the Loan among such components); or (iv) otherwise sever the Loan into two or more loans secured by the Mortgage and the other Security Documents; in each such case, in such proportions and priorities as Arranger may so direct to the Administrative Agent; provided, however, that in each such instance the outstanding principal amount of all the Notes evidencing the Loan (or components of such Notes) immediately after the effective date of such splitting, modification, componentization or other severance, equals the outstanding principal amount of the Loans immediately prior to such splitting, modification, componentization or other severance and the weighted average of the interest rates for all such Notes (or components of such Notes) immediately after the effective date of such splitting, modification, componentization or other severance equals the interest rate of the original Note immediately prior to such splitting, modification, componentization or other severance. If requested by the Administrative Agent, in connection with documents and amendments to the Loan Documents, as may reasonably be required to effect such splitting, modification, componentization or other severance, including entering into a severance agreement. Borrower shall not be responsible for any costs or expenses incurred by the Administrative Agent, the Arranger, any Lender or any other Person in connection with such splitting, modification, componentization or other severance, other than to the extent provided in Section 12.5(3).

Section 12.28 Assignment of Note and Mortgage. Provided that no Event of Default exists, upon the indefeasible payment and performance in full of Borrower’s obligations hereunder and under the other Loan Documents in accordance with their terms, the Administrative Agent and each Lender shall assign to Borrower or its designee, without representation, warranty or recourse of any kind, the Administrative Agent’s and each Lender’s right, title and interest in and to the Notes and the Mortgage; provided, however, that (a) the form of such assignment shall be acceptable to the Administrative Agent and each Lender in its sole and absolute discretion; (b) such assignment shall not include, and shall not result in any amendment, modification, termination, diminution or impairment of, any of the indemnity obligations of Borrower or any Borrower Party under the Loan Documents, all of which obligations and any rights and remedies with respect thereto shall continue to inure solely to the benefit of the Administrative Agent and the Lenders; (c) the Administrative Agent and the Lenders shall not incur any expense or liability in connection with such assignment; and (d) Borrower shall indemnify and hold the Administrative Agent and the Lenders harmless from and against any and all claims and liabilities arising out of such assignment, such indemnification to survive any such assignment.

105

ARTICLE 13

LIMITATIONS ON LIABILITY

Section 13.1 Limitation on Liability. Except as provided below, Borrower shall not be personally liable for amounts due under the Loan Documents. Borrower shall be personally liable to the Administrative Agent and the Lenders for any deficiency, loss or damage suffered by the Administrative Agent or any Lender because of: (1) Borrower’s commission of a criminal act, (2) the willful misapplication by Borrower or any Borrower Party of any funds derived from the Project, including security deposits, Net Sales Proceeds, escrow account funds, insurance proceeds and condemnation awards; (3) the fraud or material misrepresentation by Borrower or any Borrower Party made in or in connection with the Loan Documents or the Loan; (4) Borrower’s collection of rents more than one month in advance or entering into or modifying leases, or receipt of monies by Borrower or any Borrower Party in connection with the modification of any leases, in violation of this Agreement or any of the other Loan Documents; (5) Borrower’s failure to apply proceeds of rents or any other payments in respect of the leases and other income of the Project or any other collateral to the costs of maintenance and operation of the Project and to the payment of taxes, lien claims, insurance premiums, Debt Service and other amounts due under the Loan Documents; (6) Borrower’s intentional interference with the Administrative Agent’s exercise of rights and remedies under the Loan Documents; (7) any Borrower Party’s failure to comply with provisions of the Loan Documents prohibiting the sale, transfer or encumbrance of the Project, the collateral, or any direct or indirect ownership interest in Borrower or Mortgage Borrower; (8) to the extent of sufficient Operating Revenues, Borrower’s failure to maintain insurance as required by this Agreement or to pay any taxes or assessments affecting the Project or any mortgage recording or similar taxes required to be paid by any Person in connection with the execution, delivery, recordation, filing, registration, perfection or enforcement of any of the Loan Documents; (9) intentional or grossly negligent damage or destruction to the Project caused by the acts or omissions of Borrower, its agents, employees, or contractors; (10) a breach of Borrower’s obligations with respect to environmental matters under Article 5; (11) Borrower’s failure to pay for any loss, liability or expense (including attorneys’ fees) incurred by the Administrative Agent or any Lender arising out of any claim or allegation made by Borrower, its successors or assigns, or any creditor of Borrower, that this Agreement or the transactions contemplated by the Loan Documents establish a joint venture, partnership or other similar arrangement between Borrower, the Administrative Agent and any Lender; (12) any brokerage commission or finder’s fees claimed in connection with the transactions contemplated by the Loan Documents; or (13) any breach of or default under the Junior Intercreditor Agreement by the Junior Mezzanine Lender. None of the foregoing limitations on the personal liability of Borrower shall modify, diminish or discharge the personal liability of any Joinder Party. Notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents: (a) neither the Administrative Agent nor the Lenders shall be deemed to have waived any right which the Administrative Agent or any Lender may have under Sections 506(a), 506(b), 1111(b) or any other provision of the Bankruptcy Code, or corresponding or superseding sections of the Bankruptcy Amendments and Federal Judgeship Act of 1984, as such sections may be amended, to file a claim for the full amount due to the Administrative Agent or such Lender under the Loan Documents or to require that all collateral shall continue to secure the amounts due under the Loan Documents; and (b) the Secured Indebtedness shall be fully recourse to Borrower and Joinder Parties in the event that: (i) there is a default under Section 10.9 and the involuntary case or other proceeding against a Bankruptcy Party referred to therein has been commenced by or with the collusion of another Bankruptcy Party; (ii) there is a default under Section 10.10, (iii) Borrower fails to obtain the Administrative Agent’s prior written consent to any subordinate financing or other voluntary Lien encumbering the Project; or (iv) Borrower fails to obtain the Administrative Agent’s prior written consent to any assignment, transfer, or conveyance of the Project or any interest therein as required by the Loan Document.

106

Section 13.2 Limitation on Liability of the Administrative Agent’s and the Lenders’ Officers, Employees, etc. Any obligation or liability whatsoever of the Administrative Agent or any Lender which may arise at any time under this Agreement or any other Loan Document shall be satisfied, if at all, out of the Administrative Agent’s or such Lender’s respective assets 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 the Administrative Agent’s or any Lender’s shareholders, directors, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort or otherwise.

ARTICLE 14

BUILDING CONVERSION; SALE OF UNITS

Section 14.1 Completion of Building Conversion.

(1) Borrower shall diligently pursue to completion the Building Conversion in accordance with the Plans and Specifications, the Project Budget, Applicable Law and this Agreement, free and clear of Liens or claims for Liens for materials supplied and for labor or services performed in connection therewith. Without limiting the generality of the forgoing, Borrower shall cause (a) the Hotel Opening to occur by not later than the Hotel Opening Deadline, and (b) Building Conversion to occur by not later than the Construction Completion Deadline, provided that the Construction Completion Deadline may be extended for a period of time, not to exceed sixty (60) days, as a result of Unavoidable Delay.

(2) Borrower shall not modify the Plans and Specifications in any material respect, nor shall Borrower modify the Project Budget, in each case without the Administrative Agent’s and each Lender’s prior written consent; provided, however, no such consent shall be required with respect to increases in that portion of the Project Budget setting forth the cost to complete the Building Conversion which, when combined with any other increases in such portion of the Project Budget occurring after the Amendment Closing Date, do not exceed $1,700,000. Administrative Agent and each Lender shall provide its approval (or disapproval with specific reasons therefor) within ten (10) Business Days of its receipt of Borrower’s submissions hereunder and such consent shall not be unreasonably withheld.

107

(3) If at any time, the projected costs anticipated to be incurred to achieve any aspect of Construction Completion (the “Projected Costs”) exceeds the amount set forth in the Project Budget, as determined by the Administrative Agent in its sole and absolute discretion (which for purposes of such determination shall include a determination that the undisbursed Interest Holdback is insufficient to pay future interest expenses with respect to the Loans), then the Loans shall be deemed “Out of Balance.” In determining if the Loans are Out of Balance, the Administrative Agent shall take into account the funds in the Construction Completion Account, as well as projected Excess Cash Flow which is available pursuant to Section 14.4 to pay the costs of the Building Conversion (as determined by the Administrative Agent in its sole and absolute discretion). If the Loans are deemed Out of Balance, then Borrower shall, at the Administrative Agent’s option, within ten (10) Business Days after written notice from the Administrative Agent either (a) deposit with the Administrative Agent an amount sufficient to cover such deficiency (a “Deficiency Deposit”), which Deficiency Deposit shall be deposited in the Construction Completion Account or (b) make one or more equity contributions to be used by Borrower to pay costs that will cause the Loans not be Out of Balance (an “Equity Balancing Contribution”), including contributions to pay future interest. The Administrative Agent shall not be required to authorize any further disbursements of the Construction Completion Fund before receiving (i) payment of any such Deficiency Deposit and the prior application of such Deficiency Deposit to the payment of the Projected Costs so as to cause the Loans not to be Out of Balance or (ii) verification that an Equity Balancing Contribution has been made and the proceeds thereof used for the payment of Projected Costs so as to cause the Loans not to be Out of Balance. Failure of Borrower to provide satisfactory verification of an Equity Balancing Contribution as required above shall be deemed Borrower’s election to make a Deficiency Deposit. If an Event of Default shall occur and be continuing, the Administrative Agent may, at its option, in addition to exercising any other rights or remedies available under the Loan Documents, (A) apply any unexpended Deficiency Deposit to the costs of completion of the Improvements and/or (B) apply any unexpended Deficiency Deposit to the immediate reduction of any amounts due under the Notes and the other Loan Documents. Notwithstanding the forgoing, the Borrower shall not be required to make a Deficiency Deposit so long as (1) the amount by which the Loans are Out of Balance do not exceed $5,120,516.95 in the aggregate and (2) the Administrative Agent has determined in its sole good faith discretion that funds in such amount are available from one or more of additional Equity Balancing Contributions, an increase in the amount of funds available from the Junior Mezzanine Loan or Excess Cash Flow.

(4) Borrower shall pay all the expenses and costs of the Administrative Agent (and the Lenders) in connection with the Building Conversion, including without limitation, reasonable attorneys’ fees, intangible taxes, additional title insurance premiums, recording fees and all other costs connected with the funding of advances.

108

Section 14.2 Marketing and Sales Program; Sales of Units; Deposits. Borrower shall diligently pursue the sale of all Units in good faith and in accordance with the sales and marketing program in effect at the Project as of the Amendment Closing Date, as well as, to the extent requested by Administrative Agent, in accordance with a formal written sales program delivered to and approved in writing by the Administrative Agent subsequent to the Original Closing Date (the “Approved Sales Program”). Borrower shall obtain the Administrative Agent’s prior written approval for any material deviation from the sales and marketing program currently being employed at the Project by Borrower, as well as to any material deviation from the Approved Sales Program. All reservations, marketing, and sales, including the Approved Sales Program, shall be in compliance with all Applicable Laws, including the Condominium Act. Borrower shall timely and fully comply with all of its obligation under the Purchase Contracts. Without limiting the generality of the foregoing, each deposit under a Purchase Contracts shall be held in escrow in the Condominium Escrow in accordance with Applicable Law and a Condominium Escrow Agreement approved by the Administrative Agent until the earlier of (a) the closing of the sale of the respective Unit, at which time it shall be applied to the purchase price for such Unit in accordance with such Purchase Contract, or (b) such deposit becomes payable to the Borrower other than as a result of the closing of such Unit (e.g., as a result of a default by the purchaser under such Purchase Contract), at which time Borrower shall cause such deposit to be released from the Condominium Escrow to the Administrative Agent. Any deposit so released to the Administrative Agent shall be applied as follows: (x) at all times during which the Administrative Agent has determined that Projected Costs exceed the funds, if any, available to be disbursed from the Construction Completion Account and the Interest Holdback (which determination shall be made in the Administrative Agent’s sole and absolute discretion) to be deposited into the Construction Completion Account; (y) if the condition described in clause (x) above does not exist, the Administrative Agent shall apply such deposit to Borrower’s obligations under the Loan Documents in accordance with Section 2.4(7)(a); and (z) if an Event of Default exists, the Administrative Agent shall apply such deposit in any order or manner as the Administrative Agent shall determine (subject to the terms of any co-lender agreement among the Lenders).

Section 14.3 Partial Release of Units. The Administrative Agent shall in connection with the bona fide arms-length sales to third parties of the Units and the Parking Spaces execute and deliver from time to time partial releases of the Mortgage and other Loan Documents as they apply to individual Units and Parking Spaces upon the submission to the Administrative Agent of the release documents and upon fifteen (15) Business Days notice, subject, however, to the satisfaction of all of the following terms and conditions (sometimes collectively referred to as the “Partial Release Conditions”):

(1) No Event of Default or Potential Default shall exist;

(2) A partial release shall only be delivered at or in connection with the consummation of the sale of the Unit and Parking Space as to which a release of the lien of the Mortgage has been requested;

(3) With respect to the sale of a Unit, Borrower shall pay to the Administrative Agent (i) the applicable Scheduled Release Price, which payment shall be applied by the Administrative Agent in accordance with Section 2.4(7)(b); and (ii) those portions of the Excess Cash Flow required to be paid to the Administrative Agent pursuant to, and in accordance with Section 14.4, which payments shall be applied by the Administrative Agent either in accordance with Section 2.4(7)(b) or into the Construction Completion Account, as applicable, and as set forth further in Section 14.4;

(4) With respect to the sale of a Parking Space, Borrower shall pay to the Administrative Agent the applicable Parking Space Release Price, which payment shall be applied by the Administrative Agent in accordance with Section 2.4(7)(b);

109

(5) The Administrative Agent shall be given not less than fifteen (15) Business Day’s prior written notice of Borrower’s request for each partial release, which notice shall describe the Unit and the name of the purchaser and which notice shall be accompanied by a copy of the fully executed Purchase Contract and a copy of the certificate of occupancy or its equivalent for any Unit that has been the subject of construction work for which a building permit was required or issued;

(6) Each partial release shall, if required by the Administrative Agent, be delivered through an escrow agreement, the terms of which shall be satisfactory to the Administrative Agent;

(7) If requested by the Administrative Agent from time to time, the Administrative Agent shall receive title insurance endorsements satisfactory to the Administrative Agent confirming the continued validity of and priority of the Mortgage on the Unsold Units;

(8) Borrower shall pay all costs and expenses incurred by the Administrative Agent (and the Lenders) in connection with any partial release, including without limitation, attorneys’ fees and costs, recording fees and escrow fees; and

(9) The Administrative Agent shall receive evidence satisfactory to the Administrative Agent that the remaining collateral subject to the Security Documents, after giving effect to the proposed partial release, shall consist of one (1) or more separate legal lots and otherwise remain in compliance with all applicable legal requirements.

Section 14.4 Application of Excess Cash Flow.

(1) At all times during which the Administrative Agent has determined that Projected Costs exceed the funds, if any, available to be disbursed from the Construction Completion Account and the Interest Holdback (which determination shall be made in the Administrative Agent’s sole and absolute discretion), Borrower shall cause all Excess Cash Flow from the sale of each Unit to be applied as follows:

(a) To facilitate the sale of such Unit, Borrower may utilize all or a portion of such Excess Cash Flow to provide Seller Financing for the sale of such Unit; and

(b) To extent any such Excess Cash Flow remains after application of the same in accordance with clause (a) above, all such remaining Excess Cash Flow shall be paid to the Administrative Agent to be deposited in the Construction Completion Account to be applied in accordance with the provisions of Section 4.3(2).

(2) Except as provided in Section 14.4(1), Borrower shall cause all Excess Cash Flow from the sale of each Unit to be applied as follows:

(a) A portion of such Excess Cash Flow equal to ten percent (10%) of the Scheduled Release Price for such Unit shall be paid to the Administrative Agent to be applied in accordance with Section 2.4(7)(b) until the Loans are repaid in full and, thereafter, to be paid to the Existing Mezzanine Lender for application to the Existing Mezzanine Loan until the Existing Mezzanine Loan is paid in full;

110

(b) To facilitate the sale of such Unit, Borrower may utilize a portion of such Net Sales Cash Proceeds remaining after the payment required in clause (a) above to provide Seller Financing for the sale of such Unit; and

(c) To extent any such Excess Cash Flow remains after application of the same in accordance with clauses 2(a) and 2(b) above, the remainder of such Excess Cash Flow shall be used to repay the Junior Mezzanine Loan until the Junior Mezzanine Loan is repaid in full; and

(d) To extent any such Excess Cash Flow remains after application of the same in accordance with clauses 2(a), 2(b) and 2(c) above, the remainder of such Excess Cash Flow shall be paid to the Administrative Agent to be applied in accordance with Section 2.4(7)(b) until the Loans are repaid in full and, thereafter, to be paid to the Existing Mezzanine Lender for application to the Existing Mezzanine Loan until the Existing Mezzanine Loan is paid in full.

(3) Notwithstanding the forgoing provisions of this Section 14.4:

(a) All of the proceeds from any sale of Units pursuant to the Forward Purchase Contract shall be paid to the Administrative Agent to be applied (i) prior a foreclosure of the Mortgage or transfer of the Project in lieu thereof, in accordance with the provisions Section 2.4(7)(b) until the Loans are repaid in full and, thereafter, to the Existing Mezzanine Lender for application to the Existing Mezzanine Loan, and (ii) following a foreclosure of the Mortgage or transfer of the Project in lieu thereof (and notwithstanding any provisions of any intercreditor agreement among the Lenders and the Existing Mezzanine Lender to the contrary), towards any deficiency with respect to Note A, and once such deficiency has been paid in full, to the holder of Note B until all obligations with respect to Note B are paid in full and, thereafter, to the Existing Mezzanine Lender for application to the Existing Mezzanine Loan. In no event shall any portion of such proceeds be treated as Excess Cash Flow for any purposes under this Agreement; and

(b) During the existence of an Event of Default, all Excess Cash Flow shall be paid directly to the Administrative Agent and applied to the Secured Indebtedness (and, after the Secured Indebtedness is repaid in full, to the Existing Mezzanine Loan) in such manner as the Administrative Agent shall determine in its sole and absolute discretion (subject to the terms of any co-lender agreement among the Lenders).

Section 14.5 Sale of Parking Spaces. During the term of this Agreement, Borrower shall not sell or convey any Parking Space to any Person who is not also a purchaser or owner of a Unit. The foregoing prohibition shall not prohibit Borrower from entering into parking agreements with tenants of the Project, provided that the term of any such agreement shall extend no longer than the term of the respective lease. The Parking Space Release Price from any sale or conveyance of a Parking Space other than pursuant to a Purchase Contract shall be paid to the Administrative Agent and applied to reduce the principal balance of the Loans, and thereafter, towards the Borrower’s other obligations under the Loan Documents in accordance with Sections 2.4(5) and 2.4(7)(b).

111

Section 14.6 Seller Financing Collateral.

(1) Borrower hereby grants to the Administrative Agent (for the benefit of the Lenders) a first priority continuing security interest in and to all of Borrower’s right, title and interest in any collateral provided by any Unit purchasers with respect to any Seller Financing now or hereafter obtained by Borrower, together with all principal, interest and other amounts from time to time received, receivable or otherwise payable in respect of or in exchange therefor, all collateral therefor, and, to the extent not covered by the foregoing, all “proceeds” (as defined under Article 9 of the Uniform Commercial Code of any or all of the foregoing (collectively, the “Seller Financing Collateral”).

(2) In the event that Borrower receives any payment (whether of principal, interest or other amounts) with respect to any Seller Financing Collateral, Borrower shall, within two (2) Business Days of its receipt of the same, cause such payment to be paid to the Administrative Agent to be applied in accordance with Section 2.4(7)(b) until the Loans are repaid in full and, thereafter, to be paid to the Existing Mezzanine Lender for application to the Existing Mezzanine Loan; provided, however, that during the existence of an Event of Default, the Administrative Agent may apply such deposits to the Secured Indebtedness (and, after the Secured Indebtedness is repaid in full, to the Existing Mezzanine Loans) in such manner as the Administrative Agent shall determine in its sole and absolute discretion (subject to the terms of any co-lender agreement among the Lenders).

(3) Borrower shall provide the Administrative Agent with such information regarding any Seller Financing and the Seller Financing Collateral as the Administrative Agent and/or any Lender may request from time to time. Without limiting the generality of the forgoing, not later than twenty (20) days following the end of each calendar month, Borrower shall provide to the Administrative Agent and the Lenders with a written report with respect to all Seller Financing provided in the prior calendar month, which report shall identify the Units to which such Seller Financing relates, the amounts of such Seller Financing, the types of such Seller Financing and the third party lenders, if any, involved in such Seller Financing. Borrower shall not enter into any agreement, whether with a Unit purchaser or a third party lender, to provide Seller Financing unless such agreement permits the assignment of the Seller Financing Collateral to the Administrative Agent (on behalf of the Lenders) as provided hereunder.

112

ARTICLE 15

THE ADMINISTRATIVE AGENT

Section 15.1 Appointment, Powers and Immunities. Each Lender hereby appoints and authorizes the Administrative Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to the Administrative Agent by the terms of this Agreement and of the other Loan Documents, together with such other powers as are reasonably incidental thereto. The Administrative Agent (which term as used in this sentence and in Section 15.5 and the first sentence of Section 15.6 shall include reference to its affiliates and its own and its affiliates’ officers, directors, employees and agents):

(1) shall have no duties or responsibilities except those expressly set forth in this Agreement and in the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee for any Lender except to the extent that the Administrative Agent acts as an agent with respect to the receipt or payment of funds, nor shall the Administrative Agent have any fiduciary duty to Borrower nor shall any Lender have any fiduciary duty to Borrower or any other Lender;

(2) shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement or in any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Loan Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any Note or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by Borrower or any other Person to perform any of its obligations hereunder or thereunder; and

(3) as among Lenders (and not as it relates to Borrower) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other Loan Document or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except to the extent any such action taken or omitted violates the Administrative Agent’s standard of care set forth in the first sentence of Section 15.5.

(4) shall not, except to the extent expressly instructed by the Majority Lenders with respect to collateral security under the Security Documents, be required to initiate or conduct any litigation or collection proceedings hereunder or under any other Loan Document; and

(5) shall not be required to take any action which is contrary to this Agreement or any other Loan Document or Applicable Law.

The relationship between the Administrative Agent and each Lender is a contractual relationship only, and nothing herein shall be deemed to impose on the Administrative Agent any obligations other than those for which express provision is made herein or in the other Loan Documents. The Administrative Agent may employ agents and attorneys in fact, and may delegate all or any part of its obligations hereunder, to third parties and shall not be responsible for the negligence or misconduct of any such agents, attorneys in fact or third parties selected by it in good faith. The Administrative Agent may deem and treat the payee of a Note as the holder thereof for all purposes hereof unless and until a notice of the assignment or transfer thereof shall have been filed with the Administrative Agent, any such assignment or transfer to be subject to the provisions of Section 12.24. Except to the extent expressly provided in Sections 15.8, the provisions of this Article 15 are solely for the benefit of the Administrative Agent and the Lenders, and Borrower shall not have any rights as a third-party beneficiary of any of the provisions hereof and the Lenders may modify or waive such provisions of this Article 15 in their sole and absolute discretion.

113

Section 15.2 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon any certification, notice or other communication (including, without limitation, any thereof by telephone, telecopy, telegram or cable) reasonably believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent. As to any matters not expressly provided for by this Agreement or any other Loan Document, the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or thereunder in accordance with instructions given by the Majority Lenders, and such instructions of the Majority Lenders and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders.

Section 15.3 Defaults.

(1) The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of a Potential Default or Event of Default unless the Administrative Agent has received notice from a Lender or Borrower specifying such Potential Default or Event of Default and stating that such notice is a “Notice of Default”. In the event that the Administrative Agent receives such a notice of the occurrence of a Potential Default or Event of Default, the Administrative Agent shall give prompt notice thereof to the Lenders. Within ten (10) days of delivery of such notice of Potential Default or Event of Default from the Administrative Agent to the Lenders (or such shorter period of time as the Administrative Agent determines is necessary), the Administrative Agent and the Lenders shall consult with each other to determine a proposed course of action. The Administrative Agent shall (subject to Section 15.7) take such action with respect to such Potential Default or Event of Default as shall be directed by the Majority Lenders, provided that, (a) unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, including decisions (i) to make protective advances that the Administrative Agent determines are necessary to protect or maintain the Project and (ii) to foreclose on any of the Project or exercise any other remedy, with respect to such Potential Default or Event of Default as it shall deem advisable in the interest of the Lenders except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of all of the Lenders and (b) no actions approved by the Majority Lenders shall violate the Loan Documents or Applicable Law. Each of the Lenders acknowledges and agrees that no individual Lender may separately enforce or exercise any of the provisions of any of the Loan Documents (including the Notes) other than through the Administrative Agent. The Administrative Agent shall advise the Lenders of all material actions which the Administrative Agent takes in accordance with the provisions of this Section 15.3(1) and shall continue to consult with the Lenders with respect to all of such actions. Notwithstanding the foregoing, if the Majority Lenders shall at any time direct that a different or additional remedial action be taken from that already undertaken by the Administrative Agent, including the commencement of foreclosure proceedings, such different or additional remedial action shall be taken in lieu of or in addition to, the prosecution of such action taken by the Administrative Agent; provided that all actions already taken by the Administrative Agent pursuant to this Section 15.3(1) shall be valid and binding on each Lender. All money (other than money subject to the provisions of Section 15.7) received from any enforcement actions, including the proceeds of a foreclosure sale of the Project, shall be applied, first, to the payment or reimbursement of the Administrative Agent for expenses incurred in accordance with the provisions of Sections 15.3(2), (3) and (4) and 15.5, second, to the payment or reimbursement of the Lenders for expenses incurred in accordance with the provisions of Sections 15.3(2), (3) and (4) and 15.5, third, to the payment or reimbursement of the Lenders for any advances made pursuant to Section 15.3(2), and fourth, pari passu to the Lenders in accordance with their respective Proportionate Shares , unless an Unpaid Amount is owed pursuant to Section 15.12, in which event such Unpaid Amount shall be deducted from the portion of such proceeds of the Defaulting Lender and be applied to payment of such Unpaid Amount to the Special Advance Lender.

114

(2) All losses with respect to interest (including interest at the Default Rate) and other sums payable pursuant to the Notes or incurred in connection with the Loans shall be borne by the Lenders in accordance with their respective proportionate shares of the Loans. All losses incurred in connection with the Loans, the enforcement thereof or the realization of the security therefor, shall be borne by the Lenders in accordance with their respective proportionate shares of the Loan, and the Lenders shall promptly, upon request, remit to the Administrative Agent their respective proportionate shares of (a) any expenses incurred by the Administrative Agent in connection with any Default to the extent any expenses have not been paid by Borrower, (b) any advances made to pay taxes or insurance or otherwise to preserve the Lien of the Security Documents or to preserve and protect the Project, whether or not the amount necessary to be advanced for such purposes exceeds the amount of the Mortgage, (c) any other expenses incurred in connection with the enforcement of the Mortgage or other Loan Documents, and (d) any expenses incurred in connection with the consummation of the Loans not paid or provided for by Borrower. To the extent any such advances are recovered in connection with the enforcement of the Mortgage or the other Loan Documents, each Lender shall be paid its proportionate share of such recovery after deduction of the expenses of the Administrative Agent and the Lenders.

(3) If, at the direction of the Majority Lenders or otherwise as provided in Section 15.3(1), any action(s) is brought to collect on the Notes or enforce the Security Documents or any other Loan Document, such action shall (to the extent permitted under Applicable Law and the decisions of the court in which such action is brought) be an action brought by the Administrative Agent and the Lenders, collectively, to collect on all or a portion of the Notes or enforce the Security Documents or any other Loan Document and counsel selected by the Administrative Agent shall prosecute any such action on behalf of the Administrative Agent and the Lenders, and the Administrative Agent and the Lenders shall consult and cooperate with each other in the prosecution thereof. All decisions concerning the appointment of a receiver while such action is pending, the conduct of such receivership, the conduct of such action, the collection of any judgment entered in such action and the settlement of such action shall be made by the Administrative Agent. The costs and expenses of any such action shall be borne by the Lenders in accordance with each of their respective proportionate shares.

(4) If, at the direction of the Majority Lenders or otherwise as provided in Section 15.3(1), any action(s) is brought to foreclose the Mortgage, such action shall (to the extent permitted under Applicable Law and the decisions of the court in which such action is brought) be an action brought by the Administrative Agent and the Lenders, collectively, to foreclose all or a portion of the Mortgage and collect on the Notes. Counsel selected by the Administrative Agent shall prosecute any such foreclosure on behalf of the Administrative Agent and the Lenders and the Administrative Agent and the Lenders shall consult and cooperate with each other in the prosecution thereof. All decisions concerning the appointment of a receiver, the conduct of such foreclosure, the acceptance of a deed in lieu of foreclosure, the bid on behalf of the Administrative Agent and the Lenders at the foreclosure sale of the Project, the manner of taking and holding title to the Project (other than as set forth in subsection (5) below), the sale of the Project after foreclosure, and the commencement and conduct of any deficiency judgment proceeding shall be made by the Administrative Agent. The costs and expenses of foreclosure will be borne by the Lenders in accordance with their respective proportionate shares.

115

(5) If title is acquired to the Project after a foreclosure sale or by a deed in lieu of foreclosure, title shall be held by the Administrative Agent in its own name in trust for the Lenders or, at the Administrative Agent’s election, in the name of a wholly owned subsidiary of the Administrative Agent on behalf of the Lenders.

(6) If the Administrative Agent (or its subsidiary) acquires title to the Project or is entitled to possession of the Project during or after the foreclosure, all material decisions with respect to the possession, ownership, development, construction, control, operation, leasing, management and sale of the Project shall be made by the Administrative Agent. All income or other money received after so acquiring title to or taking possession of the Project with respect to the Project, including income from the operation and management of the Project and the proceeds of a sale of the Project, shall be applied, first, to the payment or reimbursement of the Administrative Agent and the expenses incurred in accordance with the provisions of this Article 15, second, to the payment of operating expenses with respect to the Project; third, to the establishment of reasonable reserves for the operation of the Project; fourth, to the payment or reimbursement of the Lenders for any advances made pursuant to Section 15.3(2); fifth to fund any capital improvement, leasing and other reserves; and sixth, to the Lenders in accordance with their respective proportionate shares, unless an Unpaid Amount is owed pursuant to Section 15.12, in which event such Unpaid Amount shall be deducted from the portion of such proceeds of the Defaulting Lender and be applied to payment of such Unpaid Amount to the Special Advance Lender.

Section 15.4 Rights as a Lender. With respect to its Commitment and the Loans made by it Eurohypo (and any successor acting as Administrative Agent) in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Administrative Agent, and the term “Lender” or “Lenders” shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. Eurohypo (and any successor acting as Administrative Agent) and its affiliates may (without having to account therefor to any Lender) lend money to, make investments in and generally engage in any kind of lending, trust or other business with Borrower (and any of its Affiliates) as if it were not acting as the Administrative Agent, and Eurohypo and its affiliates may accept fees and other consideration from Borrower for services in connection with this Agreement or otherwise without having to account for the same to the Lenders.

116

Section 15.5 Standard of Care; Indemnification. In performing its duties under the Loan Documents, the Administrative Agent will exercise the same degree of care as it normally exercises in connection with real estate loans in which no syndication or participations are involved, but the Administrative Agent shall have no further responsibility to any Lender except as expressly provided herein and except for its own gross negligence or willful misconduct which resulted in actual loss to such Lender, and, except to such extent, the Administrative Agent shall have no responsibility to any Lender for the failure by the Administrative Agent to comply with any of the Administrative Agent’s obligations to Borrower under the Loan Documents or otherwise. The Lenders agree to indemnify the Administrative Agent (to the extent not reimbursed under Section 12.5, but without limiting the obligations of Borrower under Section 12.5) ratably in accordance with the aggregate principal amount of the Loans held by the Lenders (or, if no Loans are at the time outstanding, ratably in accordance with their respective Commitments), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Administrative Agent (including by any Lender) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other Loan Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses that Borrower is obligated to pay under Section 12.5, but excluding, unless a Event of Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the Administrative Agent’s breach of its standard of care set forth in the first sentence of this Section.

Section 15.6 Non Reliance on Administrative Agent and Other Lenders. Each Lender agrees that it has, independently and without reliance on the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of Borrower and its Affiliates and decision to enter into this Agreement and that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or under any other Loan Document. Subject to the provisions of the first sentence of Section 15.5, the Administrative Agent shall not be required to keep itself informed as to the performance or observance by Borrower of this Agreement or any of the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the Project or the books of Borrower or any of its Affiliates. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Administrative Agent hereunder or as otherwise agreed by the Administrative Agent and the Lenders, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of Borrower or any of its Affiliates that may come into the possession of the Administrative Agent or any of its affiliates.

Section 15.7 Failure to Act. Except for action expressly required of the Administrative Agent hereunder, and under the other Loan Documents, the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction from the Lenders of their indemnification obligations under Section 15.5 against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action.

117

Section 15.8 Resignation of Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Lenders and Borrower. Upon any such resignation, the Majority Lenders shall have the right to appoint a successor Administrative Agent that shall be a Person that meets the qualifications of an Eligible Assignee. Such successor Administrative Agent shall be approved by Borrower, which approval shall not be unreasonably withheld, delayed or conditioned. If no successor Administrative Agent shall have been so appointed by the Majority Lenders and shall have accepted such appointment within thirty (30) days after the retiring Administrative Agent’s giving of notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, that shall be an institutional lender that meets the requirements of the immediately preceding sentence. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder (if not already discharged therefrom as provided above in this Section 15.8). The fees payable by Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between Borrower and such successor. After any retiring Administrative Agent’s resignation hereunder as Administrative Agent, the provision of this Article 15 and Section 12.5 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent.

Section 15.9 Consents under Loan Documents. As between Borrower and Lenders, the Administrative Agent may as expressly provided in the Loan Documents and, if not expressly provided, with the consent of the Majority Lenders (a) grant any consent or approval required of it or (b) consent to any modification, supplement or waiver under any of the Loan Documents. If the Administrative Agent solicits any consents or approvals from the Lenders under any of the Loan Documents, each Lender shall within ten (10) Business Days of receiving such request, give the Administrative Agent written notice of its consent or approval or denial thereof; provided that, if any Lender does not respond within such ten (10) Business Days, such Lender shall be deemed to have authorized the Administrative Agent to vote such Lender’s interest with respect to the matter which was the subject of the Administrative Agent’s solicitation as the Administrative Agent elects. Any such solicitation by the Administrative Agent for a consent or approval shall be in writing and shall include a description of the matter or thing as to which such consent or approval is requested and shall include the Administrative Agent’s recommended course of action or determination in respect thereof. After Administrative Agent’s resignation hereunder as Administrative Agent, the provisions of this Article 15 and Section 12.5 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent.

Section 15.10 Authorization. The Administrative Agent is hereby authorized by the Lenders to execute, deliver and perform in accordance with the terms of each of the Loan Documents to which the Administrative Agent is or is intended to be a party and each Lender agrees to be bound by all of the agreements of the Administrative Agent contained in such Loan Documents. Borrower shall be entitled to rely on all written agreements, approvals and consents received from the Administrative Agent as being that also of the Lenders, without obtaining separate acknowledgment or proof of authorization of same.

118

Section 15.11 Reserved.

Section 15.12 Defaulting Lenders.

(1) If any Lender (a “Defaulting Lender”) shall for any reason fail to (a) intentionally deleted, or (b)) pay its proportionate share of an advance to protect the Project or the Lien of the Security Documents, any of the other Lenders may, but shall not be obligated to, make all or a portion of the Defaulting Lender’s proportionate share of such advance, provided that such Lender gives the Defaulting Lender and the Administrative Agent prior notice of its intention to do so. The right to make such advances in respect of the Defaulting Lender shall be exercisable first by the Lender holding the greatest proportionate share and thereafter to each of the Lenders in descending order of their respective proportionate shares of the Loans or in such other manner as the Majority Lenders (excluding the Defaulting Lender) may agree on. Any Lender making all or any portion of the Defaulting Lender’s proportionate share of the applicable Loan or advance in accordance with the foregoing terms and conditions shall be referred to as a “Special Advance Lender”.

(2) In any case where a Lender becomes a Special Advance Lender (a) the Special Advance Lender shall be deemed to have purchased, and the Defaulting Lender shall be deemed to have sold, a senior participation in the Defaulting Lender’s respective Loan to the extent of the amount so advanced (the “Advanced Amount”) bearing interest (including interest at the Default Rate, if applicable) and (b) the Defaulting Lender shall have no voting rights under this Agreement or any other Loan Documents so long as it is a Defaulting Lender. It is expressly understood and agreed that each of the respective obligations under this Agreement and the other Loan Documents, including losses incurred in connection with the Loan, including costs and expenses of enforcement, advancing to preserve the Lien of the Mortgage or to preserve and protect the Project, shall be without regard to any adjustment in the proportionate shares occasioned by the acts of a Defaulting Lender. The Special Advance Lender shall be entitled to recover from the Defaulting Lender an amount (the “Unpaid Amount”) equal to the applicable Advanced Amount, plus any unpaid interest due and owing with respect thereto, less any repayments thereof made by the Defaulting Lender immediately upon demand. The Defaulting Lender shall have the right to repurchase the senior participation in its Loan from the Special Advance Lender at any time by the payment of the Unpaid Amount.

(3) A Special Advance Lender shall (a) give notice to the Defaulting Lender, the Administrative Agent and each of the other Lenders (provided that failure to deliver said notice to any party other than the Defaulting Lender shall not constitute a default under this Agreement) of the Advance Amount and the percentage of the Special Advance Lender’s senior participation in the Defaulting Lender’s Loan and (b) in the event of the repayment of any of the Unpaid Amount by the Defaulting Lender, give notice to the Defaulting Lender and the Administrative Agent of the fact that the Unpaid Amount has been repaid (in whole or in part), the amount of such repayment and, if applicable, the revised percentage of the Special Advance Lender’s senior participation. Provided that the Administrative Agent has received notice of such participation, the Administrative Agent shall have the same obligations to distribute interest, principal and other sums received by the Administrative Agent with respect to a Special Advance Lender’s senior participation as the Administrative Agent has with respect to the distribution of interest, principal and other sums under this Agreement; and at the time of making any distributions to the Lenders, shall make payments to the Special Advance Lender with respect to a Special Advance Lender’s senior participation in the Defaulting Lender’s Loan out of the Defaulting Lender’s share of any such distributions.

119

(4) A Defaulting Lender shall immediately pay to a Special Advance Lender all sums of any kind paid to or received by the Defaulting Lender from Borrower, whether pursuant to the terms of this Agreement or the other Loan Documents or in connection with the realization of the security therefore until the Unpaid Amount is fully repaid. Notwithstanding the fact that the Defaulting Lender may temporarily hold such sums, the Defaulting Lender shall be deemed to hold same as a trustee for the benefit of the Special Advance Lender, it being the express intention of the Lenders that the Special Advance Lender shall have an ownership interest in such sums to the extent of the Unpaid Amount.

(5) Each Defaulting Lender shall indemnify, defend and hold the Administrative Agent and each of the other Lenders harmless from and against any and all losses, damages, liabilities or expenses (including reasonable attorneys’ fees and expenses and interest at the Default Rate) which they may sustain or incur by reason of the Defaulting Lender’s failure or refusal to abide by its obligations under this Agreement or the other Loan Documents, except to the extent a Defaulting Lender became a Defaulting Lender due to the gross negligence or willful misconduct of the Administrative Agent and/or any Lender. The Administrative Agent shall, after payment of any amounts due to any Special Advance Lender pursuant to the terms of subsection (3) above, setoff against any payments due to such Defaulting Lender for the claims of the Administrative Agent and the other Lenders pursuant to this indemnity.

Section 15.13 Liability of the Administrative Agent. The Administrative Agent shall not have any liabilities or responsibilities to Borrower on account of the failure of any Lender (other than the Administrative Agent in its capacity as a Lender) to perform its obligations hereunder or to any Lender on account of the failure of Borrower to perform its obligations hereunder or under any other Loan Document.

Section 15.14 Transfer of Agency Function. Without the consent of Borrower or any Lender, the Administrative Agent may at any time or from time to time transfer its functions as the Administrative Agent hereunder to any of its offices wherever located in the United States; provided that the Administrative Agent shall promptly notify Borrower and the Lenders thereof

ARTICLE 16

AMENDMENT AND RESTATEMENT

This Agreement amends, restates, supersedes and replaces the Existing Loan Agreement in its entirety, and all references in the Loan Documents to the “Loan Agreement” shall hereafter refer to this Agreement. Except as expressly set forth in this Agreement and/or in any amendments or modifications to the other Loan Documents entered into on or after the date hereof, the other Loan Documents shall remain in full force and effect in accordance with their respective terms.

120

ARTICLE 17

RELEASE

In consideration of Administrative Agent’s and each Lender’s execution and delivery of this Agreement, Borrower and (by its execution of the Joinder attached hereto) each Joinder Party, on behalf of itself and its heirs, successors and assigns (collectively, the “Releasing Parties”), remises, releases, acquits, satisfies and forever discharges Administrative Agent and each Lender, Administrative Agent’s and each Lender’s predecessors in interest, and all of the respective past, present and future officers, directors, employees, agents, servicers, attorneys, representatives, participants, heirs, successors and assigns of Administrative Agent and each Lender and Administrative Agent’s and each Lender’s predecessors in interest (collectively, “Lender Parties”), from any and all manner of debts, accountings, bonds, warranties, representations, covenants, promises, contracts, controversies, agreements, liabilities, obligations, expenses, damages, judgments, executions, actions, claims, demands and causes of action of any nature whatsoever, at law or in equity, known or unknown, either now accrued or subsequently maturing, which Borrower or any of the other Releasing Parties now has or hereafter can, shall or may have by reason of any matter, cause or thing, from the beginning of the world to and including the date of this Agreement arising out of or relating to (a) the Loans, including, but not limited to, its administration or funding; (b) the Loan Documents; (c) the Project or its development, financing and operation; and (d) any other agreement or transaction between Borrower or any of the other Releasing Parties and any of Lender Parties relating to the matters described in (a) through (c) above. Borrower and (by its execution of the Joinder attached hereto) each Joinder Party, for itself and the other Releasing Parties, covenants and agrees never to institute or cause to be instituted or continue prosecution of any suit or other form of action or proceeding of any kind or nature whatsoever against any of Lender Parties by reason of or in connection with any of the foregoing matters, claims or causes of action.

[Signature Pages Follow]

121

EXECUTED as of the date first written above.

LENDER:	EUROHYPO AG, NEW YORK BRANCH
	By:	/s/ John Lippmann
		Name:	John Lippmann
		Title:	Director

By:	/s/ Stephen Cox
	Name:	Stephen Cox
	Title:	Director

Address for Notices to Eurohypo AG,
New York Branch:

Eurohypo AG, New York Branch
1114 Avenue of the Americas, 29^th Floor
New York, New York 10036
Attention: Peter Tzelios
Telecopier No.: (866) 267-7680

With a copies to:

Eurohypo AG, New York Branch
1114 Avenue of the Americas, 29^th Floor
New York, New York 10036
Attention: Head of Portfolio Operations
Telecopier No.: (866) 267-7680

and:

Morrison & Foerster LLP
555 West Fifth Street, Suite 3500
Los Angeles, California 90013
Attention: Marc D. Young, Esq.
Telecopier No.: (213) 892-5454

S-1

BORROWER:	1100 WEST PROPERTIES, LLC, a Delaware limited liability company
	By:	/s/ Marc Gordon
		Name:	Marc Gordon
		Title:	Vice President

By:	/s/ Abraham Galbut
	Name:	Abraham Galbut
	Title:	President

Address for Notices:

c/o Sanctuary Holdings
4770 Biscayne Boulevard
Miami, Florida 33137
Attention: Abraham Galbut
Telecopier: (786) 427-6203

With copies to:

Mondrian Miami Investment LLC
c/o Morgans Hotel Group
475 10^th Avenue
New York, New York 10018
Attention: Marc Gordon
Telecopier: (212) 277-4270

- and -

Greenburg Traurig
1221 Brickell Avenue
Miami, Florida 33131
Attention: Steven Goldman, Esq.
Telecopier: (305) 961-5561

- and -

McDermott Will & Emery LLP
340 Madison Avenue
New York, New York 10017
Attention: Keith M. Pattiz, Esq.
Telecopier: (212) 547-5444

S-2

SOLE MEMBER FOR PURPOSES
OF SECTIONS 9.6 and 9.8

1100 WEST HOLDINGS, LLC,
a Delaware limited liability company

By: 1100 WEST HOLDINGS II, LLC,
a Delaware limited liability company

By: MONDRIAN MIAMI INVESTMENT LLC,
a Delaware limited liability company

By: MORGANS GROUP LLC,
a Delaware limited liability company

By:	/s/ Marc Gordon
	Name:	Marc Gordon
	Title:	Authorized Signatory

By: SANCTUARY WEST AVENUE LLC,
a Delaware limited liability company

By:	/s/ Abraham Galbut
	Name:
	Title:

S-3

ADMINISTRATIVE AGENT:	EUROHYPO AG, NEW YORK BRANCH, as Administrative Agent
	By:	/s/ John Lippmann
		Name:	John Lippmann
		Title:	Director

By:	/s/ Stephen Cox
	Name:	Stephen Cox
	Title:	Director

Address for Notices to Eurohypo AG,
New York Branch:

Eurohypo AG, New York Branch
1114 Avenue of the Americas, 29^th Floor
New York, New York 10036
Attention: Peter Tzelios
Telecopier No.: (866) 267-7680

With a copies to:

Eurohypo AG, New York Branch
1114 Avenue of the Americas, 29^th Floor
New York, New York 10036
Attention: Head of Portfolio Operations
Telecopier No.: (866) 267-7680

and:

Morrison & Foerster LLP
555 West Fifth Street, Suite 3500
Los Angeles, California 90013
Attention: Marc D. Young, Esq.
Telecopier No.: (213) 892-5454

S-4

LENDER:	CIT LENDING SERVICES CORPORATION, a Delaware corporation
	By:	/s/ Raymond M. McGowan
		Name:	Raymond M. McGowan
		Title:	Vice President, Portfolio Management

Address for notice purposes:

c/o CIT Group Inc.
11 West 42nd Street, 7th Floor
New York, New York 10036
Facsimile:     (212) 461-5632
Attention:    Vice President, Portfolio

Management, Real Estate Group

With a copy to:

c/o CIT Group Inc.
505 Fifth Avenue, 14th Floor
New York, New York 10017
Facsimile: (212) 771-9520
Attention:   Stephen Millas, Vice President &
                     Chief Counsel, Commercial Real Estate

With a further copy to:

Brown Rudnick LP
7 Times Square, 47th Floor
New York, New York 10036
Facsimile: (212) 938-2906
Attention: Paul W. Cicchetti, Esq.

S-5

LENDER:	KBC BANK NV
	By:	/s/ Nicholas A. Philippides
		Name:	Nicholas A. Philippides
		Title:	Assistant Vice President

By:	/s/ Sandra T. Johnson
	Name:	Sandra T. Johnson
	Title:	Managing Director

Address for notice purposes:

KBC Bank NV
1177 Avenue of the Americas, 8^th Floor
New York, New York 10036
Attention: Nicholas Phillipides
Telecopier No.: (212) 541-0793

With a copy to:

Brown Rudnick LP
7 Times Square, 47th Floor
New York, New York 10036
Attention: Paul W. Cicchetti, Esq.
Facsimile: (212) 938-2906

S-6

JOINDER

By executing this Joinder (the “Joinder”), each of the undersigned (collectively referred to herein as the “Joinder Parties”; individually referred to herein as “Joinder Party”) hereby (i) unconditionally, irrevocably and jointly and severally guaranty the performance by Borrower of Borrower’s obligations with respect to Borrower’s indemnification obligations under Sections 9.12(2)(a) through and including 9.12(2)(e) and Section 12.5 of this Agreement and all obligations and liabilities for which Borrower is personally liable under Section 13.1 of this Agreement, (ii) agrees to cause Borrower and Sole Member to at all times be Single Purpose Entities and to otherwise comply with each of the covenants contained in Section 9.6 of this Agreement and (iii) joins in and agrees to be bound by the provisions of Article 17 hereof. This Joinder is a guaranty of full and complete payment and performance and not of collectability. The Joinder Parties are (a) Abraham Galbut, an individual, (b) Keith Menin, an individual, (c) Seth Frohlich, an individual, and (d) Morgans Group LLC, a Delaware limited liability company.

(2) Waivers. To the fullest extent permitted by Applicable Law, Joinder Parties waive all rights and defenses of sureties, guarantors, accommodation parties and/or co-makers and agree that their obligations under this Joinder shall be primary, absolute and unconditional, and that their obligations under this Joinder shall be unaffected by any of such rights or defenses, including:

(a) the unenforceability of any Loan Document against Borrower and/or any guarantor or other Joinder Party;

(b) any release or other action or inaction taken by the Administrative Agent or any Lender with respect to the collateral under any Loan Document, the Loan, Borrower, any guarantor and/or other Joinder Party, whether or not the same may impair or destroy any subrogation rights of any Joinder Party, or constitute a legal or equitable discharge of any surety or indemnitor;

(c) the existence of any collateral or other security for the Loan, and any requirement that the Administrative Agent or any Lender pursue any of such collateral or other security, or pursue any remedies it may have against Borrower, any guarantor and/or any other Joinder Party;

(d) any requirement that the Administrative Agent or any Lender provide notice to or obtain a Joinder Party’s consent to any modification, increase, extension or other amendment of the Loan, including the guaranteed obligations;

(e) any right of subrogation (until payment in full of the Loan, including the guaranteed obligations, and the expiration of any applicable preference period and statute of limitations for fraudulent conveyance claims);

(f) any defense based on any statute of limitations;

(g) any payment by Borrower to the Administrative Agent or any Lender if such payment is held to be a preference or fraudulent conveyance under bankruptcy laws or the Administrative Agent or such Lender is otherwise required to refund such payment to Borrower or any other party; and

(h) any voluntary or involuntary bankruptcy, receivership, insolvency, reorganization or similar proceeding affecting Borrower or any of its assets.

1

(3) Agreements. Joinder Parties further represent, warrant and agree that:

(a) Neither the exercise of any remedies by the Administrative Agent or any Lender nor any other action taken by the Administrative Agent or any Lender shall affect or in any manner alleviate the obligations of the Joinder Parties hereunder.

(b) The obligations under this Joinder are enforceable against each such party and are not subject to any defenses, offsets or counterclaims.

(c) The provisions of this Joinder are for the benefit of the Administrative Agent, Lenders and their respective successors and assigns.

(d) The Administrative Agent and Lenders shall have the right to (i) renew, modify, extend or accelerate the Loan, (ii) pursue some or all of its remedies against Borrower, any guarantor or any Joinder Party, (iii) add, release or substitute any collateral for the Loan or party obligated thereunder, and (iv) release Borrower, any guarantor or any Joinder Party from liability, all without notice to or consent of any Joinder Party (or other Joinder Party) and without affecting the obligations of any Joinder Party (or other Joinder Party) hereunder.

(e) Each Joinder Party shall deliver to the Administrative Agent (for delivery to the Lenders) not later than one hundred and twenty (120) days after the close of each fiscal year of such Joinder Party, annual financial statements of such Joinder Party for each such fiscal year, such financial statements to be substantially in the form of the financial statements delivered by such Joinder Party to the Administrative Agent in connection with the closing of the Loans or such other form reasonably acceptable to the Administrative Agent, including (other than with respect to an individual) a balance sheet and statement of profit and loss certified by such Joinder Party in accordance with Section 8.1 of this Agreement.

(f) To the maximum extent permitted by law, each Joinder Party hereby knowingly, voluntarily and intentionally waives the right to a trial by jury in respect of any litigation based hereon. This waiver is a material inducement to the Administrative Agent and the Lenders to enter into this Agreement.

(g) The obligations of the Joinder Parties are joint and several, and the Administrative Agent and the Lenders shall not be required to pursue or exhaust any remedies against any Joinder Party or Borrower as a condition to the pursuit and realization of remedies against either Joinder Party.

(h) In the event Borrower files or has filed against it any case in bankruptcy or similar proceedings, the Administrative Agent and the Lenders shall not be required to enforce this Joinder in connection with such proceedings and shall not be required to appear in such proceedings prior to enforcing the provisions of this Joinder.

2

(4) Counterparts. This Joinder may be executed in multiple counterparts, each of which shall constitute an original, but all of which shall constitute one document.

(5) Governing Law. This Joinder shall be governed by the laws of the State of New York.

(6) Amendment and Restatement. This Joinder amends, supersedes and replaces in its entirely the Joinder attached to the Existing Loan Agreement.

[Signature Pages Follow]

3

Executed and sealed as of November  25, 2008.

JOINDER PARTIES:
/s/	Abraham Galbut
ABRAHAM GALBUT
/s/	Keith Menin
KEITH MENIN
/s/	Seth Frohlich
SETH FROHLICH
MORGANS GROUP LLC,
a Delaware limited liability company
By:	Morgans Hotel Group Co.,
	a Delaware corporation,
	its managing member

By:	/s/ Marc Gordon
	Name:	Marc Gordon
	Title:	CIO

S-1

EXHIBIT A

LEGAL DESCRIPTION OF PROJECT

Parcel 1:

Lots 7 and 8 and the North 50 feet of Lot 9, Block 80, SUBDIVISION OF BLOCK EIGHTY OF THE ALTON BEACH REALTY COMPANY, A PART OF ALTON BEACH BAY FRONT SUBDIVISION, according to the Plat thereof, as recorded in Plat Book 6, at Page 12, of the Public Records of Miami-Dade County, Florida; also described as:

Commence at the Northwest corner of West Avenue and 10^th Street in Miami Beach, Florida, said corner also being the intersection of Tangents at the Southeast corner of Block 80, and run Northerly along the Easterly line of said Block 80, along the Westerly line of West Avenue, a distance of 350.00 feet to the Southerly line of the North 50.00 feet of said Lot 9 and the Point of Beginning (P.O.B.) of the tract of land hereinafter described: Thence continue along the Easterly line of said Block 80, along the Westerly line of West Avenue, a distance of 299.85 feet to the Northeast corner of the above referenced Lot 7; thence deflecting 90°00’00” to the left, run Westerly along the Northerly line of said Lot 7, a distance of 337.96 feet to the face of a concrete bulkhead cap and the face of deck; thence run Southerly along the face of deck and cap, a distance of 301.70 feet to the Southerly line of the North 50.00 feet of Lot 9; thence run Easterly along the Southerly line of the North 50.00 feet of said Lot 9, a distance of 304.67 feet to the Point of Beginning.

Together with the easement rights as contained in Master Declaration of Covenants, Conditions and Restrictions for Mirador South Beach, filed December 30, 2004, in Official Records Book 22959, at Page 886, of the Public Records of Miami-Dade County, Florida.

Parcel 2:

Condominium Unit CU12, MIRADOR 1000, A CONDOMINIUM, together with an undivided interest in the common elements, according to the Declaration of Condominium thereof, as recorded in Official Records Book 22959, at Page 1727, as amended from time to time, of the Public Records of Miami-Dade County, Florida.

Together with the Leasehold Estate, as created by Sovereignty Submerged Lands Lease Renewal and Modification to Reflect Change in Ownership between the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida, as Lessor, and Mirador 1000, LLC, a Delaware limited liability company, as Lessee, filed December 16, 2004, in Official Records Book 22913, at Page 825, as assigned by Assignment of Submerged Land Lease, dated August 7, 2006, recorded August 8, 2006 in Official Records Book 24801, Page 3362, as modified by that certain Sovereignty Submerged Lands Lease Modification to Reflect Change in Ownership and Change in Upland Use (No.130004276) between the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida, as Lessor, and 1100 West Properties, LLC, a Delaware limited liability company, as Lessee, filed December 1, 2006, in Official Records Book 25146, at Page 3269, all of the Public Records of Miami-Dade County, Florida.

A-1

Parcel 3:

Condominium Unit CU10, MIRADOR 1200, A CONDOMINIUM, together with an undivided interest in the common elements, according to the Declaration of Condominium thereof, as recorded in Official Record Book 23543, at Page 3930, as amended from time to time, of the Public Records of Miami-Dade County, Florida.

Together with the Leasehold Estate, as created by Sovereignty Submerged Lands Lease Renewal between the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida, as Lessor, and 1200 West Realty, LLC, a Delaware limited liability company, as Lessee, filed January 12, 2006, in Official Records Book 24141, at Page 1866, as assigned by Assignment of Submerged Land Lease, dated August 7, 2006, recorded August 8, 2006 in Official Records Book 24801, Page 3368, as modified by that certain Sovereignty Submerged Lands Lease Modification to Reflect Change in Ownership and Change in Upland Use (No.13000120T) between the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida, as Lessor, and 1100 West Properties, LLC, a Delaware limited liability company, as Lessee, filed December 1, 2006, in Official Records Book 25146, at Page 3282, all of the Public Records of Miami-Dade County, Florida.

A-2

EXHIBIT B

RESERVED

B-1

EXHIBIT C

RESERVED

C-1

EXHIBIT D

FORM OF ASSIGNMENT AND ACCEPTANCE

Reference is made to the Amended and Restated Loan Agreement dated as of November [_____], 2008 (as amended and in effect on the date hereof, the “Agreement”), between 1100 WEST PROPERTIES, LLC, a Delaware limited liability company, the Lenders named therein, and EUROHYPO AG, NEW YORK BRANCH, as Administrative Agent for the Lenders. Terms defined in the Agreement are used herein with the same meanings. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Acceptance as if set forth herein in full.

The Assignor named below hereby sells and assigns, without recourse, to the Assignee named below, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Assignment Date set forth below, the interests set forth below (the “Assigned Interest”) in the Assignor’s rights and obligations under the Agreement, including, without limitation, the interests set forth below in the Commitment of the Assignor on the Assignment Date and Loans owing to the Assignor which are outstanding on the Assignment Date, together with (a) interest on the assigned Loans from and after the Assignment Date and (b) the amount, if any, set forth below of the fees accrued to the Assignment Date for account of the Assignor. The Assignee hereby acknowledges receipt of a copy of the Agreement. From and after the Assignment Date (i) the Assignee shall be a party to and be bound by the provisions of the Agreement and, to the extent of the interests assigned by this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent of the interests assigned by this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Agreement and the Agency Agreement.

This Assignment and Acceptance is being delivered to the Administrative Agent together with, if the Assignee is not already a Lender under the Agreement, an administrative questionnaire in the form supplied by the Administrative Agent, duly completed by the Assignee. The [Assignor][Assignee] shall pay the fee payable to the Administrative Agent pursuant to Section 12.24(2)(e) of the Agreement.

This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York.

The Assignor represents and warrants to the Assignee that the Assignor is the legal and beneficial owner of the Assigned Interest and has not created any adverse interest therein. The Assignor and the Assignee represent and warrant to each other that they are, respectively, authorized to execute and deliver this Assignment and Acceptance.

D-1

Date of Assignment:

Legal Name of Assignor:

Legal Name of Assignee:

Assignee’s Address for Notices:

Effective Date of Assignment (“Assignment Date”)¹:

			Percentage Assigned of Facility/Commitment (set forth, to at least 4 decimals, as a percentage of the Facility and the aggregate Commitments of all Lenders thereunder)
	Principal Amount Assigned
Current Outstanding
Loans Assigned:		$	% 2
Future Funding Commitment:
[Fees Assigned (if any):]		$		%

The terms set forth above and below are hereby agreed to:

[NAME OF ASSIGNOR], as Assignor
By:
	Name:
	Title:

[NAME OF ASSIGNEE], as Assignee
By:
	Name:
	Title:

The undersigned hereby consent to the within assignment: ³

1	Must be at least five Business Days after execution hereof by all required parties.
2	Delete if no future advances are involved.

D-2

EUROHYPO AG, NEW YORK BRANCH, as Administrative Agent
By:
	Name:
	Title:

By:
	Name:
	Title:

³ Consent to be included to the extent required by Section 11.24(2) of the Agreement.

D-3

ANNEX 1

STANDARD TERMS AND CONDITIONS FOR

ASSIGNMENT AND ACCEPTANCE

1. Representations and Warranties.

1.1 Assignor. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Acceptance and to consummate the Transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Loan Agreement or any other Loan Document (as defined in the Agreement), (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.

1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Acceptance and to consummate the Transactions contemplated hereby and to become a Lender under the Agreement, (ii) it satisfies the requirements, if any, specified in the Agreement that are required to be satisfied by it in order to acquire the Assigned Interest and become a Lender, (iii) from and after the Assignment Date, it shall be bound by the provisions of the Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it has received a copy of the Agreement, together with copies of the most recent financial statements delivered pursuant to Section 8.1 thereof, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, (v) it satisfies the requirements of an Eligible Assignee as defined in the Agreement, and (vi) if it is a Non-U.S. Person, attached to the Assignment and Acceptance is any documentation required to be delivered by it pursuant to the terms of the Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.

D-4

2. Payments. From and after the Assignment Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Assignment Date and to the Assignee for amounts which have accrued from and after the Assignment Date.

3. General Provisions. This Assignment and Acceptance shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Acceptance may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Acceptance by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Acceptance. This Assignment and Acceptance shall be governed by, and construed in accordance with, the law of the State of New York.

D-5

EXHIBIT E

FORM OF NOTICE OF CONVERSION/CONTINUATION

                    , 200_____ 

Eurohypo AG, New York Branch,
   as Administrative Agent
1114 Avenue of the Americas, 29^th Floor
New York, New York 10036
Attn: Loan Servicing

Re: Amended and Restated Loan Agreement dated as of November [_____], 2008 (as the same may be amended, modified or supplemented from time to time, the “Agreement”) by and among 1100 WEST PROPERTIES, LLC, a Delaware limited liability company (the “Borrower”), the lenders from time to time party to the Agreement (the “Lenders”), and EUROHYPO AG, NEW YORK BRANCH, as Administrative Agent on behalf of the Lenders (the “Administrative Agent”)

Ladies and Gentlemen:

Reference is made to the Agreement. Capitalized terms used in this Notice of Conversion/Continuation without definition have the meanings specified in the Agreement.

Pursuant to Section 2.8(5) of the Agreement, the Borrower hereby elects to convert or continue the loans described in attached Schedule 1 (the “Loans”). In connection therewith, the Borrower and the undersigned authorized officer of the Borrower hereby certify that:

(1) Representations and Warranties. All representations and warranties of the Borrower contained in the Loan Documents, including those contained in Article 7 of the Agreement, are true and correct as of the date hereof and shall be true and correct on the date of the continuation/conversion of the Loans, both before and after giving effect to such continuation/conversion;

(2) No Potential Default/Event of Default. No Potential Default or Event of Default exists as of the date hereof or will result from the continuation/conversion of the Loans; and

E-1

(3) No Material Adverse Effect. No act, omission, change or event which has a Material Adverse Effect has occurred since the date of the Agreement.

1100 WEST PROPERTIES, LLC, a Delaware limited liability company
By:
	Name:
	Title:

By:
	Name:
	Title:

E-2

Schedule 1
to Notice of Conversion/Continuation

LOAN TO BE CONVERTED OR CONTINUED

A. All conversions and continuations must be of a Loan, or portion thereof, in a principal amount of $1,000,000 or a multiple of $100,000 in excess thereof.

B. Conversions/continuations to a Eurodollar Loan under paragraphs (2) and (3) below are not permitted if, after giving effect to thereto, (a) there would be more than five (5) different Eurodollar Loans in effect, or (b) the aggregate outstanding principal amount of all Eurodollar Loans would be reduced to be less than $1,000,000.

(1)	Conversion of a Eurodollar Loan into a Base Rate Loan.
	The following Eurodollar Loan to a Base Rate Loan:

Amount:	$
Requested Conversion Date: (must be a Business Day at least three (3) Business Days after date of notice)
Last day of current Interest Period:

(2)	Conversion of a Base Rate Loan into a Eurodollar Loan.
	The following Base Rate Loan to a Eurodollar Loan:

Amount:	$
Requested Conversion Date: (must be a Business Day at least three (3) Business Days after date of notice)
Requested Interest Period: (14 days or 1, 2, 3, or 6 months)

(3)	Continuation of a Eurodollar Loan into a Subsequent Interest Period.
	The following Eurodollar Loan into a subsequent Interest Period:

Amount:	$
Last day of current Interest Period: (must be a Business Day at least three (3) Business Days after date of notice)
Requested Interest Period: (14 days or 1, 2, 3, or 6 months)

E-3

SCHEDULE 1(a)

COMMITMENTS

LENDER	COMMITMENT
CIT LENDING SERVICES CORPORATION		31.78	%
KBC BANK NV		31.02	%
EUROHYPO AG, NEW YORK BRANCH		37.20	%

Schedule 1(a) - 1

Schedule 1(b)

MINIMUM SALES PRICE SCHEDULE

Schedule 1(b) - 1

Schedule 1(C)

UNIT RELEASE SCHEDULE

Schedule 1(c) - 1

SCHEDULE 2.1

DISBURSEMENT AND COMPLETION CONDITIONS

Part A – Disbursement Conditions

Part B – Construction Completion Conditions

PART A. DISBURSEMENT CONDITIONS

Each disbursement from the Construction Completion Fund shall be subject to the Administrative Agent’s receipt, review, approval and/or confirmation of the following, each in form and content satisfactory to the Administrative Agent in its sole discretion:

1. There shall exist no Potential Default or Event of Default (currently and after giving effect to the requested disbursement).

2. The representations and warranties contained in this Loan Agreement and in all other Loan Documents are true and correct.

3. Intentionally deleted.

4. Borrower shall have paid the Administrative Agent’s (and the Lenders’) costs and expenses in connection with such advance or disbursement (including title charges, and costs and expenses of the Administrative Agent’s inspecting engineer and attorneys).

5. No change shall have occurred in the financial condition of Borrower or any Borrower Party, which would have, in the Administrative Agent’s judgment, have a material adverse effect on the Loans, the Project, or Borrower’s or any Borrower Party’s ability to perform its obligations under the Loan Documents.

6. No condemnation or adverse possession, as determined by the Administrative Agent, zoning or usage change proceeding shall have occurred or shall have been threatened against the Project; the Project shall not have suffered any damage by fire or other casualty which has not been repaired or is not being restored in accordance with this Agreement; no law, regulation, ordinance, moratorium, injunctive proceeding, restriction, litigation, action, citation or similar proceeding or matter shall have been enacted, adopted, or threatened by any governmental authority, which would have, in the Administrative Agent’s judgment, a material adverse effect on the Project or Borrower’s or any Borrower Party’s ability to perform its obligations under the Loan Documents.

7. Disbursements from the Construction Completion Fund shall only be made on a Payment Date.

Schedule 2.1 - 1

8. Each request for a disbursement shall specify the amount requested, shall be on forms satisfactory to the Administrative Agent, and, shall be accompanied by appropriate invoices, bills paid affidavits, lien waivers, title updates, endorsements to the title insurance, and other documents as may be required by the Administrative Agent. Disbursements from the Construction Completion Fund may be made, at the Administrative Agent’s election, either: (a) in reimbursement for expenses paid by Borrower or (b) for payment of expenses incurred and invoiced but not yet paid by Borrower. The Administrative Agent, at its option and without further direction from Borrower, may make disbursements to the Person to whom payment is due or through an escrow satisfactory to the Administrative Agent. The Administrative Agent may, at Borrower’s expense, conduct an audit, inspection, or review of the Project to confirm the amount of any disbursement from the Construction Completion Fund.

9. Prior to any disbursement from the Construction Completion Fund, Borrower shall have submitted to the Administrative Agent and the Administrative Agent shall have approved (a) any changes to the Plans and Specifications and the Project Budget, and (b) copies of all construction, architectural and engineering contracts relating to the Building Conversion, in each case certified by Borrower as being true, correct and complete, together with undertakings of such contractors, architects and engineers to continue performance on behalf of the Administrative Agent (on behalf of the Lenders), together with bonds with respect to any subcontracts, if bonds are required pursuant to such subcontracts.

10. All improvements constructed by Borrower prior to the date a disbursement is requested shall be completed to the satisfaction of the Administrative Agent and the Administrative Agent’s engineer and in accordance with the plans and budget for such improvements, as approved by the Administrative Agent, and all legal requirements.

11. Borrower shall not use any portion of any disbursement for payment of any other cost except as specifically set forth in a request for disbursement approved by the Administrative Agent in writing.

12. Each disbursement from the Construction Completion Fund, except for a final improvements disbursement, shall be in the amount of actual costs incurred for each line item as shown on the Project Budget less ten percent (10%) of such costs as retainage (other than for materials for which no retainage shall be required) to be disbursed upon completion of such line item to the satisfaction of Administrative Agent. Disbursements may include deposits for materials so long as (a) such deposits do not exceed one hundred percent (100%) of the cost for materials which have been delivered to the Property, (b) fifty percent (50%) of the cost of materials which have not been delivered to the Property having a total cost of not more than $4,000,000; and (c) ten percent (10%) of the total cost of all other materials.

13. No portion of the Construction Completion Fund will be disbursed for materials stored at the Project unless Borrower furnishes the Administrative Agent satisfactory evidence that such materials are properly stored and secured at the Project.

Schedule 2.1 - 2

PART B. CONSTRUCTION COMPLETION CONDITIONS

The following shall have been completed to the satisfaction of the Administrative Agent in its discretion prior to the occurrence of Construction Completion:

1. The Hotel Opening shall have occurred by the Hotel Opening Deadline; and

2. The Building Conversion shall have occurred by the Construction Completion Deadline.

3. The Administrative Agent shall have received the following items in connection with the Building Conversion:

(a) Evidence of the approval by the applicable Governmental Authorities of the Project for operation in accordance with the Plans and Specifications to the extent any such approval is a condition of the lawful use of Project;

(b) Endorsements to the Title Policy which are satisfactory to the Administrative Agent and which describe the improvements located on the Project (CLTA 116 series) and insure the lien-free completion of such improvements (CLTA 101 series, as required by the Administrative Agent);

(c) Unconditional waivers of lien and sworn statements from all contractors, subcontractors, materialmen, suppliers and vendors with respect to the Building Conversion, in each case in compliance with the Applicable Laws;

(d) Certificates from Borrower and its architect to Administrative Agent and the Lenders stating that (i) the Building Conversion (A) has been substantially completed in accordance with the Plans and Specifications and (B) is available for occupancy, and (ii) the Project complies with all applicable building codes;

(e) Violation searches, if available and requested by the Administrative Agent, with Governmental Authorities indicating no notices of violation have been issued with respect to the Project;

(f) Current searches of all Uniform Commercial Code financing statements filed with the Secretary of State of the state of formation/organization of Borrower and the office of Recorder of Miami County in the State of Florida, and the Office of the Delaware Secretary of State, showing that no Uniform Commercial Code financing statements are filed or recorded against Borrower in which the collateral is personal property or fixtures located on the Project or used in connection with the Project other than financing statements with respect to the Loans;

Schedule 2.1 - 3

(g) A certificate of an Authorized Officer of Borrower certifying that:

(i) no condemnation of any portion of the Project or any action which could result in a relocation of any roadways abutting the Project or the denial of access, which, in the Administrative Agent’s sole judgment, adversely affects the Lenders’ security or the operation of the Project, has commenced or, to the best of Borrower’s knowledge, is contemplated by any Governmental Authority;

(ii) all fixtures, attachments and equipment necessary for the operation of the Hotel Improvements have been installed or incorporated into the Project and are operational and in good working order, free from defects; all guarantees and warranties have been transferred/assigned to Borrower; and Borrower is the absolute owner of all of said property free and clear of all Liens; and

(iii) all costs and expenses relating to such Building Conversion have been paid in full.

(h) Evidence that all of the Licenses have been obtained and are in full force and effect.

Schedule 2.1 - 4

SCHEDULE 2.4(1)

WIRE INSTRUCTIONS

Bank of New York

ABA#        

A/C#        

F/B/O: Eurohypo

Re: Mondrian Miami

Attention: Valerie Rodriguez        

Schedule 2.4 - 1

SCHEDULE 7.23

PROJECT BUDGET

Schedule 7.23

SCHEDULE 7.27

ORGANIZATIONAL CHART

Schedule 7.27

EX-10.45

Exhibit 10.45

AMENDED AND RESTATED
MEZZANINE LOAN AGREEMENT

Between

1100 West Holdings, LLC,

a Delaware limited liability company

as Borrower

The Lenders Party Hereto

as Lenders

and

Eurohypo AG, New York Branch

as Administrative Agent

Dated as of November 25, 2008

TABLE OF CONTENTS

	Page
ARTICLE 1 CERTAIN DEFINITIONS		2
Section 1.1 Certain Definitions		2
Section 1.2 Types of Loans		30
ARTICLE 2 LOAN TERMS		30
Section 2.1 The Commitments, Loans and Notes		30
Section 2.2 Conversions or Continuations of Loans		32
Section 2.3 Interest Rate; Late Charge		32
Section 2.4 Terms of Payment		33
Section 2.5 Extension of Maturity Date		35
Section 2.6 Exit Fee		41
Section 2.7 Application of Operating Revenues; Cash Management		41
Section 2.8 Payments; Pro Rata Treatment; Etc.		41
Section 2.9 Yield Protection; Etc.		46
ARTICLE 3 INSURANCE, CONDEMNATION, AND IMPOUNDS		51
Section 3.1 Insurance		51
Section 3.2 Use and Application of Insurance Proceeds		52
Section 3.3 Casualty and Condemnation		52
ARTICLE 4 RESERVES		53
Section 4.1 Interest Reserve Fund		53
Section 4.2 Mortgage Loan Reserves		55
ARTICLE 5 ENVIRONMENTAL MATTERS		55
Section 5.1 Certain Definitions		55
Section 5.2 Representations and Warranties on Environmental Matters		56
Section 5.3 Covenants on Environmental Matters		57
Section 5.4 Allocation of Risks and Indemnity		58
Section 5.5 No Waiver		59
ARTICLE 6 LEASING MATTERS		59
Section 6.1 Representations and Warranties on Leases		59
Section 6.2 Restaurant Lease and Future Lease		59
Section 6.3 Covenants		60
ARTICLE 7 REPRESENTATIONS AND WARRANTIES		60
Section 7.1 Organization and Power		60
Section 7.2 Validity of Loan Documents		60
Section 7.3 Liabilities; Litigation		61
Section 7.4 Taxes and Assessments		61
Section 7.5 Other Agreements; Defaults		61

-i-

TABLE OF CONTENTS
(continued)

	Page
Section 7.6 Compliance with Law		61
Section 7.7 Location of Borrower		62
Section 7.8 ERISA		62
Section 7.9 Margin Stock		62
Section 7.10 Tax Filings		62
Section 7.11 Solvency		62
Section 7.12 Full and Accurate Disclosure		62
Section 7.13 Single Purpose Entity		63
Section 7.14 Management of the Project		63
Section 7.15 No Conflicts		63
Section 7.16 Title		63
Section 7.17 Flood Zone		64
Section 7.18 Insurance		64
Section 7.19 Certificate of Occupancy; Licenses		64
Section 7.20 Physical Condition		64
Section 7.21 Boundaries		64
Section 7.22 Material Agreements		65
Section 7.23 Plans and Specifications; Project Budget		66
Section 7.24 Filing and Recording Taxes		66
Section 7.25 Investment Company Act		66
Section 7.26 Patriot Act; Foreign Assets Control Regulations		66
Section 7.27 Organizational Structure		67
Section 7.28 Property Specific Representations		67
Section 7.29 Affiliates		68
Section 7.30 List of Mortgage Loan Documents		68
Section 7.31 Mortgage Loan Event of Default		68
ARTICLE 8 FINANCIAL REPORTING		68
Section 8.1 Financial Statements		68
Section 8.2 Accounting Principles		70
Section 8.3 Other Information		70
Section 8.4 Annual Operating Budget		70
Section 8.5 Audits		70
Section 8.6 Mortgage Borrower Financial Statements		70
Section 8.7 Notice of Default		71
Section 8.8 Access		71
ARTICLE 9 COVENANTS		72
Section 9.1 Due on Sale and Encumbrance; Transfers of Interests		72
Section 9.2 Taxes; Charges		73
Section 9.3 Control; Management		73
Section 9.4 Operation; Maintenance; Inspection		74

-ii-

TABLE OF CONTENTS
(continued)

	Page
Section 9.5 Taxes on Security		74
Section 9.6 Legal Existence; Name, Etc.		74
Section 9.7 Affiliate Transactions		75
Section 9.8 Limitation on Other Debt		75
Section 9.9 Further Assurances		76
Section 9.10 Estoppel Certificates		76
Section 9.11 Notice of Certain Events		76
Section 9.12 Indemnification		76
Section 9.13 Size of Units		77
Section 9.14 Minimum Sales Prices		77
Section 9.15 Hedge Agreements		77
Section 9.16 No Distributions		79
Section 9.17 Condominium Covenants		79
Section 9.18 Patriot Act Compliance; Foreign Assets Control Regulations		80
Section 9.19 Payment for Labor and Materials		81
Section 9.20 Hotel Management Agreement		82
Section 9.21 Americans with Disabilities		83
Section 9.22 Zoning		83
Section 9.23 ERISA		83
Section 9.24 Property Specific Covenants		84
Section 9.25 Forward Purchase Contract		84
Section 9.26 Mortgage Borrower Covenants		84
Section 9.27 Refinancing or Prepayment of the Mortgage Loan		84
Section 9.28 Acquisition of the Mortgage Loan		85
Section 9.29 UCC Insurance Policy		85
Section 9.30 Construction Management Contract		86
ARTICLE 10 EVENTS OF DEFAULT		86
Section 10.1 Payments		86
Section 10.2 Insurance		86
Section 10.3 Single Purpose Entity		86
Section 10.4 Taxes		86
Section 10.5 Sale, Encumbrance, Etc.; Change of Control		86
Section 10.6 Representations and Warranties		86
Section 10.7 Other Encumbrances		86
Section 10.8 Various Covenants		86
Section 10.9 Involuntary Bankruptcy or Other Proceeding		87
Section 10.10 Voluntary Petitions, Etc.		87
Section 10.11 Indebtedness		87
Section 10.12 Dissolution		87
Section 10.13 Judgments		87

-iii-

TABLE OF CONTENTS
(continued)

	Page
Section 10.14 Security		88
Section 10.15 Guarantees		88
Section 10.16 Interest Reserve Fund		88
Section 10.17 Mortgage Loan Event of Default		88
Section 10.18 Hedge Agreement		88
Section 10.19 Junior Loan Intercreditor Agreement		88
Section 10.20 Covenants		88
ARTICLE 11 REMEDIES		89
Section 11.1 Remedies — Insolvency Events		89
Section 11.2 Remedies — Other Events		89
Section 11.3 Administrative Agent’s Right to Perform the Obligations		89
ARTICLE 12 MISCELLANEOUS		90
Section 12.1 Notices		90
Section 12.2 Amendments, Waivers, Etc.		90
Section 12.3 Limitation on Interest		91
Section 12.4 Invalid Provisions		92
Section 12.5 Reimbursement of Expenses		92
Section 12.6 Approvals; Third Parties; Conditions		93
Section 12.7 Lenders and Administrative Agent Not in Control; No Partnership		93
Section 12.8 Time of the Essence		93
Section 12.9 Successors and Assigns		93
Section 12.10 Renewal, Extension or Rearrangement		94
Section 12.11 Waivers		94
Section 12.12 Cumulative Rights		94
Section 12.13 Singular and Plural		94
Section 12.14 Phrases		94
Section 12.15 Exhibits and Schedules		94
Section 12.16 Titles of Articles, Sections and Subsections		94
Section 12.17 Promotional Material		95
Section 12.18 Survival		95
Section 12.19 WAIVER OF JURY TRIAL		95
Section 12.20 Remedies of Borrower		95
Section 12.21 GOVERNING LAW		96
Section 12.22 Entire Agreement		97
Section 12.23 Counterparts		97
Section 12.24 Assignments and Participations		97
Section 12.25 Brokers		99
Section 12.26 Right of Setoff		100
Section 12.27 Reserved		100

-iv-

TABLE OF CONTENTS
(continued)

	Page
Section 12.28 Mortgage Loan Defaults		100
Section 12.29 Intercreditor Agreement		102
Section 12.30 Discussions with Mortgage Lender		103
Section 12.31 Independent Approval Rights		103
ARTICLE 13 LIMITATIONS ON LIABILITY		103
Section 13.1 Limitation on Liability		103
Section 13.2 Limitation on Liability of the Administrative Agent’s and the Lenders’ Officers, Employees, etc.		104
ARTICLE 14 BUILDING CONVERSION; PAYMENT OF RELEASE PRICES; SALE OF UNITS		105
Section 14.1 Completion of Building Conversion		105
Section 14.2 Marketing and Sales Program; Sales of Units; Deposits		105
Section 14.3 Sale of Units and Payment of Release Price		106
Section 14.4 Application of Excess Cash Flow		106
Section 14.5 Sale of Parking Spaces		106
ARTICLE 15 THE ADMINISTRATIVE AGENT		107
Section 15.1 Appointment, Powers and Immunities		107
Section 15.2 Reliance by Administrative Agent		108
Section 15.3 Defaults		108
Section 15.4 Rights as a Lender		111
Section 15.5 Standard of Care; Indemnification		111
Section 15.6 Non Reliance on Administrative Agent and Other Lenders		111
Section 15.7 Failure to Act		112
Section 15.8 Resignation of Administrative Agent		112
Section 15.9 Consents under Loan Documents		112
Section 15.10 Authorization		113
Section 15.11 Reserved		113
Section 15.12 Defaulting Lenders		113
Section 15.13 Liability of the Administrative Agent		114
Section 15.14 Transfer of Agency Function		115
ARTICLE 16 AMENDMENT AND RESTATEMENT		115
ARTICLE 17 RELEASE		115

-v-

LIST OF EXHIBITS AND SCHEDULES

EXHIBIT A	-	LEGAL DESCRIPTION OF PROJECT
EXHIBIT B	-	RESERVED
EXHIBIT C	-	RESERVED
EXHIBIT D	-	FORM OF ASSIGNMENT AND ACCEPTANCE
EXHIBIT E	-	FORM OF NOTICE OF CONVERSION/CONTINUATION
SCHEDULE 1(a)	-	COMMITMENTS
SCHEDULE 1(b)	-	MINIMUM SALES PRICE SCHEDULE
SCHEDULE 1(c)	-	UNIT RELEASE SCHEDULE
SCHEDULE 2.1	-	ADVANCE AND CONSTRUCTION COMPLETION CONDITIONS
SCHEDULE 2.4(1)	-	WIRE INSTRUCTIONS
SCHEDULE 7.3	-	LITIGATION
SCHEDULE 7.23	-	PROJECT BUDGET
SCHEDULE 7.27	-	ORGANIZATIONAL CHART
SCHEDULE 7.30	-	LIST OF MORTGAGE LOAN DOCUMENTS

-vi-

AMENDED AND RESTATED MEZZANINE LOAN AGREEMENT

This Amended and Restated Mezzanine Loan Agreement (this “Agreement”) is entered into as of November 25, 2008 among 1100 WEST HOLDINGS, LLC, a limited liability company duly organized and validly existing under the laws of the State of Delaware (“Borrower”); each of the lenders that is a signatory hereto identified under the caption “LENDERS” on the signature pages hereof and each lender that becomes a “Lender” after the date hereof pursuant to Section 12.24(2) (individually, a “Lender” and, collectively, the “Lenders”); and EUROHYPO AG, NEW YORK BRANCH (“Eurohypo”), as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the “Administrative Agent”).

RECITALS

A. Borrower, the Administrative Agent and Eurohypo, as Lender, are parties to a Mezzanine Loan Agreement dated as of April 25, 2008 (as the same may be amended, modified and supplemented and in effect from time to time, the “Existing Loan Agreement”), which provides for, among other things, loans by the Lenders to Borrower in an aggregate principal or face amount not exceeding $28,000,000 (the “Loans or Existing Loans”).

B. Mortgage Borrower (as defined below), Mortgage Lenders (as defined below) and Eurohypo, as administrative agent are parties to that certain Loan Agreement dated as of August 8, 2006, as amended by that certain First Amendment to Loan Agreement dated as of September 6, 2007, and that certain Second Amendment to Loan Agreement dated as of April 25, 2008 (said Loan Agreement, as so amended, the “Original Mortgage Loan Agreement”), which provides for, among other things, loans by Mortgage Lenders to Mortgage Borrower in an aggregate principal or face amount not exceeding $124,000,000 (the “Mortgage Loan”).

C. On the date hereof, Mortgage Borrower, Mortgage Lenders and Eurohypo, as administrative agent, are entering into that certain Amended and Restated Loan Agreement dated as of the date hereof (as the same may be further amended, modified and supplemented and in effect from time to time, the “Mortgage Loan Agreement”).

D. Additional funds are required to complete the Building Conversion (as defined below) and cause Construction Completion (as defined below) to occur and certain affiliates of Borrower and Mortgage Borrower are ready to provide such funds through a combination of additional equity investments in Mortgage Borrower and the making of the Junior Mezzanine Loan (as defined below).

E. Borrower, the Lenders and the Administrative Agent desire to amend, restate and supersede the Existing Loan Agreement with this Agreement. As of the date hereof, the principal balance of the Loans is $26,046,370.42 and the unfunded amount of the Commitments is $1,953,629.58.

1

AGREEMENT

ARTICLE 1

CERTAIN DEFINITIONS

Section 1.1 Certain Definitions. As used herein, the following terms have the meanings indicated:

(1) “Acceptable Counterparty” shall mean (1) Eurohypo and/or its Affiliates, or (2) any other counterparty to the Hedge Agreement that has and shall maintain, until the expiration of the applicable Hedge Agreement, a credit rating of not less than ‘A’ from S&P.

(2) “Access Laws” has the meaning assigned to such term in Section 9.21(1).

(3) “Additional Costs” has the meaning assigned to such term in Section 2.9(1)(a).

(4) “Adjusted LIBOR Rate” means, for any Interest Period for any Eurodollar Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/1000 of 1%) determined by the Administrative Agent to be equal to the LIBOR Rate for such Interest Period divided by one (1) minus the Reserve Requirement (if any) for such Interest Period.

(5) “Adjusted Operating Expenses” means Operating Expenses as determined and adjusted by the Administrative Agent in accordance with its then current audit policies and procedures.

(6) “Adjusted Operating Revenues” means Operating Revenues as determined and adjusted by the Administrative Agent in accordance with its then current audit policies and procedures.

(7) “Advance Conditions” means those conditions listed in Schedule 2.1 attached hereto and made a part hereof.

(8) “Advance Date” has the meaning assigned to such term in Section 2.8(6).

(9) “Advanced Amount” has the meaning assigned to such term in Section 15.12(2).

(10) “Affiliate” means with respect to any Person, another Person that directly or indirectly Controls, or is under common Control with, or is Controlled by, such Person and, if such Person is an individual, any member of the immediate family (including parents, spouse, children and siblings) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is Controlled by any such member or trust. For purposes of this definition, any Person that owns directly or indirectly securities having ten percent (10%) or more of the voting power for the election of directors or other governing body of a corporation or thirty-five percent (35%) or more of the partnership, membership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to Control such corporation or other Person. Notwithstanding the foregoing, no individual shall be an Affiliate solely by reason of his or her being a director, officer, trustee or employee of Borrower.

2

(11) “Agency Fee” means the agency fee agreed to by Borrower and Administrative Agent pursuant to the Fee Letter.

(12) “Agreement” means this Amended and Restated Mezzanine Loan Agreement, as amended from time to time.

(13) “Amendment Closing Date” means the date hereof.

(14) “Annual Operating Budget” has the meaning assigned to such term in Section 8.4.

(15) “Anti-Terrorism Order” means Executive Order No. 13,224, 66 Fed. Reg. 49,079 (2001), issued by the President of the United States of America (Executive Order Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism).

(16) “Applicable Law” means collectively, all international, foreign, Federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any governmental authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authority, in each case whether or not having the force of law.

(17) “Applicable Lending Office” means, for each Lender and for each Type of Loan, the “Lending Office” of such Lender (or of an affiliate of such Lender) designated for such Type of Loan on the respective signature pages hereof or such other office of such Lender (or of an affiliate of such Lender) as such Lender may from time to time specify to the Administrative Agent and Borrower as the office by which its Loans of such Type are to be made and maintained.

(18) “Applicable Margin” with respect to the Loans shall mean (a) for Base Rate Loans, ten percent (10.0%) per annum; and (b) for Eurodollar Loans, six percent (6.0%) per annum.

(19) “Appraisal” means an appraisal of the Project prepared by an appraiser reasonably satisfactory to the Administrative Agent, which appraisal must also (a) satisfy the requirements of Title XI of the Federal Institution Reform, Recovery and Enforcement Act of 1989 and the regulations promulgated thereunder (including the appraiser with respect thereto) and (b) be otherwise in form and substance reasonably satisfactory to the Administrative Agent.

(20) “Approved Fund” means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business and that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

3

(21) “Approved Sales Program” has the meaning assigned to such term in Section 14.2.

(22) “Assignment and Acceptance” means an Assignment and Acceptance, duly executed by the parties thereto, in substantially the form of Exhibit D hereto and consented to by the Administrative Agent in accordance with Section 12.24(2).

(23) “Assignment of Forward Purchase Contract” means that certain Assignment of Forward Purchase Contract dated as of the Original Closing Date by and among Mortgage Borrower, Administrative Agent and the buyers named in the Forward Purchase Contract.

(24) “Assignment of Rents and Leases” means the Assignment of Rents and Leases, executed by Mortgage Borrower for the benefit of the Mortgage Loan Administrative Agent (on behalf of the Mortgage Lenders), and pertaining to leases of space in the Project, as the same may be modified, amended and/or supplemented from time to time.

(25) “Association” means the association to be formed pursuant to the Declaration.

(26) “Authorized Officer” means, with respect to Borrower or Mortgage Borrower, an officer of Sanctuary Management who has knowledge of the financial affairs of Borrower or Mortgage Borrower, and with respect to Morgans LLC, an officer who holds the title of controller or chief financial officer or an equivalent title.

(27) “Bankruptcy Code” means Title 11 of the United States Code, 11 U.S.C. § 101 et seq., as amended from time to time.

(28) “Bankruptcy Party” has the meaning assigned in Section 10.9.

(29) “Base Rate” means, for any day, a rate per annum equal to the Prime Rate for such day. Each change in any interest rate provided for herein based upon the Base Rate resulting from a change in the Base Rate shall take effect at the time of such change in the Base Rate.

(30) “Base Rate Loans” means Loans that bear interest at rates based upon the Base Rate.

(31) “Basel II” means that certain revised at-risk capital framework published by the Basel Committee on Banking Supervision in its paper entitled “International Convergence of Capital Measurement and Capital Standards: a Revised Framework” in June, 2004, as amended, modified and in effect from time to time.

4

(32) “Boat Slip” or “Boat Slips” means any one or more of the boat slips located adjacent to, and comprising a part of, the Project.

(33) “Borrower Party” means Mortgage Borrower, Borrower, MMI, Sanctuary Avenue, any Joinder Party or any Guarantor.

(34) “Broker” has the meaning assigned to such term in Section 12.25.

(35) “Building Conversion” means the conversion of the Project from a rental building to a hotel condominium building in accordance with, and as contemplated by, the Project Budget, the Plans and Specifications and the terms of this Agreement.

(36) “Business Day” means (a) any day other than a Saturday, a Sunday, or other day on which commercial banks located in New York City are authorized or required by Applicable Law to remain closed and (b) in connection with a borrowing of, a payment or prepayment of principal of or interest on, a Conversion of or into, or an Interest Period for, a Eurodollar Loan or a notice by Borrower with respect to any such borrowing, payment, prepayment or Conversion, the term “Business Day” shall also exclude a day on which banks are not open for dealings in Dollar deposits in the London interbank market.

(37) “Cash Management Account” has the meaning assigned to such term in the Cash Management Agreement.

(38) “Cash Management Agreement” means that certain Second Amended and Restated Cash Management and Security Agreement dated and delivered on or about the date hereof, by and among Mortgage Borrower, the Mortgage Loan Administrative Agent (on behalf of the Lenders) and the Depository Bank, as the same may be modified, amended and/or supplemented from time to time.

(39) “Casualty” has the meaning assigned to such term in Section 3.3(1).

(40) “Casualty/Taking Account” has the meaning assigned to such term in the Cash Management Agreement.

(41) “Change of Control” shall mean: (a) any event, including, without limitation, the sale, transfer, issuance, assignment, pledge or encumbrance in one or more transactions, of any direct or indirect beneficial ownership interests in the Borrower, which results in (i) any Person, other than MMI and Sanctuary Avenue, owning or encumbering any of the membership interests in, or rights to distributions from, Borrower; (ii) any Person other than the MMI and Sanctuary Avenue having the responsibility for managing and administering the day-to-day business and affairs of, or otherwise Controlling, the Borrower, (iii) any Person other than Morgans LLC and Sanctuary Holdings owning or encumbering any of the membership interests in, or rights to distributions from, MMI or Sanctuary Avenue, respectively, or (iv) any Person other than Morgans LLC or Sanctuary Holdings having the responsibility for managing and administering the day-to-day business and affairs of, or otherwise Controlling, MMI and Sanctuary West, respectively; or (b) Morgans Public no longer directly or indirectly (i) owning (free of any encumbrance) at least 51% of the ownership interests in and rights to distributions from MMI and owning at least 51% of the ownership interests in and rights to distributions from Morgans LLC, (ii) having responsibility for managing and

5

administering the day-to-day business and affairs of MMI or Morgans LLC, or (iii) in any other respects, any Person other than Morgans Public directly or indirectly Controlling MMI or Morgans LLC; or (c) Galbut or members of his immediate family (including parents, spouse, children and siblings) no longer directly or indirectly (i) owning at least 51% of the ownership interests in and rights to distributions from Sanctuary Avenue, Sanctuary Holdings or Sanctuary Management, (ii) having responsibility for managing and administering the day-to-day business and affairs of Sanctuary Avenue, Sanctuary Holdings or Sanctuary Management, or (iii) in any other respects, any Person other than Galbut or Sonny Kahn directly or indirectly Controlling Sanctuary Avenue, Sanctuary Holdings or Sanctuary Management. A “Change of Control” shall not be deemed to have occurred solely as a result of (w) the transfer of membership interests in Borrower between MMI and Sanctuary Avenue, so long as MMI and/or Sanctuary Avenue continue to own 100% of the membership interests in Borrower and to Control Borrower; (x) transfers of ownership interests Morgans Public; or (y) transfers by Galbut of ownership interests in Sanctuary Avenue, Sanctuary Holdings or Sanctuary Management for estate planning purposes to family members of Galbut or one or more trusts of the benefit of such immediate family members, provided that after giving effect to such transfer Galbut shall continue to have responsibility for managing and administering the day-to-day business and affairs of, and otherwise continue to Control, Sanctuary Avenue, Sanctuary Holdings or Sanctuary Management; or (z) as a result of Galbut’s passing away, he no longer Controls Sanctuary Avenue, Sanctuary Holdings or Sanctuary Management, so long as Menin, Daniel Galbut, Frohlich or the personal representative of the estate of Galbut Controls Sanctuary Avenue, Sanctuary Holdings and Sanctuary Management.

(42) “Clearing Account” has the meaning assigned to such term in the Clearing Account Agreement.

(43) “Clearing Account Agreement” means the Clearing Account Agreement among Mortgage Borrower, the Administrative Agent and the Clearing Bank pertaining to the Clearing Account, as the same may be modified, amended and/or supplemented and in effect from time to time.

(44) “Clearing Bank” has the meaning assigned to such term in the Clearing Account Agreement.

(45) “Code” means the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder.

(46) “Collateral” means the pledge of ownership interests provided as collateral for the Loan pursuant to the Pledge Agreement and all other collateral described herein and in the other Loan Documents.

(47) “Commitment” means, as to each Lender, the obligation of such Lender to make a Loan in a principal amount up to but not exceeding the amount set opposite the name of such Lender on Schedule 1(a) under the caption “Commitment” or, in the case of a Person that becomes a Lender pursuant to an assignment permitted under Section 12.24(2), as specified in the respective instrument of assignment pursuant to which such assignment is effected. The original aggregate principal amount of the Commitments is Twenty Eight Million and No/100 Dollars ($28,000,000).

6

(48) “Completion Guaranty” means that certain Completion Guaranty, dated as of the date hereof, executed by Galbut, Frohlich, Menin and Morgans LLC in favor of the Administrative Agent (on behalf of the Lenders), as the same may be modified, amended, and/or supplemented and in effect from time to time.

(49) “Condominium Act” means Chapter 718 of the Florida Statutes, as amended.

(50) “Condominium Escrow” means that certain condominium escrow held pursuant to the Condominium Escrow Agreement.

(51) “Condominium Escrow Agreement” means the condominium escrow agreement between Mortgage Borrower and Escrow Agent, approved by the Mortgage Loan Administrative Agent in writing.

(52) “Constituent Documents” has the meaning assigned to such term in Section 9.17(1).

(53) “Construction Completion” means the satisfaction of all of the conditions set forth on Part B of Schedule 2.1 as required pursuant to the terms of this Agreement.

(54) “Construction Completion Deadline” means April 1, 2009.

(55) “Construction Consultant” has the meaning assigned to such term in Section 8.8.

(56) “Construction Management Contract” means the contract for the management of construction of the Improvements dated as of July 9, 2007, entered into between Mortgage Borrower and the Construction Manager, as the same may be modified, supplemented and/or amended from time to time in accordance with the terms of the Mortgage Loan Agreement.

(57) “Construction Manager” means G.T. Construction and Development, Inc.

(58) “Continue” “Continuation” and “Continued” refer to the continuation pursuant to Section 2.2 of (a) a Eurodollar Loan from one Interest Period to the next Interest Period or (b) a Base Rate Loan at the Base Rate.

(59) “Contract Price” means the Purchase Price of a Unit as set forth in a Qualified Purchase Contract (net of any credits to the purchaser), not including any amounts for any build-out or improvements in excess of Standard Unit Finish.

7

(60) “Control” of one Person (the “controlled Person”) by another Person (the “controlling Person”) means the possession, directly or indirectly, by the controlling Person of the power or ability to direct or cause the direction of the management or policies of the controlled Person, whether through the ability to exercise voting power, by contract or otherwise (“Controlled” and “Controlling” each have the meanings correlative thereto).

(61) “Convert” “Conversion” and “Converted” means, with respect to any Type of Loan, a conversion pursuant to the terms of this Agreement of one Type of Loans into another Type of Loans, which may be accompanied by the transfer by a Lender (at its sole discretion) of a Loan from one Applicable Lending Office to another.

(62) “Debt” means, for any Person, without duplication: (a) 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, (b) 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 under the credit facility, (c) all amounts required to be paid by such Person as a guaranteed payment to partners, members (or other equity holders) or a preferred or special dividend, including any mandatory redemption of shares or interests, (d) all indebtedness guaranteed by such Person, directly or indirectly, (e) all obligations under leases that constitute capital leases for which such Person is liable, and (f) 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.

(63) “Debt Service” means, for any period of determination, the aggregate interest due with respect to the Loans and the Mortgage Loan during such period.

(64) “Debt Service Coverage Ratio” means, as of any date of determination, the ratio of Net Operating Income to Debt Service for the twelve (12) calendar months ending immediately prior to the date of such determination. The Debt Service Coverage Ratio shall be as determined by the Administrative Agent based upon the most recent reports required to have been submitted by Borrower under Section 8.1 (or, if no such reports have been so submitted, such other information as Administrative Agent shall determine in its discretion), which determination shall be conclusive in the absence of manifest error.

(65) “Declarant” has the meaning assigned to such term in Section 9.17(1).

(66) “Declaration” means that certain Declaration of Condominium for Mirador 1000, dated December 30, 2004 and recorded in the Clerk of the Court, Miami-Dade County, Florida, on December 30, 2004 in OR Book 22959 at Page 1727.

(67) “Default Rate” means a rate per annum equal to five percent (5%) plus the Base Rate as in effect from time to time plus the Applicable Margin for Base Rate Loans, provided that, with respect to principal of a Eurodollar Loan, the “Default Rate” shall be the greater of (a) five percent (5%) plus the interest rate for such Loan as provided in Section 2.3 and (b) the rate provided for above in this definition; provided, however, that in no event shall the Default Rate exceed the maximum rate allowed by Applicable Law.

8

(68) “Defaulting Lender” has the meaning assigned to such term in Section 15.12(1).

(69) “Depository Bank” has the meaning assigned to such term in the Cash Management Agreement.

(70) “Distribution” means, other than payments which are expressly permitted to be made pursuant to this Agreement, any of the following: (a) the payment by any Person of any Distributions or other payments to its shareholders, members or partners; (b) the declaration or payment of any dividend on or in respect of shares of any class of capital stock of, membership interest in, or partnership interest in, any Person; (c) the purchase or other retirement of any shares of any class of capital stock of, membership interest in, or partnership interest in, any Person, directly or indirectly through a subsidiary or otherwise; (d) the return of capital by any Person to its shareholders, members, or partners; or (e) any other payment on or in respect of any shares of any class of capital stock of, membership interest in, or partnership interest in, any Person.

(71) “Dollars” and “$” means lawful money of the United States of America.

(72) “Eligible Assignee” means any of (a) a commercial bank organized under the laws of the United States, or any State thereof, and having (i) total assets in excess of $1,000,000,000 and (ii) a combined capital and surplus of at least $250,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization of Economic Cooperation and Development (“OECD”), or a political subdivision of any such country, and having (i) total assets in excess of $1,000,000,000 and (ii) a combined capital and surplus of at least $250,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of OECD; (c) a life insurance company organized under the laws of any State of the United States, or organized under the laws of any country and licensed as a life insurer by any State within the United States and having admitted assets of at least $1,000,000,000; (d) a nationally recognized investment banking company or other financial institution in the business of making loans, or an Affiliate thereof (other than any Person which is directly or indirectly a Borrower Party or directly or indirectly an Affiliate of any Borrower Party) organized under the laws of any State of the United States, and licensed or qualified to conduct such business under the laws of any such State and having (i) total assets of at least $1,000,000,000 and (ii) a net worth of at least $250,000,000; (e) an Approved Fund; or (f) or a Related Entity of Eurohypo.

(73) “Environmental Claim” has the meaning assigned to such term in Section 5.1(1).

(74) “Environmental Laws” has the meaning assigned to such term in Section 5.1(2).

(75) “Environmental Liens” has the meaning assigned to such term in Section 5.3(4).

9

(76) “Environmental Losses” has the meaning assigned to such term in Section 5.1(4).

(77) “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time and any regulations promulgated thereunder.

(78) “Escrow Agent” means an escrow agent as may be reasonably approved by Administrative Agent.

(79) “Eurodollar Loan” means Loans that bear interest at rates based on rates referred to in the definition of “LIBOR Rate”.

(80) “Eurohypo” means Eurohypo AG, New York Branch.

(81) “Event of Default” has the meaning assigned to such term in Article 10.

(82) “Excess Cash Flow” means, with respect to the applicable Unit, the Net Sales Proceeds less the Scheduled Release Price.

(83) “Existing Loan Agreement” has the meaning assigned to such term in the Recitals.

(84) “Existing Loans” has the meaning assigned to such term in the Recitals.

(85) “Exit Fee” means a fee payable by Borrower to Administrative Agent (for the benefit of the Lenders) in an amount equal to one and one-quarter percent (1.25%) of the full amount of the Commitments.

(86) “Fee Letter” means the letter agreement, dated as of the Original Closing Date, between Borrower and Administrative Agent with respect to certain fees payable by Borrower in connection with the Loans, as the same may be modified or amended from time to time.

(87) “FNMA” means the Federal National Mortgage Association.

(88) “Fifth Extension Notice” has the meaning assigned to such term in Section 2.5(5)(a).

(89) “Fifth Extension Period” has the meaning assigned to such term in Section 2.5(5).

(90) “First Extension Notice” has the meaning assigned to such term in Section 2.5(1)(a).

(91) “First Extension Period” has the meaning assigned to such term in Section 2.5(1).

10

(92) “Forward Purchase Contract” means that Agreement for Purchase of Condominium Units and related Rider, each dated as of the Original Closing Date, by and among Mortgage Borrower, as seller and/or developer and Galbut, Frohlich, Menin and Morgans Group LLC, a Delaware limited liability company, individually and collectively, as buyers and/or purchasers.

(93) “Fourth Extension Notice” has the meaning assigned to such term in Section 2.5(4)(a).

(94) “Fourth Extension Period” has the meaning assigned to such term in Section 2.5(4).

(95) “Franchise Fee” means the franchise fee payable to Hotel Manager as hotel operator upon the sale of a Unit, which shall be in the amount of one percent (1%) of the Purchase Price of such Unit up to that portion of the gross sales price attributable to a gross sales price of $800 per square foot, and ten percent (10%) of the Units’ gross sales price attributable to a sales price greater than $800 per square foot.

(96) “Frohlich” means Seth Frohlich, an individual.

(97) “Galbut” means Abraham Galbut, an individual.

(98) “Government Lists” means (a) the Specially Designated Nationals and Blocked Persons List maintained by OFAC, (b) any other list of terrorists, terrorist organizations or narcotics traffickers maintained pursuant to any of the Rules and Regulations of OFAC that is included in “Governmental Lists”, or (c) any similar list maintained by the United States Department of State, the United States Department of Commerce or any other Governmental Authority or pursuant to any Executive Order of the President of the United States of America.

(99) “Guarantee or “Guaranty” means any instruments of guaranty (including the Joinder, Completion Guarantee and the Minimum Equity Guarantee) delivered to the Administrative Agent (for the benefit of the Lenders) in connection with the Loans.

(100) “Guarantor” or Guarantors” means the Persons, including the Joinder Parties, executing a Guarantee.

(101) “Hazardous Materials” has the meaning assigned to such term in Section 5.1(5).

(102) “Hazardous Substances Indemnity Agreement” means that certain Hazardous Substances Indemnity Agreement by Borrower and Joinder Parties in favor of the Administrative Agent and each of the Lenders, to be executed, dated and delivered to the Administrative Agent (on behalf of the Lenders) on the Original Closing Date, as the same may be modified, amended and/or supplemented and in effect from time to time.

(103) “Hedge Agreement” shall mean an interest rate cap with a maturity date of the initial Maturity Date entered into with an Acceptable Counterparty with a notional amount equal to the outstanding principal balance of the Loans for the term of the Loan and a LIBOR strike price not greater than five percent (5%). Furthermore, each Hedge Agreement shall provide for (i) the calculation of interest, (ii) the determination of the interest rate, (iii) the modification of the Interest Period, and (iv) the distribution of payments thereunder to be identical to the definition of Interest Period set forth herein.

11

(104) “Hedge Agreement Pledge” means that certain Assignment, Pledge and Security Agreement, to be executed, dated and delivered by Borrower and Acceptable Counterparty to the Administrative Agent (on behalf of the Lenders) in accordance with Section 9.15 and at any other time Borrower elects or is required to enter into a Hedge Agreement, covering Borrower’s right, title and interest in and to any such Hedge Agreement, as the same may be modified, amended and/or supplemented and in effect from time to time.

(105) “Hotel Improvements” means that portion of the Improvements consisting of a 335-room luxury hotel to be known as “Mondrian South Beach Hotel Residences,” consisting of a restaurant, a sunset bar, a swimming pool, a gym, a spa, the Boat Slips, on-site parking areas, and related amenities and improvements.

(106) “Hotel Management Agreement” means that certain Hotel Management Agreement dated as of August 7, 2006, between the Hotel Manager and Mortgage Borrower with respect to the management of the Project as a hotel, as the same may from time to time hereafter be modified, amended or replaced in accordance with the terms of this Agreement.

(107) “Hotel Manager” means Morgans Hotel Group Management LLC, a Delaware limited liability company, or another hotel manager acceptable to the Administrative Agent.

(108) “Hotel Manager’s Consent” means the Hotel Manager’s Consent and Subordination Agreement executed, dated and delivered by (i) the Hotel Manager and Borrower to the Administrative Agent (on behalf of the Lenders) on the Original Closing Date and (ii) any successor Hotel Manager to Administrative Agent (on behalf of Lenders) prior to its appointment as Hotel Manager, as the same may be modified, amended and/or supplemented and in effect from time to time.

(109) “Hotel Opening” means that the Hotel Improvements are open for business with the public in compliance with the all Applicable Law and the majority of Units have been completed and are ready for occupancy.

(110) “Hotel Opening Deadline” means January 1, 2009.

(111) “Improvements” has the meaning assigned to such term in the Mortgage.

(112) “Indemnified Party” has the meaning assigned to such term in Section 9.12.

12

(113) “Independent Manager” means, in the case of a limited liability company or a limited partnership, a member or manager that is a natural person who, for the five (5) year period prior to his or her appointment as an Independent Manager and at all times while serving as an Independent Manager was not and will not be, directly or indirectly, (i) an employee, manager, stockholder, director, member, partner, officer, attorney or counsel of such limited liability company, limited partnership or any of its Affiliates (other than his or her service as an Independent Manager or special member of the limited liability company or limited partnership), (ii) a creditor, customer of, or supplier or other Person who derives any of its purchases or revenues from its activities with such limited liability company, limited partnership or any of its members, managers or their Affiliates (other than his or her service as an Independent Manager if such Person has been provided by a nationally-recognized company that provides professional independent directors and/or as a corporate service provider if such nationally recognized company also provides corporate services), (iii) a Person Controlling or under common Control with or Controlled by any such employee, manager, stockholder, director, member, partner, officer, attorney, counsel, customer, supplier or other Person, or (iv) any member of the immediate family (including grandchildren or siblings) of a person described in clauses (i), (ii) or (iii) immediately above.

(114) “Intercreditor Agreement” has the meaning assigned to such term in Section 12.28.

(115) “Interest Allocation” has the meaning assigned to such term in Section 2.1(2)(a).

(116) “Interest Period” means, with respect to any Eurodollar Loan, each period commencing on the date such Eurodollar Loan is made or Converted from a Base Rate Loan or (in the event of a Continuation) the last day of the immediately preceding Interest Period for such Loan and ending on the numerically corresponding day fourteen (14) days thereafter or in the first, second, third or sixth calendar month thereafter, as Borrower may select as provided in Section 2.8(5); provided that (a) each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month; (b) each Interest Period that would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next succeeding calendar month, on the immediately preceding Business Day); (c) except for an Interest Period having a duration of fourteen (14) days, no Interest Period shall have a duration of less than one month and, if the Interest Period for any Eurodollar Loan would otherwise be a shorter period, such Loan shall bear interest at the Base Rate plus the Applicable Margin for Base Rate Loans; (d) in no event shall any Interest Period extend beyond the Maturity Date; and (e) there may be no more than five (5) separate Interest Periods in respect of Eurodollar Loans outstanding from each Lender at any one time.

(117) “Interest Reserve Fund” has the meaning assigned to such term in Section 4.4(1).

(118) “Involuntary Proceeding” has the meaning assigned to such term in Section 10.9.

(119) “Joinder” means the Joinder attached hereto.

13

(120) “Joinder Party” means the Persons executing the Joinder, including Galbut, Menin, Frohlich and Morgans LLC.

(121) “Junior Loan Intercreditor Agreement” means that certain Subordination and Standstill Agreement dated as of the date hereof, by and among Mortgage Borrower, Borrower, Junior Mezzanine Borrower, Junior Mezzanine Lender, Mortgage Lender and the Administrative Agent.

(122) “Junior Mezzanine Borrower” means 1100 West Holdings II, LLC, a Delaware limited liability company.

(123) “Junior Mezzanine Lender” means RMF Capital LLC, a Delaware limited liability company, and any assignee of RMF Capital LLC permitted under the Junior Loan Intercreditor Agreement, each in its capacity as the lender under the Junior Mezzanine Loan.

(124) “Junior Mezzanine Loan” means a loan to Junior Mezzanine Borrower in the original principal amount of at least $22,500,000 (inclusive of the sum of $16,500,000.00, which has been funded as of the date hereof), made pursuant to that certain Mezzanine Loan Agreement dated as of the date hereof by and between Junior Mezzanine Borrower, as borrower, and Junior Mezzanine Lender, as lender; it being agreed that, at the election of the Junior Mezzanine Borrower and the Junior Mezzanine Lender, the amount of the Junior Mezzanine Loan may be increased from time to time as necessary to pay the costs of the Building Conversion and to fund Debt Service and other payments due under the Loan Documents and the Mortgage Loan Documents).

(125) “Lender” or “Lenders” have the meaning assigned in the Recitals.

(126) “Lender Parties” has the meaning assigned in Section 17.

(127) “LIBOR Rate” or “Libor Rate” means, for any Interest Period for any Eurodollar Loan, the rate per annum appearing on Reuters Screen LIBOR01 (formerly operated as Page 3750 of the Dow Jones Market Service (Telerate)) (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m. London time on the date two (2) Business Days prior to the first day of such Interest Period as the rate for the offering of Dollar deposits having a term comparable to such Interest Period, provided that if such rate does not appear on such page, or if such page shall cease to be publicly available, or if the information contained on such page, in the reasonable judgment of Administrative Agent shall cease accurately to reflect the rate offered by leading banks in the London interbank market as reported by any publicly available source of similar market data selected by Administrative Agent, the LIBOR Rate for such Interest Period shall be determined from such substitute financial reporting service as Administrative Agent in its discretion shall determine.

14

(128) “Licenses” means any and all certifications, permits, licenses and approvals, including without limitation, certificates of completion and occupancy permits, required under Applicable Laws for the use, occupancy and operation of the Project as hotel condominium in the manner contemplated following Construction Completion.

(129) “Lien” means any interest, or claim thereof, in the Project or Collateral securing an obligation owed to, or a claim by, any Person other than the owner of the Project or Collateral, whether such interest is based on common law, statute or contract, including the lien or security interest arising from a deed of trust, mortgage, assignment, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term “Lien” shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting the Project.

(130) “Liquidation Event” has the meaning assigned to such term in Section 2.4(8).

(131) “Loan Documents” means, individually or collectively: (a) this Agreement (including the Joinder hereto), (b) the Notes, (c) the Assignment of Forward Purchase Contract, (d) the Hazardous Substance Indemnity Agreement, (e) the Minimum Equity Guarantee, (f) the Hotel Manager’s Consent, (g) the Project Manager’s Consent, (h) the Completion Guarantee, (i) the Hedge Agreement Pledge, (j) such assignments of management agreements, contracts and other rights as may be required or requested by the Administrative Agent, (k) all other documents evidencing, securing, governing or otherwise pertaining to the Loans, and (l) all amendments, modifications, renewals, substitutions and replacements of any of the foregoing.

(132) “Loan Transactions” has the meaning assigned to such term in Section 2.8(4).

(133) “Loan Year” means the period between the date hereof and August 31, 2009, for the first Loan Year and the period between each succeeding September 1 and August 31, until the Maturity Date.

(134) “Loans” means the loans to be made by the Lenders to Borrower under this Agreement and all other amounts evidenced or secured by the Loan Documents.

(135) “Majority Lenders” means Lenders holding at least 66.67% of the aggregate outstanding principal amount of the Loans or, if the Loans shall not have been made, at least 66.67% of the Commitments.

(136) “Major Modification” means any modification to a Purchase Contract which (1) modifies in any manner the purchase price set forth therein; (2) reopens, reinstates or in any manner lengthens any applicable rescission period; (3) modifies the amount and/or timing of any deposit required thereunder; (4) extends or otherwise changes in any material respect the closing date set forth therein; (5) releases or otherwise consents to an assignment or transfer of the obligations of the named purchaser thereunder; (6) increases or modifies the Standard Unit Finish (unless the purchaser agrees in writing to pay the costs of such increases or modifications); or (7) otherwise materially modifies the terms of such Purchase Contract.

15

(137) “Mandatory Net Operating Cash Flow Installments” has the meaning assigned to such term in Section 2.4(4).

(138) “Material Adverse Effect” means a material adverse effect, as unilaterally determined by the Administrative Agent, in its reasonable judgment and discretion, on (a) the Project or the business, operations, financial condition, prospects, liabilities or capitalization of Borrower, (b) the ability of Borrower, to perform its obligations under any of the Loan Documents to which it is a party, including the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith, (c) the ability of any other Borrower Party to perform its obligations under any of the Loan Documents to which it is a party, (d) the validity or enforceability of any of the Loan Documents, or (e) the rights and remedies of the Administrative Agent and the Lenders under any of the Loan Documents.

(139) “Maturity Date” means the earlier of (a) the Original Maturity Date, as such date may extended by the First Extension Period, the Second Extension Period, the Third Extension Period, the Fourth Extension Period, and the Fifth Extension Period, as applicable, and (b) any earlier date on which all of the Loans are required to be paid in full, by acceleration or otherwise, under this Agreement or any of the other Loan Documents.

(140) “Menin” means Keith Menin, an individual.

(141) “Minimum Equity Guarantee” means that certain Minimum Equity Guarantee executed by Galbut, Menin, Frohlich and Morgans LLC in favor of the Administrative Agent (on behalf of the Lenders) as the same may be modified, amended, and/or supplemented and in effect from time to time.

(142) “Minimum Sales Price” means the minimum sales price for the sale of a Unit, as set forth on the Minimum Sales Price Schedule.

(143) “Minimum Sales Price Schedule” means Schedule 1(b) attached hereto and made a party hereof.

(144) “Model Purchase Contract” means the form of purchase contract for the sale of Units which shall be received and approved by the Administrative Agent, which approval shall not be unreasonably withheld.

(145) “Mold” has the meaning assigned to such term in Section 5.1(6).

(146) “MMI” means Mondrian Miami Investment LLC, a Delaware limited liability company.

(147) “Morgans LLC” means Morgans Group LLC, a Delaware limited liability company.

16

(148) “Morgans Public” means the Morgans Hotel Group Co., a Delaware corporation.

(149) “Mortgage” means that certain that certain Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents dated as of August 8, 2006, recorded August 8, 2006, in Official Records Book 24801, at Page 3306, of the Public Records of Miami-Dade County, Florida, as modified by that certain First Amendment to Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents, dated as of December 19, 2006, recorded December 20, 2006, in Official Records Book 25210, at Page 3790, of the Public Records of Miami-Dade County, Florida, as further modified by that certain Second Amendment to Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents dated as of September 6, 2007, recorded September 21, 2007, in Official Records Book 25944, at Pages 2682-2691, of the Public Records of Miami-Dade County, Florida, as further modified by that certain Third Amendment to Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents dated as of April 25, 2008, recorded April 28, 2008, in Official Records Book 26347, at Pages 3527-3536, of the Public Records of Miami-Dade County, Florida, and as further modified by that certain Fourth Amendment to Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents dated as of the Amendment Closing Date, to be recorded in the Public Records of Miami-Dade County, Florida on or about the date hereof.

(150) “Mortgage Borrower” shall mean 1100 West Properties, LLC, a Delaware limited liability company.

(151) “Mortgage Debt Service” shall mean, with respect to any particular period of time, aggregate interest, fixed principal and other payments due under the Mortgage Note for such period.

(152) “Mortgage Lender” shall mean Eurohypo AG, New York Branch and each lender that is a “Lender” pursuant to the terms of the Mortgage Loan Agreement.

(153) “Mortgage Loan” has the meaning assigned to such term in the Recitals.

(154) “Mortgage Loan Administrative Agent” shall have the meaning assigned to “Administrative Agent” in the Mortgage Loan Agreement.

(155) “Mortgage Loan Agreement” has the meaning assigned to such term in the Recitals.

(156) “Mortgage Loan Documents” shall mean all documents or instruments evidencing, securing or guaranteeing the Mortgage Loan, including without limitation, the Mortgage Loan Agreement.

(157) “Mortgage Loan Event of Default” shall have the meaning ascribed to the term “Event of Default” in the Mortgage Loan Agreement.

(158) “Mortgage Note” shall mean, collectively, Amended and Restated Substitute Promissory Note A-1, Amended and Restated Substitute Promissory Note A-2 and Amended and Restated Substitute Promissory Note B, each dated as of the date hereof, as the same may be consolidated, replaced, severed, modified, amended or extended from time to time.

17

(159) “Net Liquidation Proceeds After Debt Service” shall mean, with respect to any Liquidation Event, all amounts paid to or received by or on behalf of Mortgage Borrower in connection with such Liquidation Event, including, without limitation, proceeds of any sale, refinancing or other disposition or liquidation, less (i) in the event of a Liquidation Event consisting of a Casualty or Condemnation, Administrative Agent’s, Lenders’ and/or Mortgage Lender’s reasonable costs incurred in connection with the recovery thereof, (ii) in the event of a Liquidation Event consisting of a Casualty or Condemnation, the costs incurred by Mortgage Borrower in connection with a restoration of all or any portion of the Project made in accordance with the Mortgage Loan Documents, (iii) in the event of a Liquidation Event consisting of a Casualty or Condemnation or a transfer, amounts required or permitted to be deducted therefrom and amounts paid pursuant to the Mortgage Loan Documents to Mortgage Lender, (iv) in the event of a Liquidation Event consisting of a Casualty or Condemnation, those proceeds paid to Mortgage Borrower pursuant to Section 7.3 of the Mortgage, (v) in the case of a foreclosure sale, disposition or transfer of the Project in connection with realization thereon following a Mortgage Loan Event of Default, such reasonable and customary costs and expenses of sale or other disposition (including attorneys’ fees and brokerage commissions), (vi) in the case of a foreclosure sale, such costs and expenses incurred by Mortgage Lender under the Mortgage Loan Documents as Mortgage Lender shall be entitled to receive reimbursement for under the terms of the Mortgage Loan Documents and (vii) in the case of a refinancing of the Mortgage Loan, such costs and expenses (including attorneys’ fees) of such refinancing, and (vii) the amount of any prepayments required pursuant to the Mortgage Loan Documents in connection with any such Liquidation Event.

(160) “Net Operating Cash Flow” has the meaning assigned to such term in the Cash Management Agreement.

(161) “Net Operating Income” means the amount by which Adjusted Operating Revenues exceed Adjusted Operating Expenses.

(162) “Net Sales Proceeds” means the Purchase Price of each Unit (and any Parking Space sold separately from a Unit, which Parking Space may only be sold with the prior written consent of Administrative Agent) less:

(a) any sales or any brokerage commissions or fees (including fees to Borrower or any Borrower Party) actually incurred in connection with the sale of such Unit and documented to the reasonable satisfaction of the Administrative Agent;

(b) closing costs and prorations actually incurred in connection with the sale of such Unit and documented to the reasonable satisfaction of the Administrative Agent (which closing costs and prorations shall include such items as title insurance costs, real estate transfer taxes, documentary stamp taxes, intangible taxes, attorneys’ fees, property taxes and homeowner’s association fees);

18

(c) with respect to any Unit, the cost of any “above standard” improvements or upgrades to such Unit which are actually incurred and paid by Borrower, other than the costs of “above standard” improvements or upgrades to such Unit for which Borrower receives reimbursement separate from the Purchase Price, including reimbursement from the purchaser of such Unit or from sources other than the Loan or the Construction Completion Fund (as defined in the Mortgage Loan Agreement) (but only to the extent that the foregoing costs were paid for with disbursements of the proceeds of the Mortgage Loan or the Loans prior to the Amendment Closing Date);

(d) with respect to any Unit which is sold at a Purchase Price equal to or greater than the Minimum Sales Price for such Unit, an allowance by Unit type for the Standard Unit Finish, which allowance shall be previously approved by Administrative Agent, not to exceed, on average, $38,000 (but only to the extent that the foregoing allowances were paid for with disbursements of the proceeds of the Mortgage Loan or the Loans prior to the Amendment Closing Date); and

(e) the amount of the Franchise Fee payable with respect to the sale of such Unit and any accrued and unpaid Franchise Fee payable in connection with the sale of any previously sold Unit.

In no event shall the amounts in clauses (a), (b) and (c) above be deducted from the Purchase Price unless Borrower or Mortgage Borrower provides evidence satisfactory to the Administrative Agent of Borrower’s or Mortgage Borrower’s payment of such amounts at the time of each closing of the Unit together with any Parking Space sold in connection with such Unit. In no event, unless approved by the Administrative Agent as provided in Section 9.7(2), shall (1) any fees or commissions be paid to Borrower or Mortgage Borrower or any Affiliate of Borrower or Mortgage Borrower from the gross sales proceeds be in excess of fees and commissions in the amount customarily charged in connection with hotel condominium unit sales in the City of Miami Beach, Miami-Dade County, Florida area, or (2) any commissions, brokerage fees and/or closing costs exceed what is reasonable and customary in the industry.

Notwithstanding any provision of this Agreement to the contrary, for all Units in the Project, the maximum total per Unit, together with any Parking Space sold in connection with such Unit, of the amounts in (a), (b) and (e) above (collectively, the “Controlled Closing Costs”) shall be nine and one-quarter percent (9.25%) of the Purchase Price of such Unit and any Parking Space sold in connection with such Unit (the “Related Parking Space”); provided, however, that the Controlled Closing Costs for any such Unit and Related Parking Space may exceed nine and one-quarter percent (9.25%) of the Purchase Price of such Unit and Related Parking Space, so long as (i) the average of Controlled Closing Costs for such Unit and Related Parking Space and all other such Units and Related Parking Spaces previously sold and closed does not exceed nine and one-quarter percent (9.25%) of the Purchase Prices of such Units and Related Parking Spaces, and (ii) upon the sale of all remaining Units having a Purchase Price equal to or greater than the respective Minimum Sales Prices, the average of Controlled Closing Costs for all such Units and Related Parking Spaces will not exceed nine and one-quarter percent (9.25%) of the Purchase Prices of all such Units and Related Parking Spaces. Controlled Closing Costs shall not include Special Credits or other “special” or “promotional” credits or concessions granted to the purchaser of such Unit, so long as the sum of all Special Credits and such other “special” or “promotional” credits and concessions do not, in the aggregate, exceed the amount by which the Purchase Price for such Unit exceeds the Minimum Sales Price therefor.

19

No corporate overhead or developer’s fees may be paid or advanced from sales proceeds of Units.

(163) “Note” means that certain Promissory Note dated as of the Original Closing Date as provided for in Section 2.1(6) and all promissory notes delivered in substitution or exchange therefore, in each case as the same may be consolidated, replaced, severed, modified, amended or extended from time to time.

(164) “OFAC” means the Office of Foreign Assets Control, United States Department of the Treasury, or any other office, agency or department that succeeds to the duties of OFAC.

(165) “Operating Expenses” means, with respect to any period, all reasonable and necessary expenses of operating the Project in the ordinary course of business which are paid in cash by Mortgage Borrower or Borrower and which are directly associated with and fairly allocable to the Project for the such period, including ad valorem real estate taxes and assessments (to the extent not paid from the Tax and Insurance Reserve Fund), insurance premiums, maintenance costs (including common area maintenance costs), accounting, legal and other professional fees, fees relating to environmental audits, expenses incurred by the Administrative Agent and reimbursed by Borrower or Mortgage Borrower under this Agreement, the other Loan Documents or the Mortgage Loan Documents, deposits to any capital replacement reserves required by the Administrative Agent, wages, salaries and personnel expenses, fees and expenses incurred or paid by Mortgage Borrower under the Project Management Agreement, fees and expenses incurred or paid by Mortgage Borrower under the Technical Services Agreement, fees and expenses incurred or paid by Mortgage Borrower under the Hotel Management Agreement and deposits to any reserves required under the Hotel Management Agreement, but excluding Debt Service, capital expenditures, any of the foregoing expenses which are paid from deposits to cash reserves previously included as Operating Expenses, any payment or expense for which Borrower or Mortgage Borrower was or is to be reimbursed from proceeds of the Loans or Mortgage Loans or insurance or by any third party, and any non-cash charges such as depreciation and amortization. Any other expense payable to any Borrower Party or to any Affiliate of any Borrower Party shall be included as an Operating Expense only with the Administrative Agent’s prior approval. Operating Expenses shall not include federal, state or local income taxes or legal and other professional fees unrelated to the operation of the Project and shall exclude Building Conversion, sales and marketing expenses and other costs attributable or incurred for the purpose of the Building Conversion and the sale and marketing of Units for sale to third parties.

(166) “Operating Revenues” means, with respect to any period after the date hereof, all cash receipts of Mortgage Borrower from operation of the Project or otherwise arising in respect of the Project which are properly allocable to the Project for the such period, including receipts from leases, parking agreements and boat slip agreements, concession fees and charges and other miscellaneous operating revenues, proceeds from rental or business interruption insurance, proceeds of any loans (other than the Loans and any refinancing of the Loans) obtained by Mortgage Borrower after the date hereof which are secured by any interest in the Project or the Collateral (less only reasonable and customary expenses incurred in procuring and closing such loan and actually paid in cash to individuals or entities other than any Borrower Party or any Affiliate of any Borrower Party and without implying any consent of the Administrative Agent or any Lender to the granting of any security for any such loans), withdrawals or disbursements from any cash reserves (except to the extent any operating expenses paid therewith are excluded from Operating Expenses), but excluding security deposits and earnest money deposits, advance rentals until they are earned, proceeds from a sale or other disposition of all or any portion of the Project (including any proceeds from the sale of Units), insurance proceeds (other than from business interruption insurance), condemnation awards, and Net Sales Proceeds.

20

(167) “Organizational Documents” means, with respect to any Person who is not a natural person, the certificate or articles of incorporation, memorandum of association, articles of association, trust agreement, by-laws, partnership agreement, limited partnership agreement, certificate of partnership or limited partnership, limited liability company articles of organization, limited liability company operating agreement or any other organizational document, and all shareholder agreements, voting trusts and similar arrangements with respect to its stock, partnership interests, membership interests or other equity interests.

(168) “Original Closing Date” means April 25, 2008.

(169) “Original Maturity Date” means August 1, 2009.

(170) “Parking Space” or “Parking Spaces” means any one or more of the parking spaces located on the Project.

(171) “Partial Release Conditions” has the meaning assigned to such term in the Mortgage Loan Agreement.

(172) “Participant” has the meaning assigned to such term in Section 12.24(3).

(173) “Parking Space Release Price” means with respect to Parking Spaces which are sold separately from a Unit, the greater of (a) ninety-five percent (95%) of the gross proceeds from the sale of such Parking Space, and (b) one hundred percent (100%) of the Net Sales Proceeds from the sale of such Parking Space (provided, however, that Net Sales Proceeds from the sale of such Parking Space shall be determined without any deduction for items described in clauses (c) and (d) of the definition of Net Sales Proceeds.

(174) “Patriot Act” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as the same may be amended from time to time, and corresponding provisions of future laws.

(175) “Patriot Act Offense” means any violation of the criminal laws of the United States of America or of any of the several states, or that would be a criminal violation if committed within the jurisdiction of the United States of America or any of the several states, relating to terrorism or the laundering of monetary instruments, including any offense under (a) the criminal laws against terrorism; (b) the criminal laws against money laundering, (c) the Bank Secrecy Act, as amended, (d) the Money Laundering Control Act of 1986, as amended, or (e) the Patriot Act. “Patriot Act Offense” also includes the crimes of conspiracy to commit, or aiding and abetting another to comment, a Patriot Act Offense.

21

(176) “Payment Date” means the first Business Day of each calendar month.

(177) “Payor” has the meaning assigned to such term in Section 2.8(6).

(178) “Permitted Encumbrances” has the meaning set forth in the Mortgage Loan Documents.

(179) “Person” means any individual, corporation, partnership, joint venture, association, joint stock company, trust, trustee, estate, limited liability company, unincorporated organization, real estate investment trust, government or any agency or political subdivision thereof, or any other form of entity.

(180) “Plans and Specifications” means the plans and specifications for the Building Conversion approved by the Administrative Agent as part of the overall review and approval of the Project by the Administrative Agent on or about the Original Closing Date.

(181) “Pledge Agreement” shall mean that certain Pledge and Security Agreement dated as of the Original Closing Date, executed and delivered by Borrower to Administrative Agent (for the benefit of Lenders) as security for the Loans, which covers one hundred percent (100%) of the limited liability interests of Borrower in Mortgage Borrower, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

(182) “Pledged Member Interests” shall mean all membership and manager interests in Mortgage Borrower.

(183) “Post Occupancy Credit Escrow Fund” has the meaning assigned in the Mortgage Loan Agreement.

(184) “Potential Default” means the occurrence of any event or condition which, with the giving of notice, or the passage of time, or both, would constitute an Event of Default.

(185) “Prime Rate” means the rate of interest from time to time announced by Eurohypo at its principal office as its prime commercial lending rate, it being understood that such prime commercial rate is a reference rate and does not necessarily represent the lowest or best rate being charged by Eurohypo to any customer.

(186) “Project” means “Mondrian South Beach,” a luxury hotel condominium development containing 335 hotel condominium units and 177 parking spaces, located in Miami Beach, Florida, including related amenities, a restaurant, parking facilities, fixtures, and personal property owned by Mortgage Borrower or Borrower, the Mortgage Borrower’s interest in the Boat Slips, and any Improvements now or hereafter located on the real property described in Exhibit A, excepting therefrom any and all Units validly released from the Lien of the Mortgage pursuant to the terms of the Loan Documents and the Mortgage Loan Documents.

22

(187) “Project Budget” means the budget for the Building Conversion and all other costs and expenses of the Project, including, furniture, fixtures and equipment, interest expense, and also including the sources and uses of funds, attached hereto as Schedule 8.4(2).

(188) “Project Manager” means Sanctuary Management or another project manager acceptable to the Administrative Agent.

(189) “Project Manager’s Consent” means the Project Manager’s Consent and Subordination Agreement delivered by the Project Manager and Borrower to the Administrative Agent (on behalf of the Lenders) on the Original Closing Date, as the same may be modified, amended and/or supplemented and in effect from time to time.

(190) “Project Management Agreement” means that certain Project Management Agreement dated as of August 7, 2006 between Mortgage Borrower and Project Manager.

(191) “Public Offering Statement” means that certain “Prospectus for 1100 West, a Condominium,” as amended, having Florida Department of Business and Professional Regulation, Division of Land Sales, Condominiums and Mobile Homes Identification No. PR74541, as the same has been approved pursuant to the Condominium Act.

(192) “Purchase Contract” means a purchase and sale contract, including any addenda thereto, between a third party purchaser and Mortgage Borrower or Borrower with respect to the sale of a Unit (which contract may also provide for the sale of one or more Parking Spaces or Boat Slips).

(193) “Purchase Price” means the gross sales price received from a Purchase Contract.

(194) “Qualified Purchase Contract” means a Purchase Contract which (a) is in the form of the Model Purchase Contract with all Major Modifications approved by Administrative Agent; (b) is between Mortgage Borrower and a purchaser that is not an Affiliate of Borrower or Mortgage Borrower; (c) has been fully executed and delivered by all of the parties thereto and constitutes a legally enforceable, unconditional contract which contains no contingencies (other than a financing contingency) or other unexpired rescission or termination provision or period; (d) is in compliance with the Condominium Act and all applicable rules and regulations; (e) is not subject to rescission or avoidance by the purchaser thereunder as a result of Mortgage Borrower’s failure to comply with the disclosure requirements of the Condominium Act; (e) is not the subject of a default by Mortgage Borrower or the purchaser; (f) except for such amounts which may be refundable pursuant to a contingency or failure of condition, is the subject of a paid non-refundable deposit of at least three percent (3%) of the Purchase Price (provided, however, with respect to all cash deals, such deposit must be at least 5% and for deals which will be 100% financed, such deposit must be at least $2,500) and such sum is held in compliance with the requirements of the Mortgage Loan Agreement; (g) without limiting the provisions of Section 9.15, specifies a Purchase Price equal to or greater than the applicable Minimum Sales Price; and (h) if it is to be financed by a third party lending institution, then the purchaser thereunder has received “pre-approval” for a mortgage by an FNMA-approved lender. Such “pre-approval” means that such lender has reviewed and approved purchaser’s credit, income, and funds to close and final approval is contingent only upon (i) lender obtaining an appraisal, (ii) the purchaser providing documentation to evidence representations made to lender, and (iii) other typical and customary closing requirements of such FNMA approved lender.

23

(195) “Regulation D” means Regulation D of the Board of Governors of the Federal Reserve System of the United States of America (or any successor), as the same may be modified and supplemented and in effect from time to time.

(196) “Regulatory Change” means, with respect to any Lender, any change after the date hereof in Federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including such Lender of or under any Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof.

(197) “Related Entity” means, as to any Person, (a) any Affiliate of such Person; (b) any other Person into which, or with which, such Person is merged, consolidated or reorganized, or which is otherwise a successor to such Person by operation of law, or which acquires all or substantially all of the assets of such Person; (c) any other Person which is a successor to the business operations of such Person and engages in substantially the same activities; or (d) any Affiliate of the Persons described in clauses (b) and (c) of this definition.

(198) “Requesting Lender” has the meaning assigned to such term in Section 2.9(7).

(199) “Required Payment” has the meaning assigned to such term in Section 2.8(6).

(200) “Reserve Account Collateral” has the meaning assigned to such term in Section 4.5(1).

(201) “Reserve Requirement” means, for any Interest Period for any Eurodollar Loan, the average maximum rate at which reserves (including, without limitation, any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding $1,000,000,000 against “Eurocurrency liabilities” (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall include any other reserves required to be maintained by such member banks by reason of any Regulatory Change with respect to (a) any category of liabilities that includes deposits by reference to which the LIBOR Rate for any Interest Period for any Eurodollar Loans is to be determined as provided in the definition of “LIBOR Rate” or (b) any category of extensions of credit or other assets that includes Eurodollar Loans. The calculation of the Reserve Requirement by Lenders shall be substantially similar to the calculation of the Reserve Requirement performed by Lenders with respect to similar classes of commercial loans or commitments made by such Lenders.

24

(202) “Restaurant Lease” means that certain Lease dated as of August 12, 2008 between Mortgage Borrower, as landlord, and MC South Beach LLC, as tenant.

(203) “S&P” means Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.

(204) “Sanctuary Avenue” means Sanctuary West Avenue, LLC, a Delaware limited liability company.

(205) “Sanctuary Holdings” means Sanctuary West Holdings, LLC, a Delaware limited liability company.

(206) “Sanctuary Management” mean Sanctuary West Management LLC, a Delaware limited liability company.

(207) “Scheduled Release Price” means, with respect to the applicable Unit, the release price with respect thereto as set forth on the Unit Release Schedule.

(208) “Second Extension Notice” has the meaning assigned to such term in Section 2.5(2)(a).

(209) “Second Extension Period” has the meaning assigned to such term in Section 2.5(2).

(210) “Secured Indebtedness” means:

(a) all Debt of Borrower under the Loan Documents;

(b) any and all future advances made pursuant to the Loan Documents by the Lenders to or for the benefit of Borrower direct or indirect, together with interest, fees, costs, and other amounts hereafter arising;

(c) the full and prompt payment and performance of any and all other Debt, obligations and covenants of Borrower to Administrative Agent and the Lenders including, but not limited to, the obligation to pay all amounts under the terms of any other agreements, assignments or other instruments now or hereafter evidencing, securing or otherwise relating to the indebtedness evidenced by the Loan Documents, including, without limitation, any assignment of rents and leases given by Borrower to Administrative Agent (on behalf of the Lenders); and

(d) any and all additional advances made by Administrative Agent or the Lenders to protect or preserve the Collateral or the Project or the Liens created by the Loan Documents on the Collateral, or to pay taxes, to pay premiums on insurance on the Collateral or the Project or to repair or maintain the Collateral or the Project (whether or not Borrower or Mortgage Borrower remains the owner of the Collateral or the Secured Property at the time of such advances and whether or not the original Administrative Agent or the Lenders remains the owner of the Secured Indebtedness.

25

(211) “Single Purpose Entity” means a corporation, limited partnership or limited liability company which at all times on and after the date hereof while the obligations hereunder and under the other Loan Documents remain outstanding, unless otherwise approved in writing by the Administrative Agent:

(a) is organized solely for the purpose of one of the following (i) acquiring, developing, owning, holding, selling, leasing, transferring, exchanging, managing and operating the Pledged Member Interests, entering into this Agreement, refinancing the Pledged Member Interests in connection with a permitted repayment of the Loans, and transacting any and all lawful business that is incident, necessary and appropriate to accomplish the foregoing, (ii) acquiring, developing, owning, holding, selling, leasing, transferring, exchanging, managing and operating the Project, entering into the Mortgage Loan Agreement, refinancing the Project in connection with a permitted repayment of the Loans, and transacting any and all lawful business that is incident, necessary and appropriate to accomplish the foregoing or (ii) acting as a managing member of Borrower or the sole managing member of Mortgage Borrower;

(b) is not engaged and will not engage in any business unrelated to (i) the acquisition, development, ownership, management or operation of the Pledged Member Interests or Project or (ii) acting as a managing member of Borrower or the sole managing member of Mortgage Borrower

(c) does not have and will not have any assets other than those related to (i) the Project, (ii) the Pledged Member Interests, or (iii) its membership interest in Borrower;

(d) has not engaged, sought or consented to and will not engage in, seek or consent to any dissolution, winding up, liquidation, consolidation, merger, sale of all or substantially all of its assets, transfer of partnership or membership interests (if such entity is a general partner in a limited partnership or a member in a limited liability company), or any amendment of its articles of incorporation, by-laws, limited partnership certificate, limited partnership agreement, articles of organization, certificate of formation or operating agreement (as applicable) with respect to the matters set forth in this definition;

(e) shall not, without the consent of all of its managers and members: (a) dissolve, merge, liquidate or consolidate; (b) sell all or substantially all of its assets or the assets of any other entity in which it has a direct or indirect legal or beneficial ownership interest; (c) engage in any other business activity, other than as permitted pursuant to the Loan Documents, or amend its organizational documents with respect to the matters set forth in this definition without the consent of the Administrative Agent; or (d) file a bankruptcy or insolvency petition or otherwise institute insolvency proceedings with respect to itself or to any other entity in which it has a direct or indirect legal or beneficial ownership interest or is the direct or indirect general partner, manager or managing member;

26

(f) in the case of Borrower, has at least one (1) Independent Manager, and in the case of Mortgage Borrower, has only one member which is Borrower;

(g) is and will remain solvent and pay its debts and liability (including, as applicable, shared personnel and overhead expenses) from its assets as the same shall become due, and is maintaining and 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;

(h) has not failed and will not fail to correct any known misunderstanding regarding the separate identity of such entity;

(i) has maintained and will maintain its accounts, books and records separate from any other Person and will file its own tax returns, except to the extent that it is required to file consolidated tax returns by law;

(j) has not commingled and will not commingle its funds or assets with those of any other Person;

(k) has held and will hold its assets in its own name;

(l) has maintained and will maintain financial statements that properly and accurately show its separate assets and liabilities and do not show the assets or liabilities of any other Person, and has not permitted and will not permit its assets to be listed as assets on the financial statement of any other entity;

(m) has paid and will pay its own liabilities and expenses, including, but not limited to, the salaries of its own employees (if any), out of its own funds and assets, and has maintained and will maintain a sufficient number of employees in light of its contemplated business operations;

(n) has observed and will observe all corporate, partnership or limited liability company formalities, as applicable;

(o) has not incurred and will not incur any Debt other than (i) in the case of Mortgage Borrower, (A) the Mortgage Loan and (B) trade and operational debt which is (1) incurred in the ordinary course of business, (2) not more than ninety (90) days past the date of invoice, (3) with trade creditors, (4) in the aggregate, in an amount less than $500,000.00, (5) not evidenced by a note, and (6) paid when due, and (ii) in the case of Borrower, the Loans;

(p) has not and will not assume or guarantee or become obligated for the debts of any other Person or hold out its credit as being available to satisfy the obligations of any other Person except as permitted pursuant to this Agreement;

(q) has not and will not acquire obligations or securities of its members or shareholders or any other affiliate (other than interests in the Borrower held by MMI and Sanctuary Avenue);

27

(r) has allocated and will allocate fairly and reasonably any overhead expenses that are shared with an affiliate, including, but not limited to, paying for shared office space and services performed by any officer or employee of an affiliate;

(s) maintains and uses and will maintain and use separate invoices and checks bearing its name. The stationary, invoices, and checks utilized by the Single Purpose Entity or utilized to collect its funds or pay its expenses shall bear its own name and shall not bear the name of any other entity unless such entity is clearly designated as being the Single Purpose Entity’s agent;

(t) except in connection with the Loans, has not pledged and will not pledge its assets for the benefit of any other Person;

(u) has conducted business, held itself out and identified itself and will conduct business, hold itself out and identify itself as a separate and distinct entity under its own name or in a name franchised or licensed to it by a Person other than an affiliate of Borrower and not as a division or part of any other Person;

(v) has maintained 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 other Person;

(w) has not made and will not make loans to any Person or hold evidence of indebtedness issued by any other Person (other than cash and securities issued by an entity that is not an affiliate or subject to common ownership with such entity);

(x) has not identified and will not identify its partners, members or shareholders, or any affiliate of any of them, as a division or part of it, and has not identified itself and shall not identify itself as a division of any other Person;

(y) except as expressly permitted in the Loan Documents, has not entered into or been a party to, and will not enter into or be a party to, any transaction with its partners, members, shareholders or affiliates except in the ordinary course of its business and on terms which are intrinsically fair, commercially reasonable and are no less favorable to it than would be obtained in a comparable arm’s-length transaction with an unrelated third party;

(z) has not and will not have any obligation to indemnify its partners, officers, directors or members, as the case may be, unless such obligation is fully subordinated to the Secured Indebtedness and will not constitute a claim against it in the event that, prior to the payment of the Secured Indebtedness, cash flow is insufficient to pay such obligation;

(aa) if such entity is a corporation, it is required to consider the interests of its creditors in connection with all corporate actions; and

(bb) except as expressly permitted in the Loan Documents, does not and will not have any of its obligations guaranteed by any Affiliate.

28

(212) “Site Assessment” means an environmental engineering report for the Project prepared by an engineer engaged by the Administrative Agent at Mortgage Borrower’s or Borrower’s expense, and in a manner satisfactory to the Administrative Agent, based upon an investigation relating to and making appropriate inquiries concerning the existence of Hazardous Materials on or about the Project, and the past or present discharge, disposal, release or escape of any such substances, all consistent with good customary and commercial practice.

(213) “Special Advance Lender” has the meaning assigned to such term in Section 15.12(1).

(214) “Special Credits” means special credits for loan origination and closing costs extended to the purchaser of a Unit in an amount which does not, in the aggregate, exceed the amount by which the Purchase Price exceeds the Minimum Sales Price for such Unit.

(215) “Standard Unit Finish” means those standard improvements established by Mortgage Borrower (with the approval of Administrative Agent), which shall be completed in any Unit prior to or after closing of the sale of such Unit.

(216) “State” means the State of Florida.

(217) “Survey” means that certain ALTA/ASCM Land Title Survey dated as of June 19, 2006, revised July 28, 2006, prepared by J. Bonfill & Associates, Inc., under Project 04-0468, Job 06-0411.

(218) “Taxes” has the meaning assigned to such term in Section 9.2.

(219) “Technical Services Agreement” means that certain Technical Services Agreement between Mortgage Borrower and Hotel Manager dated as of the Original Closing Date with respect to the delivery of certain consultation and other technical services relating to the Project.

(220) “Third Extension Notice” has the meaning assigned to such term in Section 2.5(3)(a).

(221) “Third Extension Period” has the meaning assigned to such term in Section 2.5(3).

(222) “Threshold Amount” means $1,000,000.00.

(223) “Type” has the meaning assigned in Section 1.2.

(224) “UCC Insurance Policy” shall mean an insurance policy issued by a title company acceptable to Lender in the form acceptable to Lender issued with respect to the Pledged Member Interests.

29

(225) “Unavoidable Delay” means any delay due to strikes, acts of God, fire, earthquake, floods, explosion, actions of the elements, other accidents or casualty, declared or undeclared war, riots, mob violence, acts of terrorism, inability to procure or a general shortage of labor, equipment, facilities, energy, materials or supplies in the open market, failure of transportation, lockouts, tenant delays, actions of labor unions, condemnation, court orders, laws, rules, regulations or orders of Governmental Authorities, or other cause beyond the reasonable control of Borrower; provided that, in each of the foregoing cases, (a) Borrower gives notice of such delay to the Administrative Agent within two (2) days of occurrence of the event resulting in such delay and, after the initial notification, promptly after request of the Administrative Agent, notifies the Administrative Agent of the status of such delay, (b) after giving effect to the consequences of each such delay, the Loans shall not be Out of Balance (as defined in the Mortgage Loan Agreement) at any time despite such delay, (c) Borrower uses all commercially reasonable efforts to mitigate the delay caused by such event of Unavoidable Delay; and (d) the Administrative Agent acknowledges that such delay is due to one of the foregoing causes, which acknowledgment shall not be unreasonably withheld or delayed. For the purposes hereof, Unavoidable Delays shall not include delays caused by Borrower’s lack of or inability to procure monies to fulfill Borrower’s commitments and obligations under this Agreement or the other Loan Documents.

(226) “Unit or Units” means one or more of the 335 hotel condominium units created at the Project in connection with the Building Conversion.

(227) “Unit Release Schedule” means the schedule attached hereto as Schedule 1(c), containing the Scheduled Release Price for each Unit.

(228) “Unpaid Amount” has the meaning assigned to such term in Section 15.12(2).

(229) “Unsold Units” means the Units which have not been conveyed to third parties by Mortgage Borrower with corresponding release from the Lien of the Mortgage.

(230) “Voluntary Proceeding” has the meaning assigned to such term in Section 10.10.

Section 1.2 Types of Loans. Loans hereunder are distinguished by “Type”. The “Type” of a Loan refers to whether such Loan is a Base Rate Loan or a Eurodollar Loan, each of which constitutes a Type.

ARTICLE 2

LOAN TERMS

Section 2.1 The Commitments, Loans and Notes.

(1) Loans. Each Lender severally agrees, on the terms and conditions of this Agreement, to make a term loan to Borrower in Dollars in a principal amount up to but not exceeding the amount of the Commitment of such Lender. As of the date hereof, the outstanding principal balance of the Loans is $28,000,000.

30

(2) Advances. The Loans shall be funded in one or more advances and repaid in accordance with this Agreement. Amounts borrowed hereunder and repaid may not be reborrowed.

(a) Provided an Event of Default shall not exist at such time and subject to satisfaction of the conditions set forth on Part A of Schedule 2.1, Lenders shall make Loans from time to time in an aggregate amount of up to $1,953,629.58 (the “Interest Allocation”) for the purposes of paying accrued interest on the Loans and the Mortgage Loan. Provided no Potential Default or Event of Default shall exist at such time and subject to satisfaction of the conditions set forth on Part A of Schedule 2.1, Lenders shall automatically make Loans for the payment of accrued interest, as aforesaid, and shall make the interest payments relating thereto directly to the Mortgage Lenders and the Administrative Agent, as the case may be, on the respective Payment Dates relating to the Mortgage Loan and the Loans, as the case may be.

(b) All Loans shall be shall be deemed a capital contribution by Borrower to Mortgage Borrower.

(3) Lending Offices. The Loans of each Lender shall be made and maintained at such Lender’s Applicable Lending Office for Loans of such Type.

(4) Several Obligations. The failure of any Lender to make any Loan to be made by it on the date specified therefor shall not relieve any other Lender of its obligation to make its Loan, but neither any Lender nor the Administrative Agent shall be responsible for the failure of any other Lender to make a Loan to be made by such other Lender.

(5) Notes.

(a) Loan Notes. The Loans made by each Lender shall be evidenced by the Note, made payable to such Lender in a principal amount equal to the aggregate amount of its advanced Commitment as originally in effect and otherwise duly completed.

(b) Endorsements on Notes. The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Loan made by each Lender to Borrower, and each payment made on account of the principal thereof, shall be recorded by such Lender on its books and, prior to any transfer of the Note held by it, endorsed by such Lender on the schedule attached to such Note or any continuation thereof; provided that the failure of such Lender to make any such recordation or endorsement shall not affect the obligations of Borrower to make a payment when due of any amount owing hereunder or under such Note in respect of such Loans.

(c) Substitution, Exchange and Subdivision of Notes. No Lender shall be entitled to have its Notes substituted or exchanged for any reason, or subdivided for promissory notes of lesser denominations, except in connection with a permitted assignment of all or any portion of such Lender’s Commitment, Loans and Note pursuant to Sections 12.10 and 12.24 (and, if requested by any Lender, Borrower agrees in accordance with and subject to Sections 12.10 and 12.24, to so substitute or exchange any Notes and enter into note splitter agreements in connection therewith).

31

(d) Loss, Theft, Destruction or Mutilation of Notes. In the event of the loss, theft or destruction of any Note, upon Borrower’s receipt of a reasonably satisfactory indemnification agreement executed in favor of Borrower by the holder of such Note, or in the event of the mutilation of any Note, upon the surrender of such mutilated Note by the holder thereof to Borrower, together with such other reasonable assurances as Borrower may require, Borrower shall execute and deliver to such holder a new replacement Note, in the form of the original Note, in lieu of the lost, stolen, destroyed or mutilated Note.

(e) Funding of Loans. Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will promptly make such Loans available to Borrower by wire transfer of immediately available funds to an account in the United States designated by Borrower.

Section 2.2 Conversions or Continuations of Loans.

(1) Subject to Sections 2.8(4), 2.9(2) and 2.9(3), Borrower shall have the right to Convert Loans of one Type into Loans of another Type or Continue Loans of one Type as Loans of the same Type, at any time or from time to time; provided that: (a) Borrower shall give the Administrative Agent notice of each such Conversion or Continuation as provided in Section 2.8(5); (b) Eurodollar Loans may be Converted only on the last day of an Interest Period for such Loans unless Borrower complies with the terms of Section 2.9(5); and (c) subject to Sections 2.9(1) and 2.9(3), any Conversion or Continuation of Loans shall be pro rata among the Lenders. Notwithstanding the foregoing, and without limiting the rights and remedies of the Administrative Agent and the Lenders under Article 11, in the event that any Event of Default exists, the Administrative Agent may (and at the request of the Majority Lenders shall) suspend the right of Borrower to Convert any Loan into a Eurodollar Loan, or to Continue any Loan as a Eurodollar Loan, for so long as such Event of Default exists, in which event all Loans shall be Converted (on the last day(s) of the respective Interest Periods therefor) or Continued, as the case may be, as Base Rate Loans. In connection with any such Conversion, a Lender may (at its sole discretion) transfer a Loan from one Applicable Lending Office to another.

(2) Notwithstanding anything to the contrary contained in this Agreement, at any time that a Hedge Agreement is in effect, Borrower shall not modify the Interest Period with respect to the principal amount equal to the notional amount under such Hedge Agreement.

Section 2.3 Interest Rate; Late Charge.

(1) Borrower promises to pay to the Administrative Agent for account of each Lender interest on the unpaid principal amount of each Loan (which may be the Base Rate Loans and/or Eurodollar Loans) made by such Lender for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum:

(a) during such periods as such Loan is a Base Rate Loan, the Base Rate plus the Applicable Margin; and

(b) during such periods as such Loan is a Eurodollar Loan, for each Interest Period relating thereto, the Adjusted LIBOR Rate for such Loan for such Interest Period plus the Applicable Margin.

32

(2) Accrued interest on each Loan shall be payable (i) monthly in arrears on each Payment Date and (ii) in the case of any Loan, upon the payment or prepayment thereof or the Conversion of such Loan to a Loan of another Type (but only on the principal amount so paid, prepaid or Converted), except that interest payable at the Default Rate shall be payable from time to time on demand.

(3) Notwithstanding anything to the contrary contained herein, after the Maturity Date and during any period when an Event of Default exists, Borrower shall pay to the Administrative Agent for the account of each Lender interest at the applicable Default Rate on the outstanding principal amount of any Loan made by such Lender, any interest payments thereon not paid when due and on any other amount payable by Borrower hereunder, under the Notes and any other Loan Documents.

(4) Promptly after the determination of any interest rate provided for herein or any change therein, the Administrative Agent shall give notice thereof to the Lenders to which such interest is payable and to Borrower, but the failure of the Administrative Agent to provide such notice shall not affect Borrower’s obligation for the payment of interest on the Loans.

(5) In addition to any sums due under this Section 2.3, Borrower shall pay to the Administrative Agent for the account of the Lenders a late payment premium in the amount of five percent (5%) of (i) any payments of principal under the Loans made and payable after the due date thereof (other than the repayment of the outstanding principal balance on the Maturity Date), and (ii) any payments of interest or other sums under the Loans made more than ten (10) days after the due date thereof, which late payment premium shall be due with any such late payment or upon demand by the Administrative Agent. Such late payment charge represents the reasonable estimate of Borrower and the Lenders of a fair average compensation for the loss that may be sustained by the Lenders due to the failure of Borrower to make timely payments. Such late charge shall be paid without prejudice to the right of the Administrative Agent and the Lenders to collect any other amounts provided herein or in the other Loan Documents to be paid or to exercise any other rights or remedies under the Loan Documents.

Section 2.4 Terms of Payment. Commencing on the Amendment Closing Date, the Loans shall be payable as follows:

(1) Interest. Beginning on December 1, 2008, and on the Payment Date of each month thereafter, Borrower shall pay interest in arrears in accordance with the wire transfer instructions set forth on Schedule 2.4(1) attached hereto (or such other instructions as the Administrative Agent may from time to time provide) until all amounts due under the Loan Documents are paid in full.

(2) Maturity. On the Maturity Date, Borrower shall pay to the Administrative Agent (on behalf of the Lenders) all outstanding principal, accrued and unpaid interest, and any other amounts due under the Loan Documents.

33

(3) Optional Prepayments. Subject to the provisions of Sections 2.4(5) and 2.9(5), Borrower shall have the right to prepay Loans in whole or in part, without premium or penalty; provided that: (a) Borrower shall give the Administrative Agent notice of each such prepayment as provided in Section 2.8(5) (and, upon the date specified in any such notice of prepayment, the amount to be prepaid shall become due and payable hereunder) and (b) partial prepayments shall be in the minimum aggregate principal amounts specified in Section 2.8(4). Loans that are prepaid cannot be reborrowed. After giving notice of prepayment as provided in Section 2.8(5), but prior to the date specified in any such notice of prepayment, such notice may be revoked by Borrower as long as Borrower pays within one (1) Business Day after notification from the Administrative Agent any amounts payable to a Lender pursuant to Section 2.9(5) as a result of any action taken by such Lender in reliance of such notice of prepayment. In addition, in the event the specified Loans subject to the prepayment revocation are Eurodollar Loans, such Eurodollar Loans may, at the Administrative Agent’s option, be converted to Base Rate Loans for the balance of the then current Interest Period.

(4) Mandatory Prepayments. In the event that the Mortgage Loan is repaid in full prior to the Maturity Date, commencing upon the first Payment Date following such repayment and on each Payment Date thereafter, Borrower shall pay to Lender one hundred percent (100%) of the Net Operating Cash Flow (“Mandatory Net Operating Cash Flow Installments”) for the immediately preceding month. In addition, Borrower shall also make mandatory prepayments of principal as are required pursuant to Sections 14.4 and Section 14.5.

(5) Interest and Other Charges on Prepayment. If the Loans are prepaid, in whole or in part, pursuant to Section 2.4(3) or 2.4(4), each such prepayment shall be made on the prepayment date specified in the notice to the Administrative Agent pursuant to Section 2.8(5), and (in every case) together with (a) the accrued and unpaid interest on the principal amount prepaid, (b) the Exit Fee, (c) any amounts payable to a Lender pursuant to Section 2.9(5) as a result of such prepayment while an Adjusted LIBOR Rate is in effect, and (d) any early termination amounts due under any Hedge Agreement; provided, however, that any such prepayment shall be applied first, to the prepayment of any portions of the outstanding principal amount that are Base Rate Loans and, second, to the prepayment of any portions of the outstanding principal amount that are Eurodollar Loans applying such sums first to Eurodollar Loans of the shortest maturity so as to minimize breakage costs; provided further, however, that if an Event of Default exists, the Administrative Agent may distribute such payment to the Lenders for application in such manner as it or the Majority Lenders, subject to Section 2.8(2), may determine to be appropriate.

(6) Application of Payments. All payments received by the Administrative Agent under the Loan Documents shall be applied: first, to any fees and expenses due to the Administrative Agent and the Lenders under the Loan Documents; second, to any Default Rate interest or late charges; third, to accrued and unpaid interest on the Loans; and fourth, to the principal sum in accordance with Section 2.4(5) above and other amounts due under the Loan Documents; provided, however, that, if an Event of Default exists the Administrative Agent may apply such payments in any order or manner as the Administrative Agent shall determine.

34

(7) Liquidation Events. (a) In the event of (i) any Casualty to all or any portion of the Project, (ii) any Condemnation of all or any portion of the Project, (iii) a transfer of the Project in connection with realization thereon by the Mortgage Loan Administrative Agent (on behalf of Mortgage Lender) following an Event of Default under the Mortgage Loan, including without limitation a foreclosure sale, or (iv) any refinancing of the Project or the Mortgage Loan (each, a “Liquidation Event”), Borrower shall cause the related Net Liquidation Proceeds After Debt Service to be deposited directly into an account designated by Administrative Agent. On each date on which Administrative Agent actually receives a distribution of Net Liquidation Proceeds After Debt Service, such Net Liquidation Proceeds After Debt Service shall be applied to the outstanding principal balance of the Notes in an amount equal to one hundred percent (100%) of such Net Liquidation Proceeds After Debt Service, together with interest that would have accrued on such amount through the next Payment Date and all other sums then due; provided, however, that so in the event Administrative Agent receives a distribution of Net Liquidation Proceeds After Debt Service on a date other than a Payment Date and so long as no Default or Event of Default shall have occurred and be continuing, if Borrower so requests in writing, such amounts shall be held by Administrative Agent as collateral security for the Loans in an interest bearing account, with such interest accruing to the benefit of Borrower, and shall be applied by Administrative Agent on the next Payment Date. Borrower shall immediately notify Administrative Agent of any Liquidation Event once Borrower has knowledge of such event. Borrower shall be deemed to have knowledge of (i) a sale (other than a foreclosure sale) of the Project on the date on which a contract of sale for such sale is entered into, and a foreclosure sale, on the date notice of such foreclosure sale is given, and (ii) a refinancing of the Project, on the date on which a commitment for such refinancing is entered into. The provisions of this Section 2.4(8) shall not be construed to contravene in any manner the restrictions and other provisions regarding refinancing of the Mortgage Loan or transfer of the Project set forth in this Agreement and the other Loan Documents.

(8) Agency Fee. Until payment in full of all obligations under this Agreement and the other Loan Documents, Borrower shall pay to Administrative Agent, for its sole account, the Agency Fee in accordance with the Fee Letter.

(9) Security. The Loans shall be secured by the Pledge Agreement creating a first Lien on the Collateral and the other Loan Documents.

Section 2.5 Extension of Maturity Date.

(1) First Extension of Maturity Date. Borrower may, at its option, extend the term of the then outstanding principal amount for a period commencing on the Original Maturity Date and ending on August 1, 2010; provided, however, if such day is not a Business Day, such period shall be deemed to end the immediately preceding Business Day (the applicable period being, the “First Extension Period”), subject to the satisfaction of the following conditions:

(a) Borrower shall notify (the “First Extension Notice”) Administrative Agent of Borrower’s exercise of such option between thirty (30) and ninety (90) days prior to the Original Maturity Date;

(b) No Potential Default (of which Borrower has previously received notice) or Event of Default exists as of the giving of the First Extension Notice and/or as of the Original Maturity Date;

35

(c) Without limiting the provisions of Section 14.1(1), Construction Completion shall have occurred;

(d) If the Hedge Agreement in effect at the time of Borrower’s giving of the First Extension Notice is scheduled to mature or expire prior to the end of the First Extension Period, Borrower shall have obtained and delivered to Administrative Agent not later than ten (10) Business Days prior to the first day of the First Extension Period one or more replacement Hedge Agreements which meet the requirements of Section 9.15 which shall be effective on or before the date the then effective Hedge Agreement is scheduled to mature or expire and shall have a maturity date not earlier than the end of the First Extension Period;

(e) Whether or not the extension becomes effective, Borrower shall pay all out-of-pocket costs and expenses incurred by Administrative Agent and the Lenders in connection with the proposed extension (pre- and post-closing), including reasonable legal fees; all such costs and expenses shall be due and payable within ten (10) days of demand, and any failure to pay such amounts shall constitute a default under this Agreement and the Loan Documents;

(f) Not later than the Original Maturity Date, (i) the extension shall have been documented to the Lenders’ reasonable satisfaction and consented to by Borrower, Administrative Agent and all the Lenders, including the execution and delivery by the Guarantor of reaffirmations of its obligations under the Guaranty and (ii) if requested by the Administrative Agent, the Administrative Agent shall have been provided with an updated title report and judgment and lien searches, together with any title endorsements reasonably required by Administrative Agent; and

(g) Mortgage Borrower shall have extended the Mortgage Loan pursuant to and in accordance with Section 2.5(1) of the Mortgage Loan Agreement.

Any such extension shall be otherwise subject to all of the other terms and provisions of this Agreement and the other Loan Documents.

(2) Second Extension of Maturity Date. In the event Borrower has previously extended the Maturity Date in accordance with Section 2.5(1), Borrower may, at its option, extend the term of the then outstanding principal amount of the Loans for a period commencing on the last day of the First Extension Period and ending on July 31, 2011; provided, however, if such day is not a Business Day, such period shall be deemed to end the immediately preceding Business Day (the applicable period being, the “Second Extension Period”), subject to the satisfaction of the following conditions:

(a) Borrower shall notify (the “Second Extension Notice”) Administrative Agent of Borrower’s exercise of such option between thirty (30) and ninety (90) days prior to end of the First Extension Period;

(b) No Potential Default (of which Borrower has previously received notice) or Event of Default exists as of the giving of the Second Extension Notice and/or as of last day of the First Extension Period;

36

(c) If the Hedge Agreement in effect at the time of Borrower’s giving of the Second Extension Notice is scheduled to mature or expire prior to the end of the Second Extension Period, Borrower shall have obtained and delivered to Administrative Agent not later than ten (10) Business Days prior to the first day of the Second Extension Period one or more replacement Hedge Agreements which meet the requirements of Section 9.15 which shall be effective on or before the date the then effective Hedge Agreement is scheduled to mature or expire and shall have a maturity date not earlier than the end of the Second Extension Period;

(d) Whether or not the extension becomes effective, Borrower shall pay all out-of-pocket costs and expenses incurred by Administrative Agent and the Lenders in connection with the proposed extension (pre- and post-closing), including reasonable legal fees; all such costs and expenses shall be due and payable within ten (10) days of demand, and any failure to pay such amounts shall constitute a default under this Agreement and the Loan Documents;

(e) Not later than the last day of the First Extension Period, (i) the extension shall have been documented to the Lenders’ reasonable satisfaction and consented to by Borrower, Administrative Agent and all the Lenders, including the execution and delivery by the Guarantor of reaffirmations of its obligations under the Guaranty and (ii) if requested by the Administrative Agent, the Administrative Agent shall have been provided with an updated title report and judgment and lien searches, together with any title endorsements reasonably required by Administrative Agent; and

(f) Mortgage Borrower shall have extended the Mortgage Loan pursuant to and in accordance with Section 2.5(2) of the Mortgage Loan Agreement.

Any such extension shall be otherwise subject to all of the other terms and provisions of this Agreement and the other Loan Documents.

(3) Third Extension of Maturity Date. Borrower may, at its option, extend the term of the then outstanding principal amount for a period commencing on the last day of the Second Extension Period and ending on July 30, 2012; provided, however, if such day is not a Business Day, such period shall be deemed to end the immediately preceding Business Day (the applicable period being, the “Third Extension Period”), subject to the satisfaction of the following conditions:

(a) Borrower shall notify (the “Third Extension Notice”) Administrative Agent of Borrower’s exercise of such option between thirty (30) and ninety (90) days prior to the end of the Second Extension Period;

(b) No Potential Default (of which Borrower has previously received notice) or Event of Default exists as of the giving of the Third Extension Notice and/or as of the last day of the Second Extension Period;

37

(c) Administrative Agent shall have obtained a new Appraisal dated not more than sixty (60) days prior to the last day of the Second Extension Period (which the Administrative Agent hereby agrees to timely obtain), such Appraisal to be at Borrower’s expense;

(d) The Debt Service Coverage Ratio based on the outstanding balance of the Loans for the most recently ended calendar quarter prior to the end of the Second Extension Period, shall be equal to or greater than 1.10:1.00; provided, however, in the event that the required Debt Service Coverage Ratio is not met, then Borrower may, in order to satisfy the condition in this clause, pay down the outstanding principal balance of the Loans in an amount such that the required Debt Service Coverage Ratio is achieved (in accordance with Section 2.4(4));

(e) If the Hedge Agreement in effect at the time of Borrower’s giving of the Third Extension Notice is scheduled to mature or expire prior to the end of the Second Extension Period, Borrower shall have obtained and delivered to Administrative Agent not later than ten (10) Business Days prior to the first day of the Third Extension Period one or more replacement Hedge Agreements which meet the requirements of Section 9.15 which shall be effective on or before the date the then effective Hedge Agreement is scheduled to mature or expire and shall have a maturity date not earlier than the end of the Third Extension Period;

(f) Whether or not the extension becomes effective, Borrower shall pay all out-of-pocket costs and expenses incurred by Administrative Agent and the Lenders in connection with the proposed extension (pre- and post-closing), including reasonable legal fees; all such costs and expenses shall be due and payable within ten (10) days of demand, and any failure to pay such amounts shall constitute a default under this Agreement and the Loan Documents;

(g) Not later than the last day of the Second Extension Period, (i) the extension shall have been documented to the Lenders’ reasonable satisfaction and consented to by Borrower, Administrative Agent and all the Lenders, including the execution and delivery by the Guarantor of reaffirmations of its obligations under the Guaranty and (ii) if requested by the Administrative Agent, the Administrative Agent shall have been provided with an updated title report and judgment and lien searches, together with any title endorsements reasonably required by Administrative Agent;

(h) Borrower shall pay to Administrative Agent (for the benefit of the Lenders in accordance with their proportionate shares) on the last day of the Second Extension Period, a non-refundable extension fee equal to 0.25% of the outstanding principal balance of the Loans; and

(i) Mortgage Borrower shall have extended the Mortgage Loan pursuant to and in accordance with Section 2.5(3) of the Mortgage Loan Agreement.

Any such extension shall be otherwise subject to all of the other terms and provisions of this Agreement and the other Loan Documents.

38

(4) Fourth Extension of Maturity Date. Borrower may, at its option, extend the term of the then outstanding principal amount for a period commencing on the last day of the Third Extension Period and ending on July 29, 2013; provided, however, if such day is not a Business Day, such period shall be deemed to end the immediately preceding Business Day (the applicable period being, the “Fourth Extension Period”), subject to the satisfaction of the following conditions:

(a) Borrower shall notify (the “Fourth Extension Notice”) Administrative Agent of Borrower’s exercise of such option between thirty (30) and ninety (90) days prior to the end of the Third Extension Period;

(b) No Potential Default (of which Borrower has previously received notice) or Event of Default exists as of the giving of the Fourth Extension Notice and/or as of the last day of the Third Extension Period;

(c) The Debt Service Coverage Ratio based on the outstanding balance of the Loans for the most recently ended calendar quarter prior to en d of the Third Extension Period, shall be equal to or greater than 1.35:1.00; provided, however, in the event that the required Debt Service Coverage Ratio is not met, then Borrower may, in order to satisfy the condition in this clause, pay down the outstanding principal balance of the Loans in an amount such that the required Debt Service Coverage Ratio is achieved (in accordance with Section 2.4(4));

(d) The ratio of (i) the total outstanding principal balance of the Loans to (ii) the value of the Project does not exceed eighty percent (80%) based on the “as is” value established by a new Appraisal obtained by Administrative Agent not more than sixty (60) days prior to end of the Third Extension Period, such Appraisal to be at Borrower’s expense and satisfactory to Administrative Agent in all respects; provided, however, in the event that the required loan-to-value ratio is not met, then Borrower may, in order to satisfy the condition in this clause, pay down the outstanding principal balance of the Loans in an amount such that the required loan-to-value ratio is achieved (in accordance with Section 2.4(4));

(e) If the Hedge Agreement in effect at the time of Borrower’s giving of the Fourth Extension Notice is scheduled to mature or expire prior to the end of the Third Extension Period, Borrower shall have obtained and delivered to Administrative Agent not later than ten (10) Business Days prior to the first day of the Fourth Extension Period one or more replacement Hedge Agreements which meet the requirements of Section 9.15 which shall be effective on or before the date the then effective Hedge Agreement is scheduled to mature or expire and shall have a maturity date not earlier than the end of the Fourth Extension Period;

(f) Whether or not the extension becomes effective, Borrower shall pay all out-of-pocket costs and expenses incurred by Administrative Agent and the Lenders in connection with the proposed extension (pre- and post-closing), including reasonable legal fees; all such costs and expenses shall be due and payable within ten (10) days of demand, and any failure to pay such amounts shall constitute a default under this Agreement and the Loan Documents;

39

(g) Not later than the last day of the Third Extension Period, (i) the extension shall have been documented to the Lenders’ reasonable satisfaction and consented to by Borrower, Administrative Agent and all the Lenders, including the execution and delivery by the Guarantor of reaffirmations of its obligations under the Guaranty and (ii) if requested by the Administrative Agent, the Administrative Agent shall have been provided with an updated title report and judgment and lien searches, together with any title endorsements reasonably required by Administrative Agent;

(h) Borrower shall pay to Administrative Agent (for the benefit of the Lenders in accordance with their proportionate shares) on the last day of the Third Extension Period, a non-refundable extension fee equal to 0.25% of the outstanding principal balance of the Loans; and

(i) Mortgage Borrower shall have extended the Mortgage Loan pursuant to and in accordance with Section 2.5(4) of the Mortgage Loan Agreement.

Any such extension shall be otherwise subject to all of the other terms and provisions of this Agreement and the other Loan Documents.

(5) Fifth Extension of Maturity Date. Borrower may, at its option, extend the term of the then outstanding principal amount for a period commencing on the last day of the Fourth Extension Period and ending on October 31, 2013; provided, however, if such day is not a Business Day, such period shall be deemed to end the immediately preceding Business Day (the applicable period being, the “Fifth Extension Period”), subject to the satisfaction of the following conditions:

(a) Borrower shall notify (the “Fifth Extension Notice”) Administrative Agent of Borrower’s exercise of such option between thirty (30) and ninety (90) days prior to the end of the Fourth Extension Period;

(b) No Potential Default (of which Borrower has previously received notice) or Event of Default exists as of the giving of the Fifth Extension Notice and/or as of last day of the Fourth Extension Period;

(c) If the Hedge Agreement in effect at the time of Borrower’s giving of the Fifth Extension Notice is scheduled to mature or expire prior to the end of the Fourth Extension Period, Borrower shall have obtained and delivered to Administrative Agent not later than ten (10) Business Days prior to the first day of the Fifth Extension Period one or more replacement Hedge Agreements which meet the requirements of Section 9.15 which shall be effective on or before the date the then effective Hedge Agreement is scheduled to mature or expire and shall have a maturity date not earlier than the end of the Fifth Extension Period;

(d) Whether or not the extension becomes effective, Borrower shall pay all out-of-pocket costs and expenses incurred by Administrative Agent and the Lenders in connection with the proposed extension (pre- and post-closing), including reasonable legal fees; all such costs and expenses shall be due and payable within ten (10) days of demand, and any failure to pay such amounts shall constitute a default under this Agreement and the Loan Documents;

40

(e) Not later than the last day of the Fourth Extension Period, (i) the extension shall have been documented to the Lenders’ reasonable satisfaction and consented to by Borrower, Administrative Agent and all the Lenders, including the execution and delivery by the Guarantor of reaffirmations of its obligations under the Guaranty and (ii) if requested by the Administrative Agent, the Administrative Agent shall have been provided with an updated title report and judgment and lien searches, together with any title endorsements reasonably required by Administrative Agent; and

(f) Mortgage Borrower shall have extended the Mortgage Loan pursuant to and in accordance with Section 2.5(5) of the Mortgage Loan Agreement.

Any such extension shall be otherwise subject to all of the other terms and provisions of this Agreement and the other Loan Documents.

Section 2.6 Exit Fee. Upon the earlier to occur of (a) the date when full prepayment of the Loan occurs, (b) the Maturity Date or (c) the date on which the Loan has been accelerated following an Event of Default, Borrower shall pay to the Administrative Agent for the benefit of Eurohypo the entire Exit Fee.

Section 2.7 Application of Operating Revenues; Cash Management.

(1) During the term of the Loans, Borrower shall cause Mortgage Borrower to establish and maintain the Clearing Account and Cash Management Account for the benefit of Mortgage Lender, which Clearing Account and Cash Management Account shall be under the sole dominion and control of Mortgage Lender. Borrower will not cause or permit Mortgage Borrower in any way to alter or modify the Clearing Account or Cash Management Account and will notify Administrative Agent of the account number thereof.

(2) Borrower shall direct or cause Mortgage Borrower to direct that all cash distributions from the Cash Management Account be paid to Administrative Agent (on behalf of the Lenders) in accordance with this Agreement and the Cash Management Agreement (including the Net Liquidation Proceeds After Debt Service) be deposited into an account specified by Administrative Agent.

(3) In the event Mortgage Lender waives the requirement of Mortgage Borrower to maintain the Clearing Account and Cash Management Account or the Mortgage Loan has been repaid in full, Administrative Agent (on behalf of the Lenders) shall have the right to require Borrower to establish and maintain a cash management account that would operate in the same way as the Clearing Account and Cash Management Account.

Section 2.8 Payments; Pro Rata Treatment; Etc.

(1) Payments Generally.

(a) Payments by Borrower. Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by Borrower under this Agreement and the Notes, and, except to the extent otherwise provided therein, all payments to be made by Borrower under any other Loan Document, shall be made in Dollars, in immediately available funds, without deduction, setoff or counterclaim, to the Administrative Agent at an account designated by the Administrative Agent by notice to Borrower, not later than 12:00 noon, New York City time, on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day).

41

(b) Application of Payments. Subject to the provisions of Sections 2.4(6) and 2.8(2), Borrower shall, at the time of making each payment under this Agreement or any Note for the account of any Lender, specify to the Administrative Agent (which shall so notify the intended recipient(s) thereof) the Types of Loans or other amounts payable by Borrower hereunder to which such payment is to be applied (and in the event that Borrower fails to so specify, or if an Event of Default exists, the Administrative Agent may distribute such payment to the Lenders for application in such manner as it may determine to be appropriate, subject to Section 2.8(2) and any other agreement among the Administrative Agent and the Lenders with respect to such application).

(c) Forwarding of Payments by Administrative Agent. Except as otherwise agreed by the Administrative Agent and the Lenders, each payment received by the Administrative Agent under this Agreement or any Note for account of any Lender shall be paid by the Administrative Agent promptly to such Lender, in immediately available funds, for account of such Lender’s Applicable Lending Office for the Loan or other obligation in respect of which such payment is made.

(d) Extensions to Next Business Day. If the due date of any payment under this Agreement or any Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension.

(2) Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each advance of a Loan from the Lenders under Section 2.1(2) shall be made from the Lenders, and any termination of the obligation to make an advance of the Loans shall be applied to the respective Commitments of the Lenders, pro rata according to the amounts of their respective Commitments; (b) except as otherwise provided in Section 2.9(4), Loans shall be allocated pro rata among the Lenders according to the amounts of their respective Commitments (in the case of the making of Loans) or their respective Loans (in the case of Conversions or Continuations of Loans); (c) each payment or prepayment of principal of Loans by Borrower shall be made for account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Loans held by them; and (d) each payment of interest on Loans by Borrower shall be made for account of the Lenders pro rata in accordance with the amounts of interest on such Loans then due and payable to the respective Lenders.

(3) Computations. Interest on all Loans shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable.

42

(4) Minimum Amounts. Except for (a) mandatory and other prepayments made pursuant to Sections 2.4(4) and 14.4, (b) Conversions or prepayments made pursuant to Section 2.9(4), each Conversion and Continuation (collectively, “Loan Transactions”) of Loans shall be in an aggregate amount at least equal to $1,000,000 (Loan Transactions of or into Loans of different Types or Interest Periods at the same time hereunder shall be deemed separate Loan Transactions for purposes of the foregoing, one for each Type or Interest Period); provided that if any Loans or borrowings would otherwise be in a lesser principal amount for any period, such Loans shall be Base Rate Loans during such period. Notwithstanding the foregoing, the minimum amount of $1,000,000 shall not apply to Conversions of lesser amounts into a Type of Loan that has (or will have upon such Conversion) an aggregate principal amount exceeding such minimum amount and a duration of at least one Interest Period. The initial borrowing hereunder shall be an aggregate amount at least equal to $500,000.

(5) Certain Notices. Notices by Borrower to the Administrative Agent regarding Loan Transactions and the selection of Types of Loans and/or of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Administrative Agent not later than 12:00 noon, New York City time, on the number of Business Days prior to the date of the proposed Loan Transaction or the first day of such Interest Period specified below:

	Number of Business
Notice	Days Prior
Optional Prepayment		3
Conversions into, Continuations as, or borrowings in Base Rate Loans		3
Conversions into, Continuations as, borrowings in or changes in duration of Interest Period for, Eurodollar Loans (subject to Section 2.4(6))		3

Each such notice of a Loan Transaction shall specify the amount (subject to Section 2.8(4)), Type, and Interest Period of such proposed Loan Transaction, and the date (which shall be a Business Day) of such proposed Loan Transaction. Notices for Conversions and Continuations shall be in the form of Exhibit E. Each such notice specifying the duration of an Interest Period shall specify the portion of the Loans to which such Interest Period is to relate. The Administrative Agent shall promptly notify the Lenders of the contents of each such notice. If Borrower fails to select (i) the Type of Loan or (ii) the duration of any Interest Period for any Eurodollar Loan within the time period (i.e., three (3) Business Days prior to the first day of the next applicable Interest Period) and otherwise as provided in this Section 2.8(5), such Loan (if outstanding as an Eurodollar Loan) will be automatically Continued as an Eurodollar Loan with an Interest Period of one (1) month on the last day of the current Interest Period for such Loan (based on a LIBOR Rate determined two (2) Business Days prior to the first day of the next Interest Period) or, if outstanding as a Base Rate Loan, will remain as a Base Rate Loan.

43

(6) Non Receipt of Funds by the Administrative Agent. Unless the Administrative Agent shall have been notified by a Lender or Borrower (in either case, the “Payor”) prior to the date on which the Payor is to make payment to the Administrative Agent of (in the case of a Lender) the proceeds of a Loan to be made by such Lender hereunder or (in the case of Borrower) a payment to the Administrative Agent for account of any Lender hereunder (in either case, such payment being herein called the “Required Payment”), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Administrative Agent, the Administrative Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date; and, if the Payor has not in fact made the Required Payment to the Administrative Agent, the recipient(s) of such payment shall, on demand, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date (the “Advance Date”) such amount was so made available by the Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to (a) the Prime Rate for such day in the case of payments returned to the Administrative Agent by any of the Lenders or (b) the applicable interest rate due hereunder with respect to payments returned by Borrower to the Administrative Agent and, if such recipient(s) shall fail promptly to make such payment, the Administrative Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid; provided that if neither the recipient(s) nor the Payor shall return the Required Payment to the Administrative Agent within three (3) Business Days of the Advance Date, then, retroactively to the Advance Date, the Payor and the recipient(s) shall each be obligated to pay interest on the Required Payment as follows:

(a) if the Required Payment shall represent a payment to be made by Borrower to the Lenders, Borrower and the recipient(s) shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment at the Default Rate (without duplication of the obligation of Borrower under Section 2.3 to pay interest on the Required Payment at the Default Rate), it being understood that the return by the recipient(s) of the Required Payment to the Administrative Agent shall not limit such obligation of Borrower under Section 2.3 to pay interest at the Default Rate in respect of the Required Payment, and

(b) if the Required Payment shall represent proceeds of a Loan to be made by the Lenders to Borrower, the Payor and Borrower shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment pursuant to whichever of the rates specified in Section 2.3 is applicable to the Type of such Loan, it being understood that the return by Borrower of the Required Payment to the Administrative Agent shall not limit any claim Borrower may have against the Payor in respect of such Required Payment.

(7) Sharing of Payments, Etc.

(a) Right of Set off. Borrower agrees that, in addition to (and without limitation of) any right of set off, banker’s lien or counterclaim a Lender may otherwise have, (subject, as among the Lenders, to Section 12.26), each Lender shall be entitled, at its option (to the fullest extent permitted by law), to set off and apply any deposit (general or special, time or demand, provisional or final), or other indebtedness, held by it for the credit or account of Borrower at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Lender’s Loans or any other amount payable to such Lender hereunder, that is not paid when due (regardless of whether such deposit or other indebtedness is then due to such Borrower), in which case it shall promptly notify Borrower and the Administrative Agent thereof, provided that such Lender’s failure to give such notice shall not affect the validity thereof.

44

(b) Sharing. If any Lender shall obtain from Borrower payment of any principal of or interest on any Loan owing to it or payment of any other amount under this Agreement or any other Loan Document through the exercise (subject, as among the Lenders, to Section 12.26) of any right of set off, banker’s lien or counterclaim or similar right or otherwise (other than from the Administrative Agent as provided herein), and, as a result of such payment, such Lender shall have received a greater percentage of the principal of or interest on the Loans or such other amounts then due hereunder or thereunder by Borrower to such Lender than the percentage received by any other Lender, it shall promptly purchase from such other Lenders participations in (or, if and to the extent specified by such Lender, direct interests in) the Loans or such other amounts, respectively, owing to such other Lenders (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Lenders shall share the benefit of such excess payment (net of any expenses that may be incurred by such Lender in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Loans or such other amounts, respectively, owing to each of the Lenders. To such end all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored.

(c) Consent by Borrower. Borrower agrees that any Lender so purchasing such a participation (or direct interest) may exercise (subject, as among the Lenders, to Section 12.26) all rights of set off, banker’s lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans or other amounts (as the case may be) owing to such Lender in the amount of such participation.

(d) Rights of Lenders; Bankruptcy. Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of Borrower. If, under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a set off to which this Section 2.8(7) applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section 2.8(7) to share in the benefits of any recovery on such secured claim.

45

Section 2.9 Yield Protection; Etc.

(1) Additional Costs.

(a) Costs of Making or Maintaining Eurodollar Loans. Borrower shall pay directly to each Lender from time to time such amounts as such Lender may reasonably determine to be necessary to compensate such Lender for any costs that such Lender determines are attributable to its making or maintaining of any Eurodollar Loans or its obligation to make any Eurodollar Loans hereunder, or any reduction in any amount receivable by such Lender hereunder in respect of any of such Eurodollar Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called “Additional Costs”), resulting from any Regulatory Change that:

(i) shall subject any Lender (or its Applicable Lending Office for any of such Loans) to any tax, duty or other charge in respect of such Loans or its Note or changes the basis of taxation of any amounts payable to such Lender under this Agreement or its Note in respect of any of such Loans (excluding changes in the rate of tax on the overall net income of such Lender or of such Applicable Lending Office by the jurisdiction in which such Lender has its principal office or such Applicable Lending Office); or

(ii) imposes or modifies any reserve, special deposit or similar requirements (other than the Reserve Requirement used in the determination of the Adjusted LIBOR Rate for any Interest Period for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Lender (including, without limitation, any of such Loans or any deposits referred to in the definition of “LIBOR Rate”), or any commitment of such Lender (including, without limitation, the Commitment of such Lender hereunder); or

(iii) imposes any other condition affecting this Agreement or its Note (or any of such extensions of credit or liabilities) or its Commitment.

If any Lender requests compensation from Borrower under this paragraph (a), Borrower may, by notice to such Lender (with a copy to the Administrative Agent), suspend the obligation of such Lender thereafter to make or Continue Eurodollar Loans, or to Convert Loans into Eurodollar Loans, until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 2.9(4) shall be applicable), provided that such suspension shall not affect the right of such Lender to receive the compensation so requested.

(b) Costs Attributable to Regulatory Change or Risk-Based Capital Guidelines. Without limiting the effect of the foregoing provisions of this Section 2.9(1) (but without duplication), Borrower shall pay directly to each Lender from time to time on request such amounts as such Lender may reasonably determine to be necessary to compensate such Lender (or, without duplication, the bank holding company of which such Lender is a subsidiary) for any costs that it reasonably determines are attributable to the maintenance by such Lender (or any Applicable Lending Office or such bank holding company), pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) hereafter issued by any government or governmental or supervisory authority (excluding Basel II and any other law or regulation which implements Basel II, in each case in the form existing on the date of this Agreement), of capital in respect of its Commitment or Loans (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Lender (or any Applicable Lending Office or such bank holding company) to a level below that which such Lender (or any Applicable Lending Office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request.

46

(c) Notification and Certification. Each Lender shall notify Borrower of any event occurring after the date hereof entitling such Lender to compensation under paragraph (a) or (b) of this Section 2.9(1) as promptly as practicable, but in any event within forty-five (45) days, after such Lender obtains actual knowledge thereof; provided that (i) if any Lender fails to give such notice within forty-five (45) days after it obtains actual knowledge of such an event, such Lender shall, with respect to compensation payable pursuant to this Section 2.9(1) in respect of any costs resulting from such event, only be entitled to payment under this Section 2.9(1) for costs incurred from and after the date thirty (30) days prior to the date that such Lender does give such notice and (ii) each Lender will designate a different Applicable Lending Office for the Loans of such Lender affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Lender, be disadvantageous to such Lender, except that such Lender shall have no obligation to designate an Applicable Lending Office located in the United States of America. Each Lender will furnish to Borrower a certificate setting forth the basis and amount of each request by such Lender for compensation under paragraph (a) or (b) of this Section 2.9(1). Determinations and allocations by any Lender for purposes of this Section 2.9(1) of the effect of any Regulatory Change pursuant to paragraph (a) of this Section 2.9(1), or of the effect of capital maintained pursuant to paragraph (b) of this Section 2.9(1), on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Lender under this Section 2.9(1), shall be conclusive, provided that such determinations and allocations are made on a reasonable basis.

Borrower shall be obligated to pay compensation to a Lender pursuant to subsections (a) and (b) of this Section 2.9(1) only if such Lender is imposing similar compensation requirements on borrowers under commercial loans of the same type and quality as the Loan and which are similarly affected by the Regulatory Change or other guidelines or requirements for which such Lender is seeking compensation from Borrower pursuant to this Section 2.9(1).

(2) Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if, on or prior to the determination of the LIBOR Rate for any Interest Period for any Eurodollar Loan:

(a) the Administrative Agent determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of LIBOR Rate are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Eurodollar Loans as provided herein; or

(b) any Lender determines, which determination shall be conclusive, and notify the Administrative Agent that the relevant rates of interest referred to in the definition of LIBOR Rate upon the basis of which the rate of interest for Eurodollar Loans for such Interest Period is to be determined are not likely adequately to cover the cost to such Lenders of making or maintaining Eurodollar Loans for such Interest Period;

then the Administrative Agent shall give Borrower and each Lender prompt notice thereof and, so long as such condition remains in effect, the Lenders shall be under no obligation to make additional Eurodollar Loans, to Continue Eurodollar Loans or to Convert Loans of any other Type into Eurodollar Loans, and Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Loans, either prepay such Loans or such Loans shall be automatically Converted into Base Rate Loans.

47

(3) Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to honor its obligation to make or maintain Eurodollar Loans hereunder (and, in the sole opinion of such Lender, the designation of a different Applicable Lending Office would either not avoid such unlawfulness or would be disadvantageous to such Lender), then such Lender shall promptly notify Borrower thereof (with a copy to the Administrative Agent) and such Lender’s obligation to make or Continue, or to Convert Loans of any other Type into, Eurodollar Loans shall be suspended until such time as such Lender may again make and maintain Eurodollar Loans (in which case the provisions of Section 2.9(4) shall be applicable).

(4) Treatment of Affected Loans. If the obligation of any Lender to make Eurodollar Loans or to Continue, or to Convert Base Rate Loans into, Eurodollar Loans shall be suspended pursuant to Section 2.9(1) or 2.9(3), such Lender’s Loans shall be automatically Converted into Base Rate Loans on the last day(s) of the then current Interest Period(s) for Loans (or, in the case of a Conversion resulting from a circumstance described in Section 2.9(3), on such earlier date as such Lender may specify to Borrower with a copy to the Administrative Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 2.9(1) or 2.9(3) that gave rise to such Conversion no longer exist:

(a) to the extent that such Lender’s Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender’s Loans shall be applied instead to its Base Rate Loans; and

(b) all Loans that would otherwise be made or Continued by such Lender as Eurodollar Loans shall be made or Continued instead as Base Rate Loans, and all Loans of such Lender that would otherwise be Converted into Eurodollar Loans shall remain as Base Rate Loans.

If such Lender gives notice to Borrower with a copy to the Administrative Agent that the circumstances specified in Section 2.9(1) or 2.9(3) that gave rise to the Conversion of such Lender’s Loans pursuant to this Section 2.9(4) no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans made by other Lenders are outstanding, such Lender’s Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to the extent necessary so that, after giving effect thereto, all Base Rate Loans and Eurodollar Loans are allocated among the Lenders ratably (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments.

48

(5) Compensation. Borrower shall pay to the Administrative Agent for account of each Lender, upon the request of such Lender through the Administrative Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost or expense that such Lender determines is attributable to:

(a) any payment, prepayment or Conversion of a Eurodollar Loan made by such Lender for any reason (including, without limitation, the acceleration of the Loans pursuant to the Administrative Agent’s or the Lenders’ rights referred to in Article 11) on a date other than the last day of the Interest Period for such Loan; or

(b) any failure by Borrower for any reason to borrow a Eurodollar Loan from such Lender on the date for such borrowing specified in the relevant notice of borrowing given to the Administrative Agent in accordance with the terms of this Agreement.

Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest that otherwise would have accrued on the principal amount so paid, prepaid, Converted or not borrowed for the period from the date of such payment, prepayment, Conversion or failure to borrow to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein over (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate per annum equal to the interest component of the amount such Lender would have bid in the London interbank market for Dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Lender), or if such Lender shall cease to make such bids, the equivalent rate, as reasonably determined by such Lender, derived from Page 3750 of the Dow Jones Markets (Telerate) Service or other publicly available source as described in the definition of LIBOR Rate.

(6) U.S. Taxes.

(a) Gross-up for Deduction or Withholding of U.S. Taxes. Borrower agrees to pay to each Lender that is not a U.S. Person such additional amounts as are necessary in order that the net payment of any amount due to such non U.S. Person hereunder after deduction for or withholding in respect of any U.S. Taxes imposed with respect to such payment (or in lieu thereof, payment of such U.S. Taxes by such non U.S. Person), will not be less than the amount stated herein to be then due and payable, provided that the foregoing obligation to pay such additional amounts shall not apply:

(i) to any payment to any Lender hereunder unless such Lender is, on the date hereof (or on the date it becomes a Lender hereunder as provided in Section 12.24(2)) and on the date of any change in the Applicable Lending Office of such Lender, either entitled to submit a Form W-8BEN (relating to such Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form W-8ECI (relating to all interest to be received by such Lender hereunder in respect of the Loans), or

(ii) to any U.S. Taxes imposed solely by reason of the failure by such non U.S. Person to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections with the United States of America of such non U.S. Person if such compliance is required by statute or regulation of the United States of America as a precondition to relief or exemption from such U.S. Taxes.

49

For the purposes hereof, (A) “U.S. Person” means a citizen, national or resident of the United States of America, a corporation, limited liability company, partnership or other entity created or organized in or under any laws of the United States of America or any State thereof, or any estate or trust that is subject to Federal income taxation regardless of the source of its income, (B) “U.S. Taxes” means any present or future tax, assessment or other charge or levy imposed by or on behalf of the United States of America or any taxing authority thereof or therein, (C) “Form W-8BEN” means Form W-8BEN of the Department of the Treasury of the United States of America and (D) “Form W-8ECI” means Form W-8ECI of the Department of the Treasury of the United States of America. Each of the Forms referred to in the foregoing clauses (C) and (D) shall include such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates.

(b) Evidence of Deduction, Etc. Within thirty (30) days after paying any amount to the Administrative Agent or any Lender from which it is required by law to make any deduction or withholding, and within thirty (30) days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, Borrower shall deliver to the Administrative Agent for delivery to such non U.S. Person evidence satisfactory to such Person of such deduction, withholding or payment (as the case may be).

(7) Replacement of Lenders. If any Lender requests compensation pursuant to Section 2.9(1) or 2.9(6), or any Lender’s obligation to Continue Loans of any Type, or to Convert Loans of any Type into the other Type of Loan, shall be suspended pursuant to Section 2.9(2) or 2.9(3) (any such Lender requesting such compensation, or whose obligations are so suspended, being herein called a “Requesting Lender”), Borrower, upon three (3) Business Days notice, may require that such Requesting Lender transfer all of its right, title and interest under this Agreement and such Requesting Lender’s Note to any bank or other financial institution (a “Proposed Lender”) identified by Borrower that is satisfactory to the Administrative Agent (i) if such Proposed Lender agrees to assume all of the obligations of such Requesting Lender hereunder, and to purchase all of such Requesting Lender’s Loans hereunder for consideration equal to the aggregate outstanding principal amount of such Requesting Lender’s Loans, together with interest thereon to the date of such purchase (to the extent not paid by Borrower), and satisfactory arrangements are made for payment to such Requesting Lender of all other amounts accrued and payable hereunder to such Requesting Lender as of the date of such transfer (including any fees accrued hereunder and any amounts that would be payable under Section 2.9(5) as if all of such Requesting Lender’s Loans were being prepaid in full on such date) and (ii) if such Requesting Lender has requested compensation pursuant to Section 2.9(1) or 2.9(6), such Proposed Lender’s aggregate requested compensation, if any, pursuant to Section 2.9(1) or 2.9(6) with respect to such Requesting Lender’s Loans is lower than that of the Requesting Lender. Subject to the provisions of Section 12.24(2), such Proposed Lender shall be a “Lender” for all purposes hereunder. Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements of Borrower contained in Sections 2.9(1), 2.9(6) and 12.5 (without duplication of any payments made to such Requesting Lender by Borrower or the Proposed Lender) shall survive for the benefit of such Requesting Lender under this Section 2.9(7) with respect to the time prior to such replacement.

50

ARTICLE 3

INSURANCE, CONDEMNATION, AND IMPOUNDS

Section 3.1 Insurance.

(1) Borrower shall cause Mortgage Borrower to maintain at all times during the term of the Loans the insurance required under Article 3 of the Mortgage Loan Agreement, including, without limitation, meeting all insurer requirements thereunder. Borrower shall cause Administrative Agent (on behalf of Lenders) to be named as named insureds together with Mortgage Lender, as their interest may appear, under the insurance policies required under Article 3 of the Mortgage Loan Agreement. Borrower shall also cause all insurance policies required under this Section 3.1 to provide for at least thirty (30) days’ prior notice to Administrative Agent in the event of policy cancellation or material changes. Not less than thirty (30) days’ prior to the expiration dates of the policies theretofore furnished to Administrative Agent pursuant to the terms hereof, certified copies of the policies marked “premium paid” or accompanied by evidence satisfactory to Administrative Agent of payment of the premiums due thereunder shall be delivered by Borrower to Administrative Agent; provided, however, that in the case of renewal policies, Borrower may furnish Administrative Agent with binders therefor to be followed by the original policies when issued.

(2) If at any time Administrative Agent is not in receipt of written evidence that all insurance required hereunder is in full force and effect, Administrative Agent shall have the right, without notice to Borrower to take such action as Administrative Agent deems necessary to protect its interest in the Project and the Collateral, including, without limitation, the obtaining of such insurance coverage as Administrative Agent in its sole discretion deems appropriate, and all expenses incurred by Administrative Agent in connection with such action or in obtaining such insurance and keeping it in effect shall be paid by Borrower to Administrative Agent upon demand and until paid shall be secured by the Pledge Agreement and shall bear interest at the Default Rate.

(3) For purposes of this Agreement, Administrative Agent shall have the same approval rights over the insurance referred to above (including, without limitation, the insurers, deductibles and coverages thereunder), as well as the right to require other insurance as are provided in favor of Mortgage Lender in the Mortgage Loan Agreement. All liability insurance provided for in the Mortgage Loan Documents shall provide insurance with respect to the liabilities of both Mortgage Borrower and Borrower. The insurance policies delivered pursuant to the Mortgage Loan Documents shall include endorsements required by Mortgage Lender, but pursuant to which Administrative Agent shall have the same rights as the Mortgage Lender.

(4) In the event that the Mortgage Loan has been paid in full, except upon the occurrence and continuance of an Event of Default, Borrower shall permit Mortgage Borrower to settle any insurance or condemnation claims with respect to the insurance proceeds or condemnation awards which in the aggregate are less than or equal to the Threshold Amount. Administrative Agent shall have the right to participate in and approve any settlement for insurance or condemnation claims with respect to the insurance proceeds or condemnation awards which in the aggregate are equal to or greater than the Threshold Amount. If an Event of Default shall have occurred and be continuing, Borrower hereby irrevocably empowers Administrative Agent, in the name of Mortgage Borrower as its true and lawful attorney-in-fact, to file and prosecute such claim and to collect and to make receipt for any such payment.

51

Section 3.2 Use and Application of Insurance Proceeds. Notwithstanding any provision in this Agreement to the contrary, all insurance proceeds will be made available to Mortgage Borrower in accordance with the Mortgage Loan Agreement. In the event the Mortgage Loan has been paid in full and Administrative Agent receives any insurance proceeds, Administrative Agent (for the benefit of Lenders) shall either apply such proceeds to the Debt or for the restoration of the Project in accordance with the same terms and conditions contained in the Mortgage Loan Agreement, as if such terms were set forth in full herein.

Section 3.3 Casualty and Condemnation.

(1) If the Project shall be damaged or destroyed, in whole or in part, by fire or other casualty (a “Casualty”), Borrower shall cause Mortgage Borrower to give prompt notice of such damage to Administrative Agent and shall or shall cause Mortgage Borrower to promptly commence and diligently prosecute the completion of the restoration of the Project as nearly as possible to the condition the Project was in immediately prior to such Casualty, with such alterations as may be approved by Administrative Agent and otherwise in accordance with the Mortgage Loan Agreement. Borrower shall or shall cause Mortgage Borrower to pay all costs of such restoration whether or not such costs are covered by insurance. Administrative Agent may, but shall not be obligated to make proof of loss if not made promptly by Borrower.

(2) Borrower shall cause Mortgage Borrower to promptly give Administrative Agent notice of the actual or threatened commencement of any proceeding for the condemnation of all or any part of the Project and shall or shall cause Mortgage Borrower to deliver to Administrative Agent copies of any and all papers served in connection with such proceedings. Administrative Agent may participate in any such proceedings, and Borrower shall from time to time cause Mortgage Borrower to deliver to Administrative Agent all instruments requested by it to permit such participation. Borrower shall, or shall cause Mortgage Borrower, at its own expense, to diligently prosecute any such proceedings, and shall consult with Administrative Agent, its attorneys and experts, and cooperate with them in the carrying on or defense of any such proceedings. Notwithstanding any taking by any public or quasi public authority through condemnation or otherwise (including, but not limited to, any transfer made in lieu of or in anticipation of the exercise of such taking), Borrower shall continue to pay the Loans at the time and in the manner provided for its payment in the Notes and in this Agreement.

(3) For purposes of Sections 3.1 and 3.2 hereof, Borrower shall obtain the approval of Administrative Agent for each matter requiring the approval of Mortgage Lender under the provisions of Article 3 of the Mortgage Loan Agreement.

52

ARTICLE 4

RESERVES

Section 4.1 Interest Reserve Fund.

(1) Deposits. In the event that the Administrative Agent determines from time to time in its sole and absolute discretion that Loans available pursuant to Section 2.1(2)(a) and future Operating Revenues may be insufficient to pay all interest charges due or to be due in connection with the Loans, the Administrative Agent shall notify Borrower in writing of such determination. Within ten (10) Business Days following any such notice, Borrower shall deposit with the Administrative Agent (or, at the direction of the Administrative Agent, the Depository Bank), for deposit with Administrative Agent into an account in Administrative Agent’s name an amount reasonably determined by the Administrative Agent as being necessary to provide an adequate reserve for the payment of such interest charges (the “Interest Reserve Fund”).

(2) Disbursements. Provided that no Event of Default exists (other than a Default or an Event of Default which may be cured by the transfer of amounts credited to the Interest Reserve Fund to Borrower’s account pursuant to this Section 4.1(2)), and provided that there are insufficient Operating Revenues and insufficient Loans available pursuant to Section 2.1(2)(a) from which to pay such interest payments, the Administrative Agent will direct the Depository Bank to transfer (to the extent funds are available therein) amounts credited to the Interest Reserve Fund to Borrower’s account to pay or reimburse Borrower for the payment of any interest payments then due and payable under the Loans. Provided that no Event of Default exists, the Administrative Agent shall direct the Depository Bank to make such disbursements as requested by Borrower on a monthly basis within five (5) Business Days following receipt by the Administrative Agent of a written request for disbursement (in a form reasonably approved by the Administrative Agent) executed by an authorized officer of Borrower, which certificate shall certify, among other things, that there are insufficient Operating Revenues and insufficient Loans available pursuant to Section 2.1(2)(a) to pay the interest payments for which such disbursement is being requested.

(3) Grant of Security Interest. Borrower hereby grants a perfected first priority security interest in favor of the Administrative Agent for the ratable benefit of the Lenders in the Interest Reserve Fund established by or for it hereunder and all financial assets and other property and sums at any time held, deposited or invested therein, and all security entitlements and investment property relating thereto, together with any interest or other earnings thereon, and all proceeds thereof, whether accounts, general intangibles, chattel paper, deposit accounts, instruments, documents or securities (collectively, “Reserve Account Collateral”), together with all rights of a secured party with respect thereto (even if no further documentation is requested by the Administrative Agent or the Lenders or executed by Borrower). Borrower covenants and agrees:

(a) to do all acts that may be reasonably necessary to maintain, preserve and protect Reserve Account Collateral;

(b) to pay promptly when due all material taxes, assessments, charges, encumbrances and liens now or hereafter imposed upon or affecting any Reserve Account Collateral;

53

(c) to appear in and defend any action or proceeding which may materially and adversely affect Borrower’s title to or the Administrative Agent’s interest in the Reserve Account Collateral;

(d) following the creation of the Interest Reserve Fund and the initial funding thereof, other than to the Administrative Agent pursuant to this Agreement or the Cash Management Agreement, not to transfer, assign, sell, surrender, encumber, mortgage, hypothecate, or otherwise dispose of any of the Reserve Account Collateral or rights or interests therein, and to keep the Reserve Account Collateral free of all levies and security interests or other liens or charges except the security interest in favor of the Administrative Agent granted hereunder;

(e) to account fully for and promptly deliver to the Administrative Agent, in the form received, all documents, chattel paper, instruments and agreements constituting the Reserve Account Collateral hereunder, endorsed to the Administrative Agent or in blank, as requested by the Administrative Agent, and accompanied by such powers as appropriate and until so delivered all such documents, instruments, agreements and proceeds shall be held by Borrower in trust for the Administrative Agent, separate from all other property of Borrower; and

(f) from time to time upon request by the Administrative Agent, to furnish such further assurances of Borrower’s title with respect to the Reserve Account Collateral, execute such written agreements, or do such other acts, all as may be reasonably necessary to effectuate the purposes of this agreement or as may be required by law, or in order to perfect or continue the first-priority lien and security interest of the Administrative Agent in the Reserve Account Collateral.

(4) Rights on Event of Default. Upon the occurrence and during the continuance of an Event of Default, the Administrative Agent, at its option, may withdraw the funds on deposit in the Interest Reserve Fund and apply such funds to the items for which the Interest Reserve Fund was established or to payment of the Loans in such order, proportion and priority as the Administrative Agent may determine in its sole discretion. The Administrative Agent’s right to withdraw and apply such funds shall be in addition to all other rights and remedies provided to the Administrative Agent on behalf of the Lenders under the Loan Documents.

(5) Prohibition Against Further Encumbrance. Borrower shall not, without the prior consent of the Administrative Agent, further pledge, assign or grant any security interest in the Interest Reserve Fund or permit any Lien to attach.

(6) Release of Reserve Funds. Any amount remaining in the Interest Reserve Fund after the Loans have been paid in full shall be promptly returned to Borrower.

54

(7) Interest. In the event that the Interest Reserve Fund is an interest-bearing account, the balance of any interest therein shall be deemed a part of thereof. Nothing herein shall be construed as requiring the Administrative Agent or the Lenders to pay interest on the Interest Reserve Fund.

Section 4.2 Mortgage Loan Reserves.

(1) Borrower shall cause Mortgage Borrower to deposit and maintain each of the reserve accounts as more particularly set forth in Article 4 of the Mortgage Loan Agreement and shall cause Mortgage Borrower to deposit and maintain each of the “Reserve Funds” and “Security Accounts” as set forth in Mortgage Loan Documents (collectively, “Mortgage Loan Reserve Funds”), and to perform and comply with all the terms and provisions relating thereto. Borrower grants to Administrative Agent (on behalf of Lenders) a first-priority perfected security interest in Borrower’s interest in each of the Mortgage Loan Reserve Funds, subject to the prior rights of Mortgage Lender, and any and all monies now or hereafter deposited in the Mortgage Loan Reserve Funds as additional security for payment of the Indebtedness to the extent Borrower has an interest in same.

(2) The Mortgage Loan Reserve Funds shall be under the sole dominion and control of the Mortgage Lender. Subject to the terms of the Mortgage Loan Documents, the Mortgage Lender and its servicer shall have the sole right to make withdrawals from the Mortgage Loan Reserve Funds and all costs and expenses for establishing and maintaining the Mortgage Loan Reserve Funds shall be paid by Mortgage Borrower. In the event the Mortgage Lender waives the requirement of Mortgage Borrower to maintain the Mortgage Loan Reserve Funds or the Mortgage Loan has been repaid in full, the Administrative Agent (on behalf of the Lenders) shall have the right to require Borrower to establish and maintain reserve funds that would operate in the same manner as the Mortgage Loan Reserve Funds.

ARTICLE 5

ENVIRONMENTAL MATTERS

Section 5.1 Certain Definitions. As used herein, the following terms have the meanings indicated:

(1) “Environmental Claim” means, with respect to any Person, any written notice, notification, claim, administrative, regulatory or judicial action, suit, judgment, demand or other written communication by any Person or governmental authority alleging or asserting liability with respect to Borrower, Mortgage Borrower or the Project, whether for damages, contribution, indemnification, cost recovery, compensation, injunctive relief, response, remediation, damages to natural resources, personal injuries, fines or penalties arising out of, based on or resulting from (i) the presence, use or release into the environment of any Hazardous Materials originating at or from, or otherwise affecting, the Project, (ii) any fact, circumstance, condition or occurrence forming the basis of any violation, or alleged violation, of any Environmental Law by Borrower or Mortgage Borrower or otherwise affecting the health, safety or environmental condition of the Project or (iii) any alleged injury or threat of injury to the environment by Borrower or Mortgage Borrower or otherwise affecting the Project.

55

(2) “Environmental Laws” means any federal, state or local law (whether imposed by statute, or administrative or judicial order, or common law), now or hereafter enacted, governing health, safety, industrial hygiene, the environment or natural resources, or Hazardous Materials, including, such laws governing or regulating the use, generation, storage, removal, recovery, treatment, handling, transport, disposal, control, discharge of, or exposure to, Hazardous Materials.

(3) “Environmental Liens” has the meaning assigned to such term in Section 5.3(4).

(4) “Environmental Losses” means any losses, damages, costs, fees, expenses, claims, suits, judgments, awards, liabilities (including but not limited to strict liabilities), obligations, debts, diminutions in value, fines, penalties, charges, costs of remediation (whether or not performed voluntarily), amounts paid in settlement, foreseeable and unforeseeable consequential damages, litigation costs, reasonable attorneys’ fees and expenses, engineers’ fees, environmental consultants’ fees, and investigation costs (including but not limited to costs for sampling, testing and analysis of soil, water, air, building materials, and other materials and substances whether solid, liquid or gas), of whatever kind or nature, and whether or not incurred in connection with any judicial or administrative proceedings, actions, claims, suits, judgments or awards relating to Hazardous Materials, Environmental Claims, Environmental Liens and violation of Environmental Laws.

(5) “Hazardous Materials” means (a) petroleum or chemical products, whether in liquid, solid, or gaseous form, or any fraction or by product thereof, (b) asbestos or asbestos containing materials, (c) polychlorinated biphenyls (PCBs), (d) radon gas, (e) underground storage tanks, (f) any explosive or radioactive substances, (g) lead or lead-based paint, (g) Mold, or (h) any other substance, material, waste or mixture which is or shall be listed, defined, or otherwise determined by any governmental authority to be hazardous, toxic, dangerous or otherwise regulated, controlled or giving rise to liability under any Environmental Laws.

(6) “Mold” means any microbial or fungus contamination or infestation in any Project of a type which could reasonably be anticipated (after due inquiry and investigation) to pose a risk to human health or the environment or could reasonably be anticipated (after due inquiry and investigation) to negatively and materially impact the value of such Project.

Section 5.2 Representations and Warranties on Environmental Matters. Borrower represents and warrants to the Administrative Agent and the Lenders that, to Borrower’s knowledge, except as set forth in the Site Assessment or otherwise in conformance with all applicable laws, including Environmental Laws, (1) no Hazardous Material is now or was formerly used, stored, generated, manufactured, installed, treated, discharged, disposed of or otherwise present at or about the Project or any property adjacent to the Project (except for cleaning and other products currently used in connection with the routine maintenance or repair of the Project in full compliance with Environmental Laws), (2) all permits, licenses, approvals and filings required by Environmental Laws have been obtained, and the use, operation and condition of the Project do not, and did not previously, violate any Environmental Laws, (3) no civil, criminal or administrative action, suit, claim, hearing, investigation or proceeding has been brought or been threatened in writing, nor have any settlements been reached by or with any parties or any Liens imposed in connection with the Project concerning Hazardous Materials or Environmental Laws and (4) no underground storage tanks exist at the Project.

56

Section 5.3 Covenants on Environmental Matters.

(1) Borrower shall and shall cause Mortgage Borrower to (a) comply strictly and in all respects with applicable Environmental Laws; (b) notify the Administrative Agent immediately upon Borrower’s discovery of any spill, discharge, release or presence of any Hazardous Material (unless otherwise disclosed in the Site Assessment) at, upon, under, within, contiguous to or otherwise affecting the Project; (c) promptly remove such Hazardous Materials and remediate the Project in full compliance with Environmental Laws and in accordance with the recommendations and specifications of an independent environmental consultant selected by Borrower and approved by the Administrative Agent; and (d) promptly forward to the Administrative Agent copies of all orders, notices, permits, applications or other communications and reports in connection with any spill, discharge, release or the presence of any Hazardous Material or any other matters relating to the Environmental Laws or any similar laws or regulations, as they may affect the Project or Borrower.

(2) Borrower shall not cause and shall prohibit Mortgage Borrower and any other Person within the control of Borrower from causing, and shall use prudent, commercially reasonable efforts to prohibit other Persons (including tenants) from (a) causing any spill, discharge or release, or the use, storage, generation, manufacture, installation, or disposal, of any Hazardous Materials at, upon, under, within or about the Project or the transportation of any Hazardous Materials to or from the Project (except for cleaning and other products used in connection with the routine maintenance or repair of the Project in full compliance with Environmental Laws and except as done in connection with the remediation of the Project in full compliance with Environmental Laws), (e) installing any underground storage tanks at the Project, or (f) conducting any activity that requires a permit or other authorization under Environmental Laws to be conducted at the Project, except in connection with any remediation contemplated hereunder.

(3) Borrower shall provide or shall cause Mortgage Borrower to provide to the Administrative Agent, at such Borrower’s expense promptly upon the written request of the Administrative Agent from time to time (but no more than once every two years), a Site Assessment or, if required by the Administrative Agent, an update to any existing Site Assessment, to assess the presence or absence of any Hazardous Materials and the potential costs in connection with abatement, cleanup or removal of any Hazardous Materials found on, under, at or within the Project. Borrower shall pay the cost of no more than one such Site Assessment or update in any twelve (12) month period, unless the Administrative Agent’s request for a Site Assessment is based on information provided under Section 5.3(1), a reasonable suspicion of Hazardous Materials at or near the Project, a breach of representations under Section 5.2, or an Event of Default, in which case any such Site Assessment or update shall be at Borrower’s expense.

57

(4) Environmental Notices. Borrower shall or shall cause Mortgage Borrower to promptly provide notice to the Administrative Agent of:

(a) all Environmental Claims asserted or threatened against Borrower, Mortgage Borrower or any other party occupying the Project or any portion thereof or against the Project which become known to Borrower or Mortgage Borrower;

(b) the discovery by Borrower or Mortgage Borrower of any occurrence or condition on the Project or on any real property adjoining or in the vicinity of the Project which could reasonably be expected to lead to an Environmental Claim against Borrower, Mortgage Borrower, the Administrative Agent or any of the Lenders;

(c) the commencement or completion of any remediation at the Project; and

(d) any Lien or other encumbrance imposed pursuant to any Environmental Law (“Environmental Liens”).

In connection therewith, Borrower shall or shall cause Mortgage Borrower to transmit to the Administrative Agent copies of any citations, orders, notices or other written communications received from any Person and any notices, reports or other written communications submitted to any governmental authority with respect to the matters described above.

Section 5.4 Allocation of Risks and Indemnity.

(1) Allocation and Indemnity. As between Borrower, the Administrative Agent and the Lenders, all risk of loss associated with non-compliance with Environmental Laws, or with the presence of any Hazardous Material at, upon, within, contiguous to or otherwise affecting the Project, shall lie solely with Borrower. Accordingly, Borrower shall bear all risks and costs associated with any Environmental Loss, damage or liability therefrom, including all costs of removal of Hazardous Materials or other remediation required by the Administrative Agent or by law. Borrower shall indemnify, defend and hold the Administrative Agent and the Lenders harmless from and against all loss, liabilities, damages, claims, costs and expenses (including reasonable costs of defense) arising out of or associated, in any way, with the non-compliance with Environmental Laws, or the existence of Hazardous Materials in, on, or about the Project, or a breach of any representation, warranty or covenant contained in this Article 5, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute or common law, including those arising from the joint, concurrent, or comparative negligence of the Administrative Agent and the Lenders; provided, however, Borrower shall not be liable under such indemnification to the extent such loss, liability, damage, claim, cost or expense results solely from the Administrative Agent’s or any Lender’s gross negligence or willful misconduct. Borrower’s obligations under this Section 5.4 shall arise upon the discovery of the presence of any Hazardous Material, whether or not any governmental authority has taken or threatened any action in connection with the presence of any Hazardous Material, and whether or not the existence of any such Hazardous Material or potential liability on account thereof is disclosed in the Site Assessment and shall continue notwithstanding the repayment of the Loans or any transfer or sale of any right, title and interest in the Project (by foreclosure, deed in lieu of foreclosure or otherwise).

58

(2) Possession Transfer. Notwithstanding anything to the contrary in this Agreement, Borrower’s obligations to indemnify and hold harmless the Administrative Agent and the Lenders or to remove, abate or remediate Hazardous Materials and/or cure violations of Environmental Laws shall not extend to any of the foregoing arising directly from: (i) gross negligence or willful misconduct of the Administrative Agent or the Lenders; (ii) the violation of any Environmental Law by any party other than Borrower, Mortgage Borrower, any Affiliate of Borrower or any of their respective employees, contractors or agents, after the Administrative Agent or any purchaser from the Administrative Agent at a foreclosure sale or after a deed in lieu thereof takes title to and possession of the Project or otherwise takes actual possession and control (to the exclusion of Borrower, Mortgage Borrower and its Affiliates) (a “Possession Transfer”); or (iii) the failure of Administrative Agent or any such purchaser in a Possession Transfer to comply with any lead based paint and asbestos operating and maintenance programs for the Project as approved by the Administrative Agent. The burden of proving items (i), (ii) or (iii) above shall be the obligation of Borrower.

Section 5.5 No Waiver. Notwithstanding any provision in this Article 5 or elsewhere in the Loan Documents, or any rights or remedies granted by the Loan Documents, the Administrative Agent and the Lenders do not waive and expressly reserves all rights and benefits now or hereafter accruing to the Administrative Agent and/or any Lenders under the “security interest” or “secured creditor” exception under applicable Environmental Laws, as the same may be amended. No action taken by the Administrative Agent and/or any Lender pursuant to the Loan Documents shall be deemed or construed to be a waiver or relinquishment of any such rights or benefits under the “security interest exception”.

ARTICLE 6

LEASING MATTERS

Section 6.1 Representations and Warranties on Leases. Borrower represents and warrants to the Administrative Agent and the Lenders that: (1) the only lease or other occupancy agreement presently affecting the Project is the Restaurant Lease; (2) the Restaurant Lease is in full force and effect, and has not been modified, supplemented or terminated in any way, and there are no oral agreements with respect thereto; (3) Borrower has delivered to the Administrative Agent a true, correct and complete copy of the Restaurant Lease; (4) neither the landlord nor the tenant is in default under the Restaurant Lease; (5) Mortgage Borrower has not assigned or pledged the Restaurant Lease, the rents therefrom or any interests therein except to the Mortgage Loan Administrative Agent (on behalf of the lenders party to the Mortgage Loan Agreement); and (6) the tenant under the Restaurant Lease has not prepaid more than one (1) month’s rent in advance (except for bona fide security deposits not in excess of an amount equal to two (2) months rent).

Section 6.2 Restaurant Lease and Future Lease. Borrower shall not permit Mortgage Borrower to modify, supplement or terminate in any way the Restaurant Lease without the Administrative Agent’s prior written consent, and Borrower shall not permit Mortgage Borrower to enter into any other lease of all or any portion of the Project without the prior written consent of the Administrative Agent.

59

Section 6.3 Covenants. Borrower (1) shall cause Mortgage Borrower to perform the obligations which Mortgage Borrower is required to perform under the Restaurant Lease and any other lease entered into by Mortgage Borrower with respect to the Project; (2) shall cause Mortgage Borrower to enforce the obligations to be performed by the tenants under such leases; (3) shall cause Mortgage Borrower to promptly furnish to the Administrative Agent any notice of monetary default or termination received by Mortgage Borrower from any such tenant, and any notice of monetary default or termination given by Mortgage Borrower to any such tenant; (4) shall not permit Mortgage Borrower to collect any rents under any such leases 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 (2) months rent; (5) shall not permit Mortgage Borrower to enter into any ground lease or master lease of any part of the Project; (6) shall not permit Mortgage Borrower to further assign or encumber any lease of the Project; (7) shall not permit Mortgage Borrower to, except with the Administrative Agent’s prior written consent, cancel or accept surrender or termination of any lease of the Project, except in the normal course of business; (8) shall not permit Mortgage Borrower to amend any easements affecting the Project without the Administrative Agent’s prior approval; and (9) shall not permit Mortgage Borrower, except with the Administrative Agent’s prior written consent, modify or amend any lease of the Project, and any action in violation of Sections 6.3(5), (6), (7), and (8) shall be void at the election of the Administrative Agent.

ARTICLE 7

REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants to the Administrative Agent and the Lenders that:

Section 7.1 Organization and Power.

(1) Each Borrower Party that is an entity is duly organized, validly existing and in good standing under the laws of the state of its formation or existence, and is in compliance with legal requirements applicable to doing business in the State. Neither Borrower nor Mortgage Borrower is a “foreign person” within the meaning of § 1445(f)(3) of the Code.

(2) Borrower owns all of the issued and outstanding membership interests in Mortgage Borrower and Borrower Controls Mortgage Borrower. Upon the realization of the Collateral under the Pledge Agreement, Lenders or any other party succeeding to the Borrower’s interest in the Collateral described in the Pledge Agreement would have such control. Without limiting the foregoing, Borrower has sufficient control over Mortgage Borrower to cause Mortgage Borrower to (i) take any action on Mortgage Borrower’s part required by the Loan Documents and (ii) refrain from taking any action prohibited by the Loan Documents.

Section 7.2 Validity of Loan Documents. The execution, delivery and performance by each Borrower Party of the Loan Documents to which it is a party: (1) if an entity, is duly authorized; and (2) will not violate any law. The Loan Documents constitute the legal, valid and binding obligations of each Borrower Party, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, or similar laws generally affecting the enforcement of creditors’ rights.

60

Section 7.3 Liabilities; Litigation.

(1) The financial statements delivered by each Borrower Party are true and correct in all material respects with no significant change since the date of preparation. Except as disclosed in such financial statements, there are no liabilities (fixed or contingent) affecting the Project, the Collateral, Borrower, Mortgage Borrower or any other Borrower Party that would reasonably be expected to have an adverse effect on Borrower’s ability to fulfill its obligations hereunder or Mortgage Borrower’s ability to fulfill its obligations under the Mortgage Loan Documents. Except as disclosed in such financial statements or as set forth on Schedule 7.3, there is no litigation, administrative proceeding, investigation or other legal action (including any proceeding under any state or federal bankruptcy or insolvency law) pending or, to Borrower’s knowledge, threatened, against the Project, the Collateral, Borrower, Mortgage Borrower or any other Borrower Party which if adversely determined could have a material adverse effect on such party, the Project, the Collateral or the Loans.

(2) No Borrower Party is contemplating either the filing of a petition by it under state or federal bankruptcy or insolvency laws or the liquidation of all or a major portion of its assets or property, and no Borrower Party has knowledge of any Person contemplating the filing of any such petition against it.

Section 7.4 Taxes and Assessments. The Project is comprised of three (3) parcels which constitute separate tax lots and do not constitute a portion of any other tax lot. There are no pending or, to Borrower’s best knowledge, proposed, special or other assessments for public improvements or otherwise affecting the Project, nor are there any contemplated improvements to the Project that may result in such special or other assessments.

Section 7.5 Other Agreements; Defaults. No Borrower Party is a party to any agreement or instrument or subject to any court order, injunction, permit, or restriction which might adversely affect the Project or the business, operations, or condition (financial or otherwise) of it or any other Borrower Party. No Borrower Party is in violation of any agreement which violation would have an adverse effect on it or on the Project or any other Borrower Party or on its or any other Borrower Party’s business, properties, or assets, operations or condition, financial or otherwise.

Section 7.6 Compliance with Law.

(1) Each Borrower Party has (or shall timely obtain) all requisite licenses, permits, franchises, qualifications, certificates of occupancy or other governmental authorizations to own, lease and operate the Project and carry on its business, and will take all actions necessary to obtain such approvals to establish and sell condominium units at the Project. The Project is in compliance in all material respects with all applicable legal requirements, and, to Borrower’s knowledge, except as set disclosed to Administrative Agent in structural reports provided to Administrative Agent prior to closing, is free of material defects, and all building systems contained therein are generally in good working order, subject to ordinary wear and tear. The Project constitutes a legally non-conforming use under applicable legal requirements;

61

(2) No condemnation has been commenced or, to Borrower’s knowledge, is contemplated with respect to all or any portion of the Project or for the relocation of roadways providing access to the Project; and

(3) The Project has adequate rights of access to public ways and, except as would not reasonably be expected to have any Material Adverse Effect, is served by adequate water, sewer, sanitary sewer and storm drain facilities. All public utilities necessary or convenient to the full use and enjoyment of the Project are located in the public right-of-way abutting the Project, and all such utilities are connected so as to serve the Project without passing over other property, except to the extent such other property is subject to an easement for such utility benefiting the Project. All roads necessary for the full utilization of the Project for its current purpose have been completed and, dedicated to public use and accepted by all governmental authorities.

Section 7.7 Location of Borrower. Borrower’s principal place of business and chief executive offices are located at the address stated in Section 12.1.

Section 7.8 ERISA. Neither Borrower nor Mortgage Borrower has established any pension plan for employees which would cause Borrower or Mortgage Borrower to be subject to the ERISA.

Section 7.9 Margin Stock. No part of proceeds of the Loans will be used for purchasing or acquiring any “margin stock” within the meaning of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System.

Section 7.10 Tax Filings. Each Borrower Party has filed (or have obtained effective extensions for filing) all federal, state and local tax returns required to be filed and have paid or made adequate provision for the payment of all federal, state and local taxes, charges and assessments payable by such Borrower Party.

Section 7.11 Solvency. Giving effect to the Loans, the fair saleable value of Borrower’s assets exceeds and will, immediately following the making of the Loans, 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 Loans, 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 Loans 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 Debts and liabilities (including contingent liabilities and other commitments) beyond its ability to pay such Debts 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).

Section 7.12 Full and Accurate Disclosure. No statement of fact made by or on behalf of Borrower or any other Borrower Party in this Agreement or in any of the other Loan Documents or in any certificate, statement or questionnaire prepared and delivered by Borrower or any other Borrower Party in connection with the Loans contains any untrue statement of a material fact or omits to state any material fact necessary to make statements contained herein or therein not misleading. There is no fact presently known to Borrower or any other Borrower Party which has not been disclosed to the Administrative Agent which adversely affects, nor as far as Borrower can foresee, might adversely affect, the Project or the business, operations or condition (financial or otherwise) of Borrower or any other Borrower Party.

62

Section 7.13 Single Purpose Entity. Each of Borrower and Mortgage Borrower is and has at all times since its formation been a Single Purpose Entity.

Section 7.14 Management of the Project. The Building Conversion is being managed solely by Project Manager. From and after the Hotel Opening, the Hotel Improvements shall be operated solely by the Hotel Manager pursuant to the Hotel Management Agreement.

Section 7.15 No Conflicts. The execution, delivery and performance of this Agreement and the other Loan Documents by Borrower and each other Borrower Party will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any Lien (other than pursuant to the Loan Documents) upon any of the property or assets any such party pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, operating agreement or other agreement or instrument to which Borrower or any other Borrower Party is a party or by which any of property or assets of Borrower or any other Borrower Party is subject, nor will such action result in any violation of the provisions of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over Borrower or any other Borrower Party or any properties or assets of Borrower or any other Borrower Party, and any consent, approval, authorization, order, registration or qualification of or with any court or any such regulatory authority or other governmental agency or body required for the execution, delivery and performance by Borrower or any other Borrower Party of this Agreement or any other Loan Documents has been obtained and is in full force and effect.

Section 7.16 Title.

(1) Borrower is the record and beneficial owner of, and has good and marketable title to, the Collateral, free and clear of all Liens whatsoever. The Pledge Agreement, together with the UCC financing statements relating to the Collateral when properly filed in the appropriate records, will create a valid, perfected first priority security interests in and to the Collateral, all in accordance with the terms thereof for which a Lien can be perfected by filing a UCC financing statement. For so long as the Lien of the Pledge Agreement is outstanding, Borrower shall forever warrant, defend and preserve such title and the validity and priority of the Lien of the Pledge Agreement and shall forever warrant and defend such title, validity and priority to Lender against the claims of all persons whomsoever.

(2) Mortgage Borrower has good, marketable and insurable title to the Project, free and clear of all Liens whatsoever, except for the Permitted Encumbrances and such other Liens as are permitted pursuant to the Loan Documents. The Mortgage and any UCC financing statements filed in connection therewith created (1) a valid and perfected Lien on the Project, subject only to Permitted Encumbrances and (2) valid and perfected security interests in and to, and collateral assignments of, all personality (including the leases), all in accordance with the terms thereof, in each case subject only to any applicable Permitted Encumbrances and such other Liens as are permitted pursuant to the Loan Documents. To Borrower’s knowledge, there are no claims for payment for work, labor or materials affecting the Project which are or may become a Lien prior to, or of equal priority with, the Liens created by the Loan Documents or the Mortgage Loan Documents. 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 the Mortgage Loan Agreement, materially and adversely affect the value of the Project, impair the use or operations of the Project or impair Borrower’s ability to pay its obligations in a timely manner.

63

Section 7.17 Flood Zone. Project is located in an area identified by the Secretary of Housing and Urban Development or any successor thereto as an area having special flood hazards pursuant to the National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 or the National Flood Insurance Act of 1994, as amended, or any successor law.

Section 7.18 Insurance. Borrower has obtained and has delivered to the Administrative Agent certificates of insurance or certified copies of all of the insurance policies for the Project reflecting the insurance coverages, amounts and other insurance requirements set forth in this Agreement. No claims have been made under any such policy, and no Person, including Borrower and Mortgage Borrower, has done, by act or omission, anything which would impair the coverage of any such policy.

Section 7.19 Certificate of Occupancy; Licenses. All Licenses required under Applicable Law to have been obtained on or before the date hereof have been obtained and are in full force and effect. Borrower shall also cause Mortgage Borrower to timely obtain in accordance with Applicable Law all Licenses required to be obtained subsequent to the date hereof, and to keep and maintain all Licenses in full force and effect as required by Applicable Law.

Section 7.20 Physical Condition. As of the date hereof (except with respect to the work necessary in order to achieve Construction Completion), and thereafter upon Construction Completion, the Project, 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, shall be in good condition, order and repair in all material respects. To Borrower’s knowledge, there exists no structural or other material defects or damages in the Project, whether latent or otherwise, and neither Borrower nor Mortgage Borrower has received written notice from any insurance company or bonding company of any defects or inadequacies in the Project, 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.

Section 7.21 Boundaries. Except as disclosed on the Survey, all of the Improvements lie wholly within the boundaries and building restriction lines of the Project, and no improvements on adjoining properties encroach upon the Project, and no Improvements encroach upon or violate any easements or other encumbrances upon the Project, so as to materially adversely affect the value or marketability of the Project, except those which are insured against by title insurance.

64

Section 7.22 Material Agreements.

(1) Borrower has delivered or has caused Mortgage Borrower to deliver to the Administrative Agent a true, correct and complete copy of the Project Management Agreement, and such agreement has not been modified, supplemented or terminated in any way and remains in full force and effect. The Project Management Agreement is the only project management agreement in existence with respect to the subject matter thereof. Neither party to such agreement is in default under such agreement and the Project Manager has no defense, offset right or other right to withhold performance under or terminate such agreement.

(2) Borrower has delivered or has caused Mortgage Borrower to deliver to the Administrative Agent a true, correct and complete copy of the Hotel Management Agreement, and such agreement has not been modified, supplemented or terminated in any way and remains in full force and effect. The Hotel Management Agreement is the only hotel management agreement in existence with respect to the operation or management of the hotel to be opened at the Project. Neither party to such agreement is in default under such agreement and the Hotel Manager has no defense, offset right or other right to withhold performance under or terminate such agreement.

(3) Borrower has delivered or has caused Mortgage Borrower to deliver to the Administrative Agent a true, correct and complete copy of the Technical Services Agreement, and such agreement has not been modified, supplemented or terminated in any way and remains in full force and effect. The Technical Services Agreement is the only technical services agreement in existence with respect to the Project. Neither party to such agreement is in default under such agreement and Hotel Manager has no defense, offset right or other right to withhold performance under or terminate such agreement.

(4) Borrower has delivered or has caused Mortgage Borrower to deliver to the Administrative Agent a true, correct and complete copy of the Construction Management Contract, and such agreement has not been modified, supplemented or terminated in any way and remains in full force and effect. The Construction Management Contract is the only construction management or general contractor contract in existence with respect to the Building Conversion. Neither party to such agreement is in default under such agreement and the Construction Manager has no defense, offset right or other right to withhold performance under or terminate such agreement

(5) Borrower has delivered or has caused Mortgage Borrower to deliver to the Administrative Agent a true, correct and complete copy of the Forward Purchase Contract, and such agreement has not been modified, supplemented or terminated in any way and remains in full force and effect. None of the parties to such agreement are in default under such agreement and none of the parties to such agreement has any defense, offset right or other right to withhold performance under or terminate such agreement.

65

Section 7.23 Project Budget. Schedule 7.23 hereto sets forth a true, correct and complete copy of the Project Budget. The amounts and allocations set forth in the Project Budget, as it may be amended in accordance with the terms of this Agreement, present a full, complete and good faith representation of all costs, expenses and fees required to achieve Construction Completion, to pay pre-opening costs associated with the Hotel Opening, to pay interest on the Loans and Operating Expenses through the Hotel Opening, and to pay costs in connection with the marketing and sale of the Units.¹ Borrower is unaware of any other such costs, expenses or fees which are material and are not included within the Project Budget.

Section 7.24 Filing and Recording Taxes. All transfer taxes, deed stamps, intangible taxes or other amounts in the nature of transfer taxes required to be paid by any Person under applicable legal requirements currently in effect in connection with the transfer of the Collateral to Borrower or any transfer of a controlling interest in Borrower have been paid. All mortgage, mortgage recording, stamp, intangible or other similar tax required to be paid by any Person under applicable legal requirements currently in effect in connection with the execution, delivery, recordation, filing, registration, perfection or enforcement of any of the Loan Documents, including, without limitation, the Pledge Agreement and the UCC financing Statements, have been paid and, under current legal requirements, the Pledge Agreement is enforceable in accordance with its terms by the Administrative Agent or any subsequent holder thereof (on behalf of the Lenders), subject to applicable bankruptcy, insolvency, or similar laws generally affecting the enforcement of creditors’ rights.

Section 7.25 Investment Company Act. Neither Borrower nor Mortgage Borrower is (1) an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended; (2) 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 (3) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money.

Section 7.26 Patriot Act; Foreign Assets Control Regulations. Neither the execution and delivery of this Agreement, the Notes and the other Loan Documents by Borrower or any other Borrower Party nor the use of the proceeds of the Loans, will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or the Anti-Terrorism Order or any enabling legislation or executive order relating to any of the same. Without limiting the generality of the foregoing, neither Borrower, any direct or indirect owner of any interest in Borrower (a) is listed on any Government Lists, (b) is a person who has been determined by competent authority to be subject to the prohibitions contained in Anti-Terrorism Order or any other similar prohibitions contained in the rules and regulations of OFAC or in any enabling legislation or other Executive Order of the President of the United States in respect thereof, (c) has been previously indicted for or convicted of any felony involving a crime or crimes of moral turpitude or for any Patriot Act Offenses, (d) is currently under investigation by any governmental authority for alleged criminal activity, or (e) has a reputation in the community for criminal or unethical behavior.

¹ Eurohypo to confirm.

66

Section 7.27 Organizational Structure.

(1) Borrower has heretofore delivered to the Administrative Agent a true and complete copy of the Organizational Documents of each Borrower Party. Borrower is the only member of Mortgage Borrower and manages Mortgage Borrower. The only members of Borrower are MMI and Sanctuary Avenue. The Borrower is managed by both of its members (subject to the rights of the Independent Manager). There are no outstanding equity rights with respect to Borrower.

(2) The only member of MMI on the date hereof is Morgan LLC. The only member of Sanctuary Avenue on the date hereof is Sanctuary Holdings. MMI and Sanctuary Avenue are managed by their respective members. There are no outstanding equity rights with respect to MMI or Sanctuary Avenue.

(3) Schedule 7.27 contains a true and accurate chart reflecting the ownership of all of the direct and indirect equity interests in Borrower, Mortgage Borrower and Junior Mezzanine Borrower, including the percentage of ownership interest of the Persons shown thereon.

Section 7.28 Property Specific Representations.

(1) Neither the Project nor any part thereof is now damaged or injured as a result of any fire, explosion, accident, flood or other casualty.

(2) The Project is zoned RM-3, which permits the current operation of the Project as a 335-unit apartment facility with 177 parking spaces as a legal non-conforming use; and does not restrict conversion of the Project to a 335-unit hotel condominium project with adequate space at the Project for 177 parking spaces and 29 or more boat slips.

(3) There are currently 177 parking spaces located on the Project. Without limiting the representations of Borrower set forth in Sections 7.6 and 7.19, the Project complies with all applicable zoning and land use laws, rules, regulations as a legal nonconforming use and complies with all material Licenses.

(4) The repair and replacement of the exterior windows and sliding doors at the Project as required to be accomplished by Mortgage Borrower under the Original Mortgage Loan Agreement has been satisfactorily completed by Mortgage Borrower.

(5) The repairs to the Project as set forth on Schedule 9.24(a) of the Original Mortgage Loan Agreement as required to be completed by Mortgage Borrower under the Original Mortgage Loan Agreement have been satisfactorily completed by Mortgage Borrower.

(6) The Building Conversion has been effectuated through the Amendment Closing Date, in compliance with Applicable Law, including the Condominium Act.

(7) To Borrower’s knowledge, the City of Miami Beach maintains and will continue to maintain all the roadways providing access to and from the Project, including, but not limited to, access from West Avenue.

67

Section 7.29 Affiliates. Borrower does not own any equity interests in any other Person other than Mortgage Borrower.

Section 7.30 List of Mortgage Loan Documents. There are no Mortgage Loan Documents other than those set forth on Schedule 7.30 attached hereto. Borrower has or has caused to be delivered to Administrative Agent true, complete and correct copies of all Mortgage Loan Documents, and none of the Mortgage Loan Documents has been amended, modified or terminated as of the date thereof.

Section 7.31 Mortgage Loan Event of Default. No Mortgage Loan Event of Default or an event or circumstance has occurred which with the giving of notice or the passage of time, or both, would constitute a Mortgage Loan Event of Default exists as of the date hereof.

ARTICLE 8

FINANCIAL REPORTING

Section 8.1 Financial Statements.

(1) Monthly Reports. Within twenty (20) days after the end of each calendar month, Borrower shall furnish to the Administrative Agent current (as of the calendar month just ended) balance sheets and detailed operating statements for Borrower and Mortgage Borrower (showing monthly activity and year to date) stating Operating Revenues, Operating Expenses, operating income, and Net Operating Cash Flow for the calendar month just ended, a general ledger, an updated rent roll and, as requested by the Administrative Agent, copies of bank statements and bank reconciliations and other documentation supporting the information disclosed in the most recent financial statements.

(2) Quarterly Reports. Within forty-five (45) days after the end of each calendar quarter, Borrower shall furnish to Administrative Agent detailed operating statements for Borrower and Mortgage Borrower (showing quarterly activity and year to date) stating Operating Revenues, Operating Expenses, Net Operating Cash Flow, operating income, and capital improvements for the calendar quarter just ended, and balance sheets for such quarter for Borrower and Mortgage Borrower. Such quarterly statements, which shall be prepared on an accrual basis, shall be accompanied by (i) a current rent roll for the Project and after the Building Conversion Date, a list of all sales of Units, (ii) a statement of the balance in each of the Interest Reserve Fund, and (iii) a certificate executed by an Authorized Officer of Borrower stating that each such quarterly statement presents fairly the financial condition and the results of operations of Borrower, Mortgage Borrower and the Project.

68

(3) Annual Reports. Within one hundred and twenty (120) days after the end of each fiscal year of Borrower and Mortgage Borrower, Borrower will furnish to the Administrative Agent complete copies of Borrower’s, Mortgage Borrower’s and Guarantors’ annual financial statements which shall be substantially in the form provided the Administrative Agent in connection with the closing of the Loan and, in the case of Borrower’s and Mortgage Borrower’s financial statements, shall have been prepared in accordance with general accepted accounting principles (consistently applied) and certified by an independent certified public accountant reasonably acceptable to the Administrative Agent. Such financial statements shall contain balance sheets, and in the case of Borrower and Mortgage Borrower, a detailed operating statement stating Operating Revenues, Operating Expenses, operating income and Net Operating Cash Flow. All annual financial statements shall be accompanied by (i) a certificate executed by an Authorized Officer Borrower, in the case of Borrower, by an Authorized Officer of Morgans LLC, in the case of Morgans LLC, and by Galbut, in the case of Galbut, stating that each such annual financial statement presents fairly the financial condition and the results of operations of Borrower, Mortgage Borrower and the Project, in the case Borrower and Mortgage Borrower, and the Guarantors, in the case of Guarantors. The annual financial statements of Borrower and Mortgage Borrower required to be delivered pursuant to this Section 8.1(3) may be consolidated with those of other entities owned by Morgans LLC or Sanctuary Management, provided that such financial statements contain notes clearly identifying each item on such financial statements which is attributable to the Borrower, Mortgage Borrower and the Project.

(4) Certification; Supporting Documentation. Each such financial statement shall be in scope and detail satisfactory to the Administrative Agent and certified by an Authorized Officer of Borrower.

(5) Building Conversion Reporting Requirements. Borrower shall, or shall cause Mortgage Borrower to, furnish to the Administrative Agent:

(a) by the twentieth (20th) day of each month, monthly reports certifying the Units sold to date, the number of Qualified Purchase Contracts outstanding as of the last day of the preceding month, the names and addresses of the purchasers thereunder, the Contract Prices for each Unit, the Units under contract, the aggregate amount deposited into a third party escrow pursuant to each such Qualified Purchase Contract, whether there are any defaults by either Mortgage Borrower or any purchaser under any such Qualified Purchase Contract and whether any event has occurred or is likely to occur which would cause a default to occur or give the purchaser a right to terminate or rescind its obligations thereunder; the number of sales closed in the number and designation of the Units conveyed; the price paid for each such Unit; and the reports and matters set forth at (c) below;

(b) within twenty (20) days of the last day of each calendar quarter (and at such other times as the Administrative Agent may reasonably request), report of the escrow agent setting forth all deposits in, withdrawals from, and the current balance of, the “Condominium Escrow” described in the Mortgage Loan Agreement; and

69

(c) a copy of each material report, statement, certification, claim, data, notice or other communication received, made or delivered by Mortgage Borrower or a purchaser under a Qualified Purchase Contract which relates to events that may materially negatively affect Mortgage Borrower’s or such purchaser’s obligations and/or performance under the terms of a Qualified Purchase Contract, or any Borrower Party’s obligations and/or performance under the Loan Documents or the Mortgage Loan Documents, including, without limitation, the imposition of any penalties or damages, the exercise of any termination or cancellation rights, the filing of any dispute or litigation or the failure of Mortgage Borrower or such purchaser to comply with any of the requirements of a Qualified Purchase Contract. Any of the foregoing which affects the Qualified Purchase Contracts or a material portion thereof shall be supplied by Borrower to the Administrative Agent within five (5) days of occurrence or receipt.

(d) a copy of all budgets and accounting reports recorded and to be filed with the Division of Florida Land Sales, Condominiums and Mobile Homes in connection with the Project.

Section 8.2 Accounting Principles. All financial statements shall be prepared substantially in the form of the financial statements provided to the Administrative Agent and shall otherwise be reasonably acceptable to the Administrative Agent.

Section 8.3 Other Information. Borrower shall and shall cause Mortgage Borrower to deliver to the Administrative Agent such additional information as Administrative Agent may reasonably request regarding Borrower, Mortgage Borrower, their subsidiaries, their business, any Borrower Party, the Collateral and the Project within thirty (30) days after the Administrative Agent’s request therefor.

Section 8.4 Annual Operating Budget.

(1) At least thirty (30) days prior to the commencement of each calendar year, Borrower shall cause Mortgage Borrower to provide to the Administrative Agent its proposed annual operating and capital improvements budget for such fiscal year for review and approval by the Administrative Agent, which approval shall not be unreasonably withheld (as so approved for any fiscal year, the “Annual Operating Budget”).

(2) Borrower shall promptly advise the Administrative Agent and the Lenders of any proposed changes to the Project Budget to be made from and after the date hereof. Except to the extent expressly provided in Section 14.1(2), any changes to the Project Budget shall be subject to the review and approval of the Administrative Agent and the Lenders.

Section 8.5 Audits. The Administrative Agent shall have the right to choose and appoint a certified public accountant to perform financial audits as it deems necessary. The costs of such audits shall be paid by Borrower; provided, however, that so long no Event of Default exists, Borrower shall not be required to pay the cost of more than one such audit in any Loan Year. Borrower shall permit the Administrative Agent to examine such records, books and papers of Borrower and Mortgage Borrower which reflect upon its financial condition and the income and expense relative to the Project.

Section 8.6 Mortgage Borrower Financial Statements. Borrower will furnish, or cause Mortgage Borrower to furnish, to Administrative Agent a copy of the financial statements and all of the materials Mortgage Borrower is required to provide Mortgage Lender under the Mortgage Loan Agreement within the time periods required under the Mortgage Loan Agreement.

70

Section 8.7 Notice of Default. Promptly after Borrower, Mortgage Borrower or any other Borrower Party obtains actual knowledge thereof, Borrower shall give Administrative Agent notice of the occurrence of any “Potential Default” or “Event of Default” under the Mortgage Loan Documents. Each notice delivered pursuant to this Section 8.7 shall be accompanied by a certificate of an authorized officer of Borrower setting forth the details of the occurrence referred to therein and describing the actions Borrower proposes to take with respect thereto.

Section 8.8 Access. The Administrative Agent, the Lenders and any of their respective officers, employees and/or agents shall have the right, exercisable as frequently as the Administrative Agent reasonably determines to be appropriate, during normal business hours (or at such other times as may reasonably be requested by the Administrative Agent), to inspect the Project and (on twenty-four (24) hours prior notice, which may be oral) to inspect, audit and make extracts from all of Borrower’s or Mortgage Borrower’s records, files and books of account. Borrower shall or shall cause Mortgage Borrower to deliver any document or instrument reasonably necessary for the Administrative Agent, as the Administrative Agent may request, to obtain records from any service bureau maintaining records for Borrower or Mortgage Borrower, and shall maintain duplicate records or support documentation on media, including, without limitation, computer tapes and discs owned by Borrower or Mortgage Borrower relating to the use or operation of the Project. At the Administrative Agent’s request, Borrower shall or shall cause Mortgage Borrower to instruct its banking and other financial institutions to make available to the Administrative Agent such information and records concerning the Project as the Administrative Agent may reasonably request. Without limiting the generality of the foregoing, Administrative Agent (on behalf of the Lenders) reserves the right to employ a construction consultant (the “Construction Consultant”) and any other consultants necessary, in Administrative Agent’s reasonable judgment, to, review requests for disbursements from the Construction Completion Fund (as defined in the Mortgage Loan Agreement) and inspect all construction and the periodic progress of the same, the reasonable cost therefor to be borne by Borrower as a loan expense. Borrower shall make or cause Mortgage Borrower to make available to Administrative Agent and the Construction Consultant on reasonable notice during business hours, all documents and other information (including, without limitation, receipts, invoices, lien waivers and other supporting documentation to substantiate the costs to be paid with the proceeds of any request for loan advance) which any contractor or other Person entitled to payment for construction work is required to deliver to Borrower and shall use its best efforts to obtain any further documents or information reasonably requested by Administrative Agent or the Construction Consultant in connection with any Loan or the administration of this Agreement. Borrower acknowledges and agrees that the Construction Consultant shall have no responsibilities or duties to Borrower or Mortgage Borrower, and shall be employed solely for the benefit of Administrative Agent and the Lenders. No default of Borrower or Mortgage Borrower will be waived by an inspection by Administrative Agent or the Construction Consultant. In no event will any inspection by Administrative Agent or the Construction Consultant be a representation that there has been or will be compliance with the Plans and Specifications or that the construction work is free from defective materials or workmanship. Any and all provisions of this Agreement in respect of the Construction Consultant shall be enforceable solely by, and at the option of, Administrative Agent, and Borrower shall not be a third-party beneficiary thereof. Any and all reports, advice or other information provided by the Construction Consultant to Administrative Agent and/or the Lenders or otherwise produced by or in the possession of the Construction Consultant shall be confidential and Borrower shall have no right to obtain or review same.

71

ARTICLE 9

COVENANTS

Borrower covenants and agrees with the Administrative Agent and the Lenders as follows:

Section 9.1 Due on Sale and Encumbrance; Transfers of Interests. Without the prior written consent of the Administrative Agent and the Lenders (to the extent required under Section 12.2):

(1) Neither Borrower nor any other Person having an ownership or beneficial interest in Borrower or Mortgage Borrower shall (a) directly or indirectly sell, transfer, convey, mortgage, pledge, assign, encumber or permit any Lien on the Project, (b) encumber or permit any Lien on the Collateral or any part thereof (including any partnership, membership or any other ownership interest in Mortgage Borrower), whether voluntarily, involuntarily, by operation of law or otherwise; or (c) enter into any easement or other agreement granting rights in or restricting the use or development of the Project or the Collateral;

(2) No new member shall be admitted to or created in Borrower or Mortgage Borrower (nor shall any existing member withdraw from Borrower or Mortgage Borrower), and no change in Borrower’s or Mortgage Borrower’s Organizational Documents shall be effected; and

(3) Borrower shall not allow any Change of Control to occur, or permit any transfer to occur (whether of equity interests or through any pledge or encumbrance of equity interests, or of the economic or other benefits therefrom, whether voluntary, involuntary, by operation of law or otherwise), if any such transfer would result in a Change of Control.

As used in this Section 9.1, “transfer” shall include the sale, transfer, conveyance, mortgage, pledge, assignment of any legal or beneficial ownership.

Without limiting the foregoing provisions of this Section 9.1, any transfer of a direct or indirect ownership interest in Borrower or Mortgage Borrower shall be further subject to (w) Borrower providing not less than ten (10) Business Days’ written notice to Administrative Agent of any such transfer, (x) no Potential Default or Event of Default then existing, and (y) payment to the Administrative Agent on behalf of the Lenders of all costs and expenses incurred by the Administrative Agent or any Lenders in connection with such transfer.

72

Section 9.2 Taxes; Charges. Borrower shall or shall cause Mortgage Borrower to pay before any fine, penalty, interest or cost may be added thereto, and shall not enter into any agreement to defer, any real estate taxes and assessments, franchise taxes and charges, and other governmental charges that may become a Lien upon the Project or become payable during the term of the Loans (collectively, the “Taxes”), and will promptly furnish the Administrative Agent with evidence of such payment; provided, however, Mortgage Borrower’s compliance with Section 4.1 of the Mortgage Loan Agreement relating to impounds for taxes and assessments shall, with respect to payment of such taxes and assessments, be deemed compliance with this Section 9.2. Borrower shall not and shall not permit Mortgage Borrower to suffer or permit the joint assessment of the Project with any other real property constituting a separate tax lot or with any other real or personal property. Borrower shall or shall cause Mortgage Borrower to pay when due all claims and demands of mechanics, materialmen, laborers and others which, if unpaid, might result in a Lien on the Project; however, Borrower may permit Mortgage Borrower to contest the validity of such claims and demands so long as (1) Borrower notifies the Administrative Agent that Mortgage Borrower intends to contest such claim or demand, (2) Borrower or Mortgage Borrower provides the Administrative Agent with an indemnity, bond or other security satisfactory to the Administrative Agent assuring the discharge of Borrower’s obligations for such claims and demands, including interest and penalties, and (3) Mortgage Borrower is diligently contesting the same by appropriate legal proceedings in good faith and at its own expense and concludes such contest prior to the tenth (10th) day preceding the earlier to occur of the Maturity Date or the date on which the Project is scheduled to be sold for non payment.

Section 9.3 Control; Management.

(1) Without limiting the provisions of Section 9.1, there shall be no change in the day-to-day management and control of Borrower, Mortgage Borrower or any other Borrower Party without the prior written consent of the Administrative Agent.

(2) Borrower shall cause Mortgage Borrower to (i) perform and observe in all material respects all of its covenants and agreements contained in the Project Management Agreement to which it is a party; (ii) take all reasonable and necessary action to prevent the termination of the Project Management Agreement in accordance with the terms thereof or otherwise; (iii) enforce each material covenant or obligation of the Project Management Agreement in accordance with its terms; (iv) promptly give the Administrative Agent copies of any default or other material notices given by or on behalf of Mortgage Borrower or received by or on behalf of Mortgage Borrower from the Project Manager; and (v) take all such action to achieve the purposes described in clauses (i), (ii) and (iii) of this Section 9.3(2) as may from time to time be reasonably requested by the Administrative Agent; provided, however, that Mortgage Borrower shall be permitted, upon the Administrative Agent’s reasonable approval, to contest the validity or applicability of any requirement under the Project Management Agreement.

(3) Borrower shall cause Mortgage Borrower to not, without the Administrative Agent’s prior consent, (i) take any action to (A) cancel or terminate the Project Management Agreement, (B) replace the Project Manager or (C) appoint a new hotel manager; (ii) sell, assign, pledge, transfer, mortgage, hypothecate or otherwise dispose of (by operation of law or otherwise) or encumber any part of its interest in the Project Management Agreement; (iii) waive any material default under or breach of any material provisions of the Project Management Agreement or waive, fail to enforce, forgive or release any material right, interest or entitlement, howsoever arising, under or in respect of any material provisions of the Project Management Agreement or vary or agree to the variation in any material way of any material provisions of the Project Management Agreement or of the performance of the Project Manager under the Project Management Agreement; or (iv) petition, request or take any other legal or administrative action that seeks, or may reasonably be expected, to rescind, terminate or suspend the Project Management Agreement.

73

(4) Any change in day-to-day management and control of the Project Manager shall be cause for Administrative Agent to re-approve such Project Manager and Project Management Agreement. If at any time the Administrative Agent consents to the appointment of a new hotel manager, such new manager and Mortgage Borrower shall, as a condition of Administrative Agent’s consent, execute a Project Manager’s Consent and Subordination of Management Agreement in the form then used by Administrative Agent. Each Project Manager shall hold and maintain all necessary licenses, certifications and permits required by law to carry on its duties under the Project Management Agreement. Borrower shall cause Mortgage Borrower to fully perform all of its covenants, agreements and obligations under the Management Agreement.

Section 9.4 Operation; Maintenance; Inspection. Borrower shall and shall cause Mortgage Borrower to observe and comply with all Applicable Laws, including those applicable to the ownership, use and operation of the Project and the Collateral. Borrower shall cause Mortgage Borrower to maintain the Project in good condition and promptly repair any damage or casualty. Borrower shall cause Mortgage Borrower to permit the Administrative Agent and the Lenders and their respective agents, representatives and employees, upon reasonable prior notice to Borrower, to inspect the Project and conduct such environmental and engineering studies as the Administrative Agent may reasonably require, provided such inspections and studies do not materially interfere with the use and operation of the Project.

Section 9.5 Taxes on Security. Borrower shall pay all taxes, charges, filing, registration and recording fees, excises and levies payable with respect to the Notes or the Liens created or secured by the Loan Documents, other than income, franchise and doing business taxes imposed on the Administrative Agent or any Lender. If there shall be enacted any law (1) deducting the Loans from the value of the Collateral for the purpose of taxation, (2) affecting any Lien on the Collateral, or (3) changing existing laws of taxation of pledges secured by equity interests, or changing the manner of collecting any such taxes, Borrower shall promptly pay to the Administrative Agent, on demand, all taxes, costs and charges for which the Administrative Agent or any Lender is or may be liable as a result thereof; however, if such payment would be prohibited by law or would render the Loans usurious, then instead of collecting such payment, the Administrative Agent may (and on the request of the Majority Lenders shall) declare all amounts owing under the Loan Documents to be immediately due and payable.

Section 9.6 Legal Existence; Name, Etc. Borrower shall, and shall cause Mortgage Borrower to, preserve and keep in full force and effect its existence as a Single Purpose Entity, and each of Borrower and Mortgage Borrower shall preserve and keep in full force and effect its entity status, franchises, rights and privileges under the laws of the state of its formation, and all qualifications, licenses and permits applicable to the ownership, use and operation of the Project. In the event there is a conflict between the Single Purpose Entity requirements contained in this Agreement and the terms of the Organizational Documents of Borrower or Mortgage Borrower, the Single Purpose Entity requirements contained in this Agreement shall control. Neither Borrower nor Mortgage Borrower shall wind up, liquidate, dissolve, reorganize, merge, or consolidate with or into, or convey,

74

sell, assign, transfer, lease, or otherwise dispose of all or substantially all of its assets, or acquire all or substantially all of the assets of the business of any Person, or permit any subsidiary of Borrower to do so. Each of Borrower and Mortgage Borrower shall conduct business only in its own name and shall not change its name, identity, or organizational structure, or the location of its chief executive office or principal place of business unless Borrower (a) shall have obtained the prior written consent of the Administrative Agent to such change, and (b) shall have taken all actions necessary or requested by the Administrative Agent to file or amend any financing statement or continuation statement to assure perfection and continuation of perfection of security interests under the Loan Documents. Borrower shall not enter into any new line of business other than the ownership of the Collateral, or make any change in the scope or nature of its business purposes, or undertake or participate in activities other than the continuance of its present business.

Section 9.7 Affiliate Transactions.

(1) In General. Except as provided in this Section 9.7, Borrower shall not and shall not permit Mortgage Borrower to engage in any other transaction affecting the Project and/or the Collateral with an Affiliate of Borrower or Mortgage Borrower without the Administrative Agent’s prior written consent except on arm’s length, market terms. Without limiting the foregoing, all transactions among Borrower and/or Mortgage Borrower and their Affiliates shall be at arms length and shall be for a price and terms that are no greater than market terms for similar services.

(2) Sales Commission and Franchise Fee. With respect to the sale of a Unit, Borrower may permit a payment of up to a seven percent (7%) sale commission to Mortgage Borrower or an Affiliate of Mortgage Borrower upon the sale of such Unit. Borrower may permit Mortgage Borrower to pay the Franchise Fee to Morgans Hotel Group Management LLC.

(3) Junior Mezzanine Loan. Junior Mezzanine Borrower is permitted to obtain the Junior Mezzanine Loan, subject to the terms of the Junior Loan Intercreditor Agreement.

(4) Other Arrangements. The Administrative Agent acknowledges that Borrower and Mortgage Borrower have entered into the following arrangements with Affiliates of Borrower and Mortgage Borrower and that are hereby approved by the Administrative Agent under the following conditions:

(a) Mortgage Borrower may use a title insurance agency that is an Affiliate of Project Manager and an agent for a national title insurance company; and

(b) An Affiliate of Mortgage Borrower or Project Manager may serve as a mortgage broker or mortgage originator for the placement of loans to purchasers of Units, provided that all fees and other amounts payable in connection with such services shall be paid by the purchasers of such Units or credited by Mortgage Borrower to the purchasers of such Units as Special Credits and paid by Mortgage Borrower.

Section 9.8 Limitation on Other Debt. Neither Borrower nor Mortgage Borrower shall, without the prior written consent of the Administrative Agent and the Majority Lenders (which consent may be withheld in the Administrative Agent’s sole and absolute discretion), incur any Debt other as permitted under subsection (o) of the definition of Single Purpose Entity.

75

Section 9.9 Further Assurances. Borrower shall promptly (1) cure any defects in the execution and delivery of the Loan Documents, and (2) execute and deliver, or cause to be executed and delivered, all such other documents, agreements and instruments as the Administrative Agent may reasonably request to further evidence and more fully describe the collateral for the Loans, 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.

Section 9.10 Estoppel Certificates. Borrower, within ten (10) Business Days after request, shall furnish to the Administrative Agent a written statement, duly acknowledged, setting forth or confirming, as applicable, the amount due on the Loans, the terms of payment of the Loans, the date to which interest has been paid, whether any offsets or defenses exist against the Loans and, if any are alleged to exist, the nature thereof in detail, and such other matters as the Administrative Agent reasonably may request.

Section 9.11 Notice of Certain Events. Borrower shall and shall cause Mortgage Borrower to promptly notify the Administrative Agent of (1) any Potential Default or Event of Default, or Mortgage Loan Event of Default, together with a detailed statement of the steps being taken to cure such Potential Default or Event of Default; (2) any notice of default received by Borrower, Mortgage Borrower or any Borrower Party under other obligations relating to the Project, the Collateral or otherwise material to Borrower’s or Mortgage Borrower’s business; and (3) any threatened or pending legal, judicial or regulatory proceedings, including any dispute between Borrower or Mortgage Borrower and any governmental authority, affecting Borrower, Mortgage Borrower, the Project, or the Collateral.

Section 9.12 Indemnification. Borrower hereby agrees to indemnify, defend, protect and hold harmless the Administrative Agent, each Lender and their respective shareholders, officers, employees, attorneys, agents, representatives and affiliates (each, an “Indemnified Party”) from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever, including the reasonable fees and actual expenses of each Indemnified Party’s counsel, which may be imposed upon, asserted against or incurred by any of them relating to or arising out of third-party claims relating to (1) the Project or the Collateral or (2) any of the Loan Documents or the transactions contemplated thereby, including, without limitation, (a) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about any of the Project or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways, (b) any inspection, review or testing of or with respect to the Project, (c) any investigative, administrative, mediation, arbitration, or judicial proceeding, whether or not the Administrative Agent or any Lender is designated a party thereto, commenced or threatened at any time (including after the repayment of the Loans) in any way related to the execution, delivery or performance of any Loan Document or to the Project, (d) any proceeding instituted by any Person claiming a Lien, and (e) any brokerage commissions or finder’s fees claimed by any broker or other party in connection with the Loans, the Project, or any of the transactions contemplated in the Loan Documents, including those arising from the joint, concurrent, or comparative negligence of the Administrative Agent or any Lender, except to the extent any of the foregoing is caused by the Administrative Agent’s or any Lender’s gross negligence or willful misconduct, in which case the party to whom the gross negligence or willful misconduct is attributable (but not any other party) shall not be entitled to the indemnification provided for hereunder to the extent of such gross negligence or willful misconduct.

76

Section 9.13 Size of Units. Borrower agrees that the net sellable area as set forth in the Unit Release Schedule shall constitute and be deemed to be the square footage for each Unit and shall be used for all purposes under the Loan Documents.

Section 9.14 Minimum Sales Prices. Borrower shall not permit and shall not permit Mortgage Borrower to permit the sale of any Unit at a Purchase Price less than the applicable Minimum Sales Price for such Unit.

Section 9.15 Hedge Agreements.

(1) The Borrower shall at all times maintain in full force and effect a Hedge Agreement satisfactory to the Administrative Agent in its sole and absolute discretion with an Acceptable Counterparty, which shall be effective on or before the Amendment Closing Date, and shall be coterminous with the Loan.

(2) Borrower shall collaterally assign to Administrative Agent pursuant to the Hedge Agreement Pledge all of its right, title and interest to receive any and all payments under the Hedge Agreement or any replacement Hedge Agreement, as additional security for the Loan Agreement, and shall deliver to Administrative Agent counterparts of such Hedge Agreement Pledge executed by the Borrower and by the Acceptable Counterparty and notify the Acceptable Counterparty of such collateral assignment (either in such Hedge Agreement or by separate instrument).

(3) Acceptable Counterparty must enter into a written agreement with the Administrative Agent (i) whereby such Acceptable Counterparty acknowledges the collateral assignment of such Hedge Agreement to Administrative Agent as additional security for the Loan pursuant to the Hedge Agreement Pledge, (ii) whereby such Acceptable Counterparty agrees that Administrative Agent shall have the ability to cure any defaults by the Acceptable Counterparty under the Hedge Agreement and to maintain the Hedge Agreement in full force and effect after the occurrence of any default by the Borrower thereunder, (iii) which provides that in no event shall the Administrative Agent be obligated to perform any of the Borrower’s obligations under the Hedge Agreement, and (iv) which is otherwise in form and substance acceptable to the Administrative Agent in its sole and absolute discretion.

(4) If the provider of the Hedge Agreement or any replacement Hedge Agreement ceases to be an Acceptable Counterparty, for any reason (including in the event of any downgrade, withdrawal or qualification of the rating of the Acceptable Counterparty below “A” by S&P), Borrower shall obtain a replacement Hedge Agreement at Borrower’s sole cost and expense within twenty (20) days of receipt of notice from Administrative Agent or Borrower’s obtaining knowledge that the provider is no longer an Acceptable Counterparty.

77

(5) In the event that Borrower fails to purchase and deliver to Administrative Agent the Hedge Agreement or any replacement Hedge Agreement as and when required hereunder, or fails to maintain such agreement in accordance with the terms and provisions of this Agreement, Administrative Agent may purchase the Hedge Agreement or any replacement Hedge Agreement, as applicable, and the cost incurred by Administrative Agent in purchasing the Hedge Agreement or any replacement Hedge Agreement, as applicable, shall be paid by Borrower to Administrative Agent with interest thereon at the Default Rate from the date such cost was incurred by Administrative Agent until such cost is reimbursed by Borrower to Administrative Agent.

(6) Borrower shall comply with all of its obligations under the terms and provisions of the Hedge Agreement and any replacement Hedge Agreement. All amounts paid by the Acceptable Counterparty under any Hedge Agreement to Borrower or Administrative Agent shall be deposited immediately into the Cash Management Account. Borrower shall take all actions reasonably requested by Administrative Agent to enforce Administrative Agent’s rights under the Hedge Agreement and any replacement Hedge Agreement in the event of a default by the Acceptable Counterparty and shall not waive, amend or otherwise modify any of its rights thereunder.

(7) At such time as the Loan is repaid in full, all of Administrative Agent’s right, title and interest in the Hedge Agreement and any replacement Hedge Agreement shall terminate and Administrative Agent shall execute and deliver at Borrower’s sole cost and expense, such documents as may be required to evidence Administrative Agent’s release of the Hedge Agreement and any replacement Hedge Agreement and to notify the Acceptable Counterparty of such release.

(8) In connection with any Hedge Agreement, Borrower shall obtain and deliver to the Administrative Agent an opinion from counsel (which counsel may be in-house counsel for the Acceptable Counterparty) for the Acceptable Counterparty (in form reasonably satisfactory to the Administrative Agent and upon which the Administrative Agent, the Lenders and their respective successors and assigns may rely) which shall provide, in relevant part, that:

(a) the Acceptable Counterparty is duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation or organization and has the organizational power and authority to execute and deliver, and to perform its obligations under, the Hedge Agreement;

(b) the execution and delivery of the Hedge Agreement by the Acceptable Counterparty, and any other agreement which the Acceptable Counterparty has executed and delivered pursuant thereto, and the performance of its obligations thereunder have been and remain duly authorized by all necessary action and do not contravene any provision of its certificate of incorporation or by-laws (or equivalent organizational documents) or any law, regulation or contractual restriction binding on or affecting it or its property;

(c) all consents, authorizations and approvals required for the execution and delivery by the Acceptable Counterparty of the Hedge Agreement, and any other agreement which the Acceptable Counterparty has executed and delivered pursuant thereto, and the performance of its obligations thereunder have been obtained and remain in full force and effect, all conditions thereof have been duly complied with, and no other action by, and no notice to or filing with any governmental authority or regulatory body is required for such execution, delivery or performance; and

78

(d) the Hedge Agreement, and any other agreement which the Acceptable Counterparty has executed and delivered pursuant thereto, has been duly executed and delivered by the Acceptable Counterparty and constitutes the legal, valid and binding obligation of the Acceptable Counterparty, enforceable against the Acceptable Counterparty in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).

Section 9.16 No Distributions. Except as expressly provided in Section 14.4 of the Mortgage Loan Agreement, Borrower shall not make any Distributions to any members of Borrower without the Administrative Agent’s prior consent.

Section 9.17 Condominium Covenants. In addition to the covenants and agreements made in this Agreement, Borrower and the Administrative Agent further covenant and agree as follows:

(1) Condominium Obligations. Borrower shall cause Mortgage Borrower to perform or cause to be performed all of Mortgage Borrower’s obligations and the obligations of the Association under the Declaration all with respect to any of the applicable Project’s Constituent Documents and under the Condominium Act. The “Constituent Documents” are the: (a) the Public Offering Statement; (b) the Declaration; (c) the articles of incorporation and by-laws of the Association; and (c) all documents related to the creation, management and operation of the Project by the Association. Borrower shall cause Mortgage Borrower to promptly pay when due, all dues and assessments imposed pursuant to the Constituent Documents.

(2) Hazard Insurance. So long as the Association maintains casualty insurance through a “master” or “blanket” policy on the Project which satisfies the requirements of Section 3.1 of the Mortgage Loan Agreement and is otherwise satisfactory to the Administrative Agent, Borrower’s obligation under Article 3 to cause Mortgage Borrower to maintain such casualty insurance coverage on the Project shall be satisfied to the extent that the required coverage is provided by the Association. In the event of an insured casualty to all or a portion of the Project, insurance proceeds shall be distributed and utilized in the manner required by the Constituent Documents. In the event of a distribution of hazard insurance proceeds in lieu of restoration or repair following a loss to the Project, whether to the unit(s) or to common elements, any proceeds payable to Borrower or Mortgage Borrower is hereby assigned and shall be paid to the Administrative Agent for application to the Loans in accordance with Article 3 hereof.

(3) Public Liability Insurance. Borrower shall or shall cause Mortgage Borrower to take such actions as may be reasonable to insure that the Association maintains a public liability insurance policy acceptable in form, amount and extent of coverage to the Administrative Agent.

79

(4) Condemnation. The proceeds of any award or claim for damages, direct or consequential, payable to Borrower or Mortgage Borrower in connection with any condemnation or other taking of all or any part of the Project, whether of the unit(s) or of common elements, or for any conveyance in lieu of condemnation, shall be paid to the Mortgage Loan Administrative Agent and applied in accordance herewith.

(5) Declaration. Borrower hereby represents, warrants, and covenants as follows as to the Declaration:

(a) Borrower shall cause Mortgage Borrower to be the owner of all the interests created under the Declaration other than with respect to interests conveyed to the Association and Units sold hereunder or conveyed in accordance herewith;

(b) Borrower shall cause Mortgage Borrower to be the Declarant under the Declaration and the owner without encumbrance (other than under the Loan Documents) of all voting rights under the Declaration (other than those of the owners of Units conveyed in accordance herewith);

(c) Borrower shall cause Mortgage Borrower to be the owner of all of the interests in and to the Association other than interests of owners of Units conveyed in accordance herewith;

(d) The interest of the Association is not encumbered by any other pledge, hypothecation, mortgage, deed to secure debt or other security interest, lien or judgment whatsoever;

(e) Borrower shall cause Mortgage Borrower at all times collaterally assign its rights as “Declarant” under the Declaration to the Administrative Agent and upon an Event of Default shall provide proxy rights to the Administrative Agent; and

(f) None of the Units will be omitted from coverage by the Declaration without the prior written consent of the Administrative Agent.

Section 9.18 Patriot Act Compliance; Foreign Assets Control Regulations.

(1) Borrower shall comply with the Patriot Act and all applicable legal requirements of governmental authorities having jurisdiction of Borrower, including those relating to money laundering and terrorism. The Administrative Agent shall have the right to audit Borrower’s compliance with the Patriot Act and all applicable legal requirements of governmental authorities having jurisdiction of Borrower, including those relating to money laundering and terrorism. In the event that Borrower fails to comply with the Patriot Act or any such legal requirements of governmental authorities, then the Administrative Agent may, at its option, declare an Event of Default.

80

(2) Without limiting the provisions of Section 9.18(1), Borrower, Mortgage Borrower and any other Borrower Party shall not use the proceeds of the Loans in any manner that will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or the Anti-Terrorism Order or any enabling legislation or executive order relating to any of the same. Without limiting the foregoing, Borrower, Mortgage Borrower, and any Borrower Party will not permit itself or any of its subsidiaries to (a) become a blocked person described in Section 1 of the Anti-Terrorism Order or (b) knowingly engage in any dealings or transactions or be otherwise associated with any person who is known by Borrower, Mortgage Borrower or such Borrower Party or who (after such inquiry as may be required by Applicable Law) should be known by Borrower, Mortgage Borrower or such Borrower Party to be a blocked person.

(3) Borrower shall execute and deliver to the Administrative Agent from time to time upon request a certificate stating that no Borrower, Mortgage Borrower, Borrower Party, or any direct or indirect owner of any interest in Borrower or any Borrower Party (a) is listed on any Government Lists, (b) is a person who has been determined by competent authority to be subject to the prohibitions contained in the Anti-Terrorism Order or any other similar prohibitions contained in the rules and regulations of OFAC or in any enabling legislation or other Presidential Executive Orders in respect thereof, (c) has been previously indicted for or convicted of any felony involving a crime or crimes of moral turpitude or for any Patriot Act Offenses, (d) is currently under investigation by any governmental authority for alleged criminal activity, or (e) has a reputation in the community for criminal or unethical behavior.

Section 9.19 Payment for Labor and Materials. Borrower will or will cause Mortgage Borrower to promptly pay when due all bills and costs for labor, materials, and specifically fabricated materials incurred in connection with the Project and never permit to exist beyond the due date thereof in respect of the Project or Collateral or any part thereof any Lien, even though inferior to the Liens of the Loan Documents, and in any event never permit to be created or exist in respect of the Project or Collateral or any part thereof any other or additional Lien other than the Liens or security of the Loan Documents and Mortgage Loan Documents, except for the Permitted Encumbrances. Notwithstanding the foregoing provisions of this Section 9.19, Borrower may contest in the validity of any bills and costs for labor, materials, and specifically fabricated materials incurred in connection with the Project. Any such contest shall be in good faith, be at Borrower’s own expense and be made by appropriate legal proceedings which shall operate to prevent the collection thereof or other realization thereon and the sale or forfeiture of the Project or any part thereof to satisfy the same. As a condition to pursuing any such contest, Borrower shall or shall cause Mortgage Borrower to, at the Administrative Agent’s option, provide security reasonably satisfactory to the Administrative Agent, assuring the discharge of Borrower’s or Mortgage Borrower’s obligations thereunder and of any additional charge, penalty or expense arising from or incurred as a result of such contest.

81

Section 9.20 Hotel Management Agreement.

(1) Borrower shall cause Mortgage Borrower to (i) perform and observe in all material respects all of its covenants and agreements contained in the Hotel Management Agreement and the Technical Services Agreement; (ii) take all reasonable and necessary action to prevent the termination of the Hotel Management Agreement or the Technical Services Agreement; (iii) enforce each material covenant or obligation of each of the Hotel Management Agreement and the Technical Services Agreement in accordance with its terms; (iv) promptly give the Administrative Agent copies of any default or other material notices given by or on behalf of Mortgage Borrower or received by or on behalf of Mortgage Borrower from the Hotel Manager pursuant to the Hotel Management Agreement or the Technical Services Agreement; and (v) take all such action to achieve the purposes described in clauses (i), (ii) and (iii) of this Section 9.20 as may from time to time be reasonably requested by the Administrative Agent; provided, however, that Mortgage Borrower shall be permitted, upon the Administrative Agent’s reasonable approval, to contest the validity or applicability of any requirement under the Hotel Management Agreement or the Technical Services Agreement.

(2) Borrower shall cause Mortgage Borrower to not, without the Administrative Agent’s prior written consent (which may be withheld in the Administrative Agent’s sole and absolute discretion), (i) take any action to (A) cancel or terminate the Hotel Management Agreement or the Technical Services Agreement, (B) replace the Hotel Manager or (C) appoint a new hotel manager; (ii) sell, assign, pledge, transfer, mortgage, hypothecate or otherwise dispose of (by operation of law or otherwise) or encumber any part of its interest in the Hotel Management Agreement or the Technical Services Agreement; (iii) waive any material default under or breach of any material provisions of the Hotel Management Agreement or the Technical Services Agreement, or waive, fail to enforce, forgive or release any material right, interest or entitlement, howsoever arising, under or in respect of any material provisions of the Hotel Management Agreement or the Technical Services Agreement, or vary or agree to the variation in any material way of any material provisions of the Hotel Management Agreement or the Technical Services Agreement or of the performance of the Hotel Manager under the Hotel Management Agreement or the Technical Services Agreement; (iv) petition, request or take any other legal or administrative action that seeks, or may reasonably be expected, to rescind, terminate or suspend the Hotel Management Agreement or the Technical Services Agreement.

(3) Any change in day-to-day management and control of the Hotel Manager shall be cause for Administrative Agent to re-approve such Hotel Manager and Hotel Management Agreement (which approval may be withheld in the Administrative Agent’s sole and absolute discretion). If at any time the Administrative Agent consents to the appointment of a new hotel manager, such new manager and Mortgage Borrower shall, as a condition of Administrative Agent’s consent, execute a Hotel Manager’s Consent and Subordination of Management Agreement in the form then used by Administrative Agent. Each Hotel Manager shall hold and maintain all necessary licenses, certifications and permits required by law to carry on its duties under the Hotel Management Agreement and the Technical Services Agreement. Borrower shall cause Mortgage Borrower to fully perform all of its covenants, agreements and obligations under the Management Agreement and the Technical Services Agreement.

82

Section 9.21 Americans with Disabilities.

(1) Borrower (a) agrees that it shall use and shall cause Mortgage Borrower to use commercially reasonable efforts to ensure that the Project shall at all times comply 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”) and (b) has no actual knowledge as to the Project’s non-compliance with any Access Laws where, in the case of (a) or (b) above, the failure to so comply could have a material adverse effect on the Project or on Borrower’s ability to repay the Loans in accordance with the terms hereof.

(2) Notwithstanding any provisions set forth herein or in any other document regarding the Administrative Agent’s approval of alterations of the Project, Borrower shall not and shall not permit Mortgage Borrower to alter the Project in any manner which would materially increase Borrower’s or Mortgage Borrower’s responsibilities for compliance with the applicable Access Laws without the prior written approval of the Administrative Agent. The foregoing shall apply to tenant improvements constructed by Mortgage Borrower or by any of its tenants. The Administrative Agent may condition any such approval upon receipt of a certificate of Access Law compliance from an architect, engineer, or other person reasonably acceptable to the Administrative Agent.

(3) Borrower agrees to give prompt notice to the Administrative Agent of the receipt by Borrower or Mortgage Borrower of any written complaints related to violation of any Access Laws with respect to the Project and of the commencement of any proceedings or investigations which relate to compliance with applicable Access Laws.

Section 9.22 Zoning. Borrower shall not and shall not permit Mortgage Borrower to, without the Administrative Agent’s prior consent, seek, make, suffer or acquiesce in any change or variance in any zoning or land use laws or other conditions of use of the Project or any portion thereof. Borrower shall not and shall not permit Mortgage Borrower to use or permit the use of any portion of the Project in any manner that could result in such use becoming an illegal non-conforming use under any zoning or land use law or any other Applicable Law or modify any agreements relating to zoning or land use matters or with the joinder or merger of lots for zoning, land use or other purposes, without the prior written consent of the Administrative Agent. Without limiting the foregoing, in no event shall Borrower or Mortgage Borrower take any action that would reduce or impair below applicable requirements (a) the number of parking spaces at the Improvements or (b) access to the Project from adjacent public roads.

Section 9.23 ERISA. Borrower shall not and shall not permit Mortgage Borrower to take any action, or omit to take any action, which would (a) cause Borrower’s or Mortgage Borrower’s assets to constitute “plan assets” for purposes of ERISA or the Code or (b) cause the Transactions to be a nonexempt prohibited transaction (as such term is defined in Section 4975 of the Code or Section 406 of ERISA) that could subject the Administrative Agent and/or the Lenders, on account of any Loan or execution of the Loan Documents hereunder, to any tax or penalty on prohibited transactions imposed under Section 4975 of the Code or Section 502(i) of ERISA.

83

Section 9.24 Property Specific Covenants.

(1) Borrower shall cause Mortgage Borrower to pay to the title company any fees or charges imposed by the title company in connection with amending the mortgagee title policy issued in favor of Mortgage Loan Administrative Agent as a result of the Building Conversion, including, but not limited to the costs of obtaining updated title searches, date-down endorsement, a “condominium” endorsement and an endorsement modifying the insured legal description.

(2) Without the prior written consent of Administrative Agent, Borrower shall not and shall not permit Mortgage Borrower to amend, modify or terminate its Organizational Documents, the Project Management Agreement or the Technical Services Agreement, replace the Project Manager or Hotel Manager or appoint a new project manager or technical services advisor.

(3) Borrower shall not permit the Building Conversion or any other renovations at the Project to constitute “Level 3” alterations as defined in the Florida Building Code nor violate what is commonly known as the “50% Rule” under Florida law.

Section 9.25 Forward Purchase Contract. Borrower shall cause each other Borrower Party which is a party thereto (a) to perform and observe all of its covenants and agreements contained in the Forward Purchase Contract; (b) to enforce each covenant or obligation of the other Borrower Parties under the Forward Purchase Contract; (c) not to sell, assign, pledge, transfer, mortgage, hypothecate or otherwise dispose of (by operation of law or otherwise) or encumber any part of its interest in the Forward Purchase Contract; and (d) not to waive any material default under or breach of any material provisions of the Forward Purchase Contract or waive, fail to enforce, forgive or release any material right, interest or entitlement, howsoever arising, under or in respect of any provisions of the Forward Purchase Contract.

Section 9.26 Mortgage Borrower Covenants. Borrower shall cause Mortgage Borrower to comply with all obligations with which Mortgage Borrower has covenanted to comply under the Mortgage Loan Agreement and all other Mortgage Loan Documents (including, without limitation, those certain affirmative and negative covenants set forth in the Mortgage Loan Agreement and the Mortgage Loan Documents) whether the Mortgage Loan has been repaid or the related Mortgage Loan Document has been otherwise terminated, unless otherwise consented to in writing by Administrative Agent. Borrower shall cause Mortgage Borrower to promptly notify Administrative Agent of all notices received by Mortgage Borrower under or in connection with the Mortgage Loan, including, without limitation, any notice by the Mortgage Lender to Mortgage Borrower of any default by Mortgage Borrower in the performance or observance of any of the terms, covenants or conditions of the Mortgage Loan Documents on the part of Mortgage Borrower to be performed or observed, and deliver to Administrative Agent a true copy of each such notice, together with any other consents, notices, requests or other written correspondence between Mortgage Borrower and Mortgage Lender.

Section 9.27 Refinancing or Prepayment of the Mortgage Loan. Neither Borrower nor Mortgage Borrower shall be required to obtain the consent of Administrative Agent to refinance the Mortgage Loan, provided that the Loans shall have (or shall simultaneously be) been paid in full in accordance with the terms of this Agreement (including any prepayment premiums and other amounts due and payable to Administrative Agent under the Loan Documents). Borrower shall cause Mortgage Borrower to obtain the prior written consent of Administrative Agent to enter into any other refinancing of the Mortgage Loan, which consent may be withheld or conditioned in Administrative Agent’s sole and absolute discretion.

84

Section 9.28 Acquisition of the Mortgage Loan.

(1) No Borrower Party or any Affiliate of any of them or any Person acting at any such Person’s request or direction, shall acquire or agree to acquire any Mortgage Lender’s interest in the Mortgage Loan, or any portion thereof or any interest therein, or any direct or indirect ownership interest in the holder of the Mortgage Loan, via purchase, transfer, exchange or otherwise, and any breach or attempted breach of this provision shall constitute an Event of Default hereunder. If, solely by operation of applicable subrogation law, Borrower shall have failed to comply with the foregoing, then Borrower: (i) shall immediately notify Administrative Agent of such failure; (ii) shall cause any and all such prohibited parties acquiring any interest in the Mortgage Loan Documents: (A) not to enforce the Mortgage Loan Documents; and (B) upon the request of Administrative Agent, to the extent any of such prohibited parties has or have the power or authority to do so, to promptly: (1) cancel the promissory note evidencing the Mortgage Loan, (2) reconvey and release the Lien securing the Mortgage Loan and any other collateral under the Mortgage Loan Documents, and (3) discontinue and terminate any enforcement proceeding(s) under the Mortgage Loan Documents.

(2) Administrative Agent (on behalf of the Lenders) shall have the right at any time to acquire all or any portion of the Mortgage Loan or any interest in any holder of, or participant in, the Mortgage Loan without notice or consent of Borrower or any other Borrower Party, in which event Administrative Agent shall have and may exercise all rights of Mortgage Lender thereunder (to the extent of its interest), including the right (i) to declare that the Mortgage Loan is in default and (ii) to accelerate the Mortgage Loan indebtedness, in accordance with the terms thereof and (iii) to pursue all remedies against any obligor under the Mortgage Loan Documents. In addition, Borrower hereby expressly agrees that any claims, counterclaims, defenses, offsets, deductions or reductions of any kind which Mortgage Borrower or any other Person may have against relating to or arising out of the Mortgage Loan shall be the personal obligation of Mortgage Lender, and in no event shall Mortgage Borrower be entitled to bring, pursue or raise any such claims, counterclaims, defenses, offsets, deductions or reductions against the Lenders or Administrative Agent or any Affiliate of the Lenders or Administration Agent or any other Person as the successor holder of the Mortgage Loan or any interest therein, provided that Mortgage Borrower may seek specific performance of its contractual rights under the Mortgage Loan Documents,

Section 9.29 Construction Management Contract. Borrower shall not and shall not permit Mortgage Borrower, without Administrative Agent’s prior consent: (a) take any action to cancel or terminate any material right under the Construction Management Contract; (b) waive any material default under or breach of any material provisions of the Construction Management Contract, or waive, forgive, release or fail to enforce any material right thereunder; (c) amend or modify any material provision of, or give any consent under, the Construction Management Contract; or (d) enter into any other construction management or general contractor contract with respect to the Building Conversion or the Project.

85

ARTICLE 10

EVENTS OF DEFAULT

Each of the following shall constitute an “Event of Default” under the Loans:

Section 10.1 Payments. Borrower’s failure to (1) pay any regularly scheduled installment of principal, interest, the Agency Fee, or other amount within five (5) days of (and including) the date when due as required under the Loan Documents or (2) make a deposit of cash or pay any other amount due hereunder within five (5) days of (and including) the date when due as required under the Loan Documents, or (3) pay the Loans at the Maturity Date, whether by acceleration or otherwise.

Section 10.2 Insurance. Borrower’s failure or failure to cause Mortgage Borrower to maintain insurance as required under Section 3.1 of this Agreement.

Section 10.3 Single Purpose Entity. If Borrower (i) violates any of the provisions set forth in clauses (a), (b), (c), (d), (e), (g), (j), (o), (p), (q), (t), (w), (z) or (bb) of the definition of “Single Purpose Entity”, or (ii) violates any of the provisions clauses (f), (h), (i), (k), (l), (m), (n), (r), (s), (u), (v), (x), (y) or (aa) of the definition of “Single Purpose Entity” and, in the case of this clause (ii) such violation is not cured with thirty (30) days of the date that any officer of Borrower, Mortgage Borrower or any Borrower Party obtains knowledge of such violation.

Section 10.4 Taxes. If any of the Taxes are not paid when the same are due and payable.

Section 10.5 Sale, Encumbrance, Etc.; Change of Control. The sale, transfer, conveyance, pledge, mortgage or assignment of any part or all of the Project, the Collateral or any interest therein, or of any interest in Borrower, Mortgage Borrower or any Borrower Party, in violation of Section 9.1 of this Agreement, or the occurrence of any Change of Control in violation of Section 9.1.

Section 10.6 Representations and Warranties. Any representation or warranty made in any Loan Document proves to be untrue in any material respect when made or deemed made.

Section 10.7 Other Encumbrances. Any default (beyond applicable cure periods) under any document or instrument, other than the Loan Documents, evidencing or creating a Lien on the Project or any part thereof.

Section 10.8 Various Covenants. Any default under any of its obligations under Sections 6.2 (pertaining to lease approvals), 9.3 (management of the Project), 9.8 (limitations on debt), 9.18 (Patriot Act compliance), 9.22 (zoning and use changes), 9.23 (ERISA), 9.25 (Forward Purchase Contract), 9.27 (Refinancing or Prepayment of the Mortgage Loan), 9.28(1) (Acquisition of Mortgage Loan) or 14(1) (Completion of Building Conversion) of this Agreement.

86

Section 10.9 Involuntary Bankruptcy or Other Proceeding. Commencement of an involuntary case or other proceeding against Borrower, Mortgage Borrower, any Borrower Party or any other Person having an ownership or security interest in the Project (each, a “Bankruptcy Party”) which seeks liquidation, reorganization or other relief with respect to such Person or its Debts or other liabilities under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeks the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any of its property, and such involuntary case or other proceeding shall remain undismissed or unstayed for a period of sixty (60) days, or an order for relief against a Bankruptcy Party shall be entered in any such case under the Bankruptcy Code (an “Involuntary Proceeding”).

Section 10.10 Voluntary Petitions, Etc. Commencement by a Bankruptcy Party of a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its Debts or other liabilities under any bankruptcy, insolvency or other similar law or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or any of its property, or consent by a Bankruptcy Party to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or the making by a Bankruptcy Party of a general assignment for the benefit of creditors, or the failure by a Bankruptcy Party, or the admission by a Bankruptcy Party in writing of its inability, to pay its Debts generally as they become due, or any action by a Bankruptcy Party to authorize or effect any of the foregoing (a “Voluntary Proceeding”).

Section 10.11 Indebtedness. Any of Borrower or Mortgage Borrower, or any combination thereof, shall default in the payment when due of any principal of or interest on any of its other Debt aggregating $500,000 or more and such default shall not be cured within any applicable notice or cure period provided with respect thereto; or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Debt shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Debt to cause, such Debt to become due or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise) prior to its stated maturity.

Section 10.12 Dissolution. Any Borrower Party shall be terminated, dissolved or liquidated (as a matter of law or otherwise) or proceedings shall be commenced by any Person (including any Borrower Party) seeking the termination, dissolution or liquidation of any Borrower Party, which, in the case of actions by Persons other than a Borrower Party or any of their Affiliates, shall continue unstayed and in effect for a period of sixty (60) or more days.

Section 10.13 Judgments. One or more (a) final, non-appealable judgments for the payment of money (exclusive of judgment amounts fully covered by insurance where the insurer has admitted liability in respect of such judgment) shall be rendered against Borrower or Mortgage Borrower in an amount aggregating in excess of $1,000,000, or (b) non-monetary judgments, orders or decrees shall be entered against Borrower or Mortgage Borrower which have or would reasonably be expected to have a Material Adverse Effect, and, in either case, the same shall remain undischarged for a period of sixty (60) consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of such Borrower or Mortgage Borrower, as the case may be, to enforce any such judgment.

87

Section 10.14 Security. The Liens created by the Pledge Agreement shall at any time not constitute a valid and perfected first priority Lien on the collateral intended to be covered thereby in favor of the Administrative Agent, free and clear of all other Liens, or, except for expiration in accordance with its terms, any of Pledge Agreement shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by Borrower, Mortgage Borrower or any Borrower Party or any of their Affiliates;

Section 10.15 Guarantees. Any Guarantor or Joinder Party shall (i) default under any Guarantee or the Joinder, as applicable, beyond any applicable notice and grace period; or (ii) revoke or attempt to revoke, contest or commence any action against its obligations under any Guarantee or under the Joinder, as applicable.

Section 10.16 Interest Reserve Fund. Borrower uses, or permits the use of, funds from the Interest Reserve Fund for any purpose other than the purpose for which such funds were disbursed in accordance herewith.

Section 10.17 Mortgage Loan Event of Default. If any Mortgage Loan Event of Default shall occur, or if Mortgage Borrower enters into or otherwise suffers or permits any amendment, waiver, supplement, termination, extension, renewal, replacement or other modification of any Mortgage Loan Document without the prior written consent of Administrative Agent.

Section 10.18 Hedge Agreement. The Acceptable Counterparty shall default under any Hedge Agreement and such default is not cured within the applicable notice and cure periods provided therein.

Section 10.19 Junior Loan Intercreditor Agreement. Any failure by any of Mortgage Borrower, Borrower, Junior Mezzanine Borrower or Junior Mezzanine Lender to perform or observe any the agreements and covenants contained in the Junior Loan Intercreditor Agreement.

Section 10.20 Covenants. Borrower’s failure to perform or observe any of the agreements and covenants contained in this Agreement or in any of the other Loan Documents and not specified above, and the continuance of such failure for ten (10) days after notice by the Administrative Agent to Borrower; provided, however, subject to any shorter period for curing any failure by Borrower as specified in any of the other Loan Documents, Borrower shall have an additional thirty (30) days to cure such failure if (1) such failure does not involve the failure to make payments on a monetary obligation; (2) such failure cannot reasonably be cured within ten (10) days; (3) Borrower is diligently undertaking to cure such default, and (4) Borrower has provided the Administrative Agent with security reasonably satisfactory to the Administrative Agent against any interruption of payment or impairment of collateral as a result of such continuing failure.

88

ARTICLE 11

REMEDIES

Section 11.1 Remedies — Insolvency Events. Upon the occurrence of any Event of Default described in Section 10.9 or 10.10, the obligations of the Lenders to advance amounts hereunder shall immediately terminate, and all amounts due under the Loan Documents immediately shall become due and payable, all without written notice and without presentment, demand, protest, notice of protest or dishonor, notice of intent to accelerate the maturity thereof, notice of acceleration of the maturity thereof, or any other notice of default of any kind, all of which are hereby expressly waived by Borrower and each Borrower Party; provided, however, if the Bankruptcy Party under Section 10.9 or 10.10 is other than Borrower, then all amounts due under the Loan Documents shall become immediately due and payable at the Administrative Agent’s election, in the Administrative Agent’s sole discretion.

Section 11.2 Remedies — Other Events.

(1) Except as set forth in Section 11.1 above, while any Event of Default exists, the Administrative Agent may (1) by written notice to Borrower, declare the entire amount of the Loans to be immediately due and payable without presentment, demand, protest, notice of protest or dishonor, notice of intent to accelerate the maturity thereof, notice of acceleration of the maturity thereof, or other notice of default of any kind, all of which are hereby expressly waived by Borrower and each Borrower Party, (2) terminate the obligation, if any, of the Lenders to advance amounts hereunder, and (3) exercise all rights and remedies therefore under the Loan Documents and at law or in equity.

(2) Any amounts recovered from the Collateral after an Event of Default may be applied by Administrative Agent toward the payment of any interest and/or principal of the Loans and/or any other amounts due under the Loan Documents in such order, priority and proportions as Administrative Agent in its sole discretion shall determine.

Section 11.3 Administrative Agent’s Right to Perform the Obligations. If Borrower shall fail, refuse or neglect to make any payment or perform any act required by the Loan Documents, then while any Event of Default exists, and without notice to or demand upon Borrower and without waiving or releasing any other right, remedy or recourse the Administrative Agent or any Lender may have because of such Event of Default, the Administrative Agent may (but shall not be obligated to) make such payment or perform such act for the account of and at the expense of Borrower, and shall have the right to enter upon the Project for such purpose and to take all such action thereon and with respect to the Project or the Collateral as it may deem necessary or appropriate. If the Administrative Agent shall elect to pay any sum due with reference to the Project or the Collateral, the Administrative Agent may do so in reliance on any bill, statement or assessment procured from the appropriate governmental authority or other issuer thereof without inquiring into the accuracy or validity thereof. Similarly, in making any payments to protect the security intended to be created by the Loan Documents, the Administrative Agent shall not be bound to inquire into the validity of any apparent or threatened adverse title, Lien, encumbrance, claim or charge before making an advance for the purpose of preventing or removing the same. Additionally, if any Hazardous Materials affect or threaten to affect the Project, the Administrative Agent may (but shall not be obligated to) give such notices and take such actions as it deems necessary or advisable in order to abate the discharge of any Hazardous Materials or remove the Hazardous Materials. Borrower shall indemnify, defend and hold the Administrative Agent and the Lenders harmless from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature

89

whatsoever, including reasonable attorneys’ fees and disbursements, incurred or accruing by reason of any acts performed by the Administrative Agent or any Lender pursuant to the provisions of this Section 11.3, including those arising from the joint, concurrent, or comparative negligence of the Administrative Agent and any Lender, except as a result of the Administrative Agent’s or any Lender’s gross negligence or willful misconduct. All sums paid by the Administrative Agent pursuant to this Section 11.3, and all other sums expended by the Administrative Agent or any Lender to which it shall be entitled to be indemnified, together with interest thereon at the Default Rate from the date of such payment or expenditure until paid, shall constitute additions to the Loans, shall be secured by the Loan Documents and shall be paid by Borrower to the Administrative Agent upon demand.

ARTICLE 12

MISCELLANEOUS

Section 12.1 Notices. Any notice required or permitted to be given under this Agreement shall be in writing and either shall be (1) mailed by certified mail, postage prepaid, return receipt requested, (2) sent by overnight air courier service, (3) personally delivered to a representative of the receiving party, or (4) sent by telecopy (provided an identical notice is also sent simultaneously by mail, overnight courier, or personal delivery as otherwise provided in this Section 12.1) to the intended recipient at the “Address for Notices” specified below its name on the signature pages hereof. Any communication so addressed and mailed shall be deemed to be given on the earliest of (a) when actually delivered, (b) on the first Business Day after deposit with an overnight air courier service, or (c) on the third Business Day after deposit in the United States mail, postage prepaid, in each case to the address of the intended addressee, and any communication so delivered in person shall be deemed to be given when receipted for by, or actually received by the Administrative Agent, a Lender or Borrower, as the case may be. If given by telecopy, a notice shall be deemed given and received when the telecopy is transmitted to the party’s telecopy number specified above, and confirmation of complete receipt is received by the transmitting party during normal business hours or on the next Business Day if not confirmed during normal business hours, and an identical notice is also sent simultaneously by mail, overnight courier, or personal delivery as otherwise provided in this Section 12.1. Any party may designate a change of address by written notice to each other party by giving at least ten (10) days’ prior written notice of such change of address.

Section 12.2 Amendments, Waivers, Etc.

(1) Subject to any consents required pursuant to this Section 12.2 and any other provisions of this Agreement and any other Loan Document which expressly require the consent, approval or authorization of the Majority Lenders, this Agreement and any other Loan Document may be modified or supplemented only by an instrument in writing signed by Borrower and the Administrative Agent; provided that, the Administrative Agent may (without any Lender’s consent) give or withhold its agreement to any amendments of the Loan Documents or any waivers or consents in respect thereof or exercise or refrain from exercising any other rights or remedies which the Administrative Agent may have under the Loan Documents or otherwise provided that such actions do not, in the Administrative Agent’s judgment reasonably exercised, materially adversely affect the

90

value of any collateral, taken as a whole, or represent a departure from Administrative Agent’s standard of care described in Section 15.5 (and the assignment or granting of a participation by Eurohypo shall not limit or otherwise affect its discretion in respect of any of the foregoing), except that the Administrative Agent will not, without the consent of each Lender, agree to the following (provided that no Lender’s consent shall be required for any of the following which are otherwise required or contemplated under the Loan Documents): (a) reduce the principal amount of the Loans or reduce the interest rate thereon; (b) extend any stated payment date for principal of or interest on the Loans payable to such Lender; (c) release Borrower, any Joinder Party, any Guarantor or any other party from liability under the Loan Documents (except for any assigning Lender pursuant to Section 12.24 and any resigning Administrative Agent pursuant to Section 15.8); (d) release or subordinate in whole or in part any material portion of the collateral given as security for the Loans; (e) modify any of the provisions of this Section 12.2, the definition of “Majority Lenders” or any other provision in the Loan Documents specifying the number or percentage of Lenders required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder; (f) modify the terms of any Event of Default; or (g) consent to (i) the sale, transfer or encumbrance of any portion of the Project (or any interest therein) or any direct or indirect ownership interest therein and (ii) the incurrence by Borrower of any additional indebtedness secured by the Project, in each case to the extent (and subject to any standard of reasonability) such consent is required under the Loan Documents. Notwithstanding the foregoing provisions of this Section 12.2, as between Borrower and Lenders, notification by Administrative Agent to Borrower of Administrative Agent’s consent to any of the matters set forth in clauses (a) through and including (g) of the preceding sentence shall be deemed to be the consent of each Lender to such matter.

(2) Notwithstanding anything to contrary contained in this Agreement, any modification or supplement of Article 15, or of any of the rights or duties of the Administrative Agent hereunder, shall require the consent of the Administrative Agent.

Section 12.3 Limitation on Interest. It is the intention of the parties hereto to conform strictly to applicable usury laws. Accordingly, all agreements between Borrower, the Administrative Agent and the Lenders with respect to the Loans are hereby expressly limited so that in no event, whether by reason of acceleration of maturity or otherwise, shall the amount paid or agreed to be paid to the Administrative Agent or any Lender or charged by any Lender for the use, forbearance or detention of the money to be lent hereunder or otherwise, exceed the maximum amount allowed by law. If the Loans would be usurious under Applicable Law (including the laws of the State, the laws of the State of New York and the laws of the United States of America), then, notwithstanding anything to the contrary in the Loan Documents: (1) the aggregate of all consideration which constitutes interest under Applicable Law that is contracted for, taken, reserved, charged or received under the Loan Documents shall under no circumstances exceed the maximum amount of interest allowed by Applicable Law, and any excess shall be credited on the Notes by the holders thereof (or, if the Notes have been paid in full, refunded to Borrower); and (2) if maturity is accelerated by reason of an election by the Administrative Agent in accordance with the terms hereof, or in the event of any prepayment, then any consideration which constitutes interest may never include more than the maximum amount allowed by Applicable Law. In such case, excess interest, if any, provided for in the Loan Documents or otherwise, to the extent permitted by Applicable Law, shall be amortized, prorated, allocated and spread from the date of advance until payment in full so that the

91

actual rate of interest is uniform through the term hereof. If such amortization, proration, allocation and spreading is not permitted under Applicable Law, then such excess interest shall be cancelled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited on the Notes (or, if the Notes have been paid in full, refunded to Borrower). The terms and provisions of this Section 12.3 shall control and supersede every other provision of the Loan Documents. The Loan Documents are contracts made under and shall be construed in accordance with and governed by the laws of the State of New York, except that if at any time the laws of the United States of America permit the Lenders to contract for, take, reserve, charge or receive a higher rate of interest than is allowed by the laws of the State of New York (whether such federal laws directly so provide or refer to the law of any state), then such federal laws shall to such extent govern as to the rate of interest which the Lenders may contract for, take, reserve, charge or receive under the Loan Documents.

Section 12.4 Invalid Provisions. If any provision of any Loan Document is held to be illegal, invalid or unenforceable, such provision shall be fully severable; the Loan Documents shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part thereof; the remaining provisions thereof shall remain in full effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom; and in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part of such Loan Document a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible to be legal, valid and enforceable.

Section 12.5 Reimbursement of Expenses. Borrower shall pay or reimburse the Administrative Agent and/or the Lenders on demand of the applicable party for: (1) all expenses incurred by the Administrative Agent in connection with the Loans, including fees and expenses of the Administrative Agent’s attorneys, environmental, engineering and other consultants, and fees, charges or taxes for the negotiation, recording or filing of Loan Documents, (2) all expenses of the Administrative Agent in connection with the administration of the Loans, including audit costs, inspection fees, attorneys’ fees and disbursement, settlement of condemnation and casualty awards, and premiums for title insurance and endorsements thereto, (3) all of the Administrative Agent’s reasonable costs and expenses (including reasonable fees and disbursements of the Administrative Agent’s external counsel) incurred in connection with the syndication of the Loans to the Lenders and the actions taken pursuant to Section 12.10, and (4) the Administrative Agent and the Lenders for all amounts expended, advanced or incurred by the Administrative Agent and the Lenders to collect the Notes, or to enforce the rights of the Administrative Agent and the Lenders under this Agreement or any other Loan Document, or to defend or assert the rights and claims of the Administrative Agent and the Lenders under the Loan Documents or with respect to the Project or the Collateral (by litigation or other proceedings), which amounts will include all court costs, attorneys’ fees and expenses, fees of auditors and accountants, and investigation expenses as may be incurred by the Administrative Agent and the Lenders in connection with any such matters (whether or not litigation is instituted), together with interest at the Default Rate on each such amount from the date of disbursement until the date of reimbursement to the Administrative Agent and the Lenders, all of which shall constitute part of the Loans and shall be secured by the Loan Documents.

92

Section 12.6 Approvals; Third Parties; Conditions. All approval rights retained or exercised by the Administrative Agent and the Lenders with respect to leases, contracts, plans, studies and other matters are solely to facilitate the Lenders’ credit underwriting, and shall not be deemed or construed as a determination that the Lenders have passed on the adequacy thereof for any other purpose and may not be relied upon by Borrower or any other Person. This Agreement is for the sole and exclusive use of the Administrative Agent, the Lenders and Borrower and may not be enforced, nor relied upon, by any Person other than the Administrative Agent, the Lenders and Borrower. All conditions of the obligations of the Administrative Agent and the Lenders hereunder, including the obligation to make advances, are imposed solely and exclusively for the benefit of the Administrative Agent and the Lenders, their successors and assigns, and no other Person shall have standing to require satisfaction of such conditions or be entitled to assume that the Lenders 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 the Administrative Agent and the Lenders at any time in their sole discretion.

Section 12.7 Lenders and Administrative Agent Not in Control; No Partnership. None of the covenants or other provisions contained in this Agreement shall, or shall be deemed to, give the Administrative Agent or any Lender the right or power to exercise control over the affairs or management of Borrower, the power of the Administrative Agent and the Lenders being limited to the rights to exercise the remedies referred to in the Loan Documents. The relationship between Borrower and the Lenders is, and at all times shall remain, solely that of debtor and creditor. No covenant or provision of the Loan Documents is intended, nor shall it be deemed or construed, to create a partnership, joint venture, agency or common interest in profits or income between the Administrative Agent, the Lenders and Borrower or to create an equity in the Project in the Administrative Agent or any Lender. The Administrative Agent and the Lenders neither undertake nor assume any responsibility or duty to Borrower or to any other person with respect to the Project, the Collateral or the Loans, except as expressly provided in the Loan Documents; and notwithstanding any other provision of the Loan Documents: (1) neither the Administrative Agent nor any Lender is, nor shall be construed as, a partner, joint venturer, alter ego, manager, controlling person or other business associate or participant of any kind of Borrower or its stockholders, members, or partners and neither the Administrative Agent nor any Lender intends to ever assume such status; (2) no Lender or the Administrative Agent shall in any event be liable for any Debts, expenses or losses incurred or sustained by Borrower; and (3) no Lender or the Administrative Agent shall be deemed responsible for or a participant in any acts, omissions or decisions of Borrower or its stockholders, members, or partners. The Administrative Agent, the Lenders and Borrower disclaim any intention to create any partnership, joint venture, agency or common interest in profits or income between the Administrative Agent, the Lenders and Borrower, or to create an equity interest in the Project or the Collateral in the Administrative Agent or any Lender, or any sharing of liabilities, losses, costs or expenses.

Section 12.8 Time of the Essence. Time is of the essence with respect to this Agreement.

Section 12.9 Successors and Assigns. Subject to the provisions of Section 12.24, this Agreement shall be binding upon and inure to the benefit of the Administrative Agent, the Lenders and Borrower and the respective successors and permitted assigns.

93

Section 12.10 Renewal, Extension or Rearrangement. All provisions of the Loan Documents shall apply with equal effect to each and all promissory notes and amendments thereof hereinafter executed which in whole or in part represent a renewal, extension, increase or rearrangement of the Loans. For portfolio management purposes, the Lenders may elect to divide the Loans into two or more separate loans evidenced by separate promissory notes with the same or different interest rates, so long as the aggregate payment and other obligations of Borrower are not effectively increased or otherwise modified. Borrower agrees to cooperate with the Administrative Agent and the Lenders and to execute such documents as the Administrative Agent reasonably may request to effect such division of the Loans.

Section 12.11 Waivers. No course of dealing on the part of the Administrative Agent or any Lender, their respective officers, employees, consultants or agents, nor any failure or delay by the Administrative Agent or any Lender with respect to exercising any right, power or privilege of the Administrative Agent or any Lender under any of the Loan Documents, shall operate as a waiver thereof.

Section 12.12 Cumulative Rights. Rights and remedies of the Administrative Agent and the Lenders under the Loan Documents shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy.

Section 12.13 Singular and Plural. Words used in this Agreement and the other Loan Documents in the singular, where the context so permits, shall be deemed to include the plural and vice versa. The definitions of words in the singular in this Agreement and the other Loan Documents shall apply to such words when used in the plural where the context so permits and vice versa.

Section 12.14 Phrases. When used in this Agreement and the other Loan Documents, the phrase “including” means “including, but not limited to,” the phrases “satisfactory to any Lender” or “satisfactory to the Administrative Agent” means in form and substance satisfactory to such Lender or the Administrative Agent, as the case may be, in all respects, the phrases “with Lender’s consent”, “with Lender’s approval”, “with the Administrative Agent’s consent” or “with the Administrative Agent’s approval” means such consent or approval at Lender’s or the Administrative Agent’s, as the case may be, discretion, and the phrases “acceptable to Lender” or “acceptable to the Administrative Agent” means acceptable to Lender or the Administrative Agent, as the case may be, at such party’s reasonable discretion acting in good faith.

Section 12.15 Exhibits and Schedules. The exhibits and schedules attached to this Agreement are incorporated herein and shall be considered a part of this Agreement for the purposes stated herein.

Section 12.16 Titles of Articles, Sections and Subsections. All titles or headings to articles, sections, subsections or other divisions of this Agreement and the other Loan Documents or the exhibits hereto and thereto are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto.

94

Section 12.17 Promotional Material. Borrower authorizes the Administrative Agent and each of the Lenders to issue press releases, advertisements and other promotional materials in connection with the Administrative Agent’s or such Lender’s own promotional and marketing activities, and describing the Loans and the Project in general terms and the Administrative Agent’s or such Lender’s participation in the Loans subject, in each case, to Borrower’s approval, which approval shall not be unreasonably withheld, conditioned or delayed. All references to the Administrative Agent or any Lender contained in any press release, advertisement or promotional material issued by Borrower or Borrower shall be approved in writing by the Administrative Agent and such Lender in advance of issuance.

Section 12.18 Survival. In the event that any Lender that may assign any interest in its Commitment or Loans hereunder in accordance with the terms of this Agreement, all of the representations, warranties, covenants, and indemnities of Borrower hereunder and under the other Loan Documents shall survive for the benefit of such assigning Lender the making of such assignment, notwithstanding that such assigning Lender may cease to be a “Lender” hereunder. Without limiting the foregoing, all indemnities of Borrower hereunder and under the other Loan Documents shall survive indefinitely, notwithstanding (a) the repayment in full of the Loans and the release of the Liens evidencing or securing the Loans or (b) the transfer (by sale, foreclosure, conveyance in lieu of foreclosure or otherwise) of any or all right, title and interest in and to the Project to any party. The representations, warranties and covenants of Borrower, other than those imposing indemnification obligations on Borrower (which shall survive indefinitely), shall survive for a period of two (2) years following the repayment in full of the Loans and the release of the Liens evidencing or securing the Loans (notwithstanding that prior to the end of such two-year period, Borrower may have transferred (by sale, foreclosure, conveyance in lieu of foreclosure or otherwise) any or all its right, title and interest in and to the Project to any other party).

Section 12.19 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER, THE ADMINISTRATIVE AGENT AND EACH LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTION OF EITHER PARTY OR ANY EXERCISE BY ANY PARTY OF THEIR RESPECTIVE RIGHTS UNDER THE LOAN DOCUMENTS OR IN ANY WAY RELATING TO THE LOANS OR THE PROJECT (INCLUDING, WITHOUT LIMITATION, ANY ACTION TO RESCIND OR CANCEL THIS AGREEMENT, AND ANY CLAIM OR DEFENSE ASSERTING THAT THIS AGREEMENT WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR VOIDABLE). THIS WAIVER IS A MATERIAL INDUCEMENT FOR THE ADMINISTRATIVE AGENT AND EACH LENDER TO ENTER THIS AGREEMENT.

Section 12.20 Remedies of Borrower. In the event that a claim or adjudication is made that the Administrative Agent, any of the Lenders, or their agents, acted unreasonably or unreasonably delayed acting in any case where by Applicable Law or under this Agreement or the other Loan Documents, the Administrative Agent, any Lender or any such agent, as the case may be, has an obligation to act reasonably or promptly, or otherwise violated this Agreement or the Loan Documents, Borrower agrees that none of the Administrative Agent, the Lenders or their agents shall be liable for any incidental, indirect, special, punitive, consequential or speculative damages or losses resulting from such failure to act reasonably or promptly in accordance with this Agreement or the other Loan Documents.

95

Section 12.21 GOVERNING LAW.

(1) THIS AGREEMENT WAS NEGOTIATED IN THE STATE OF NEW YORK AND MADE BY THE ADMINISTRATIVE AGENT AND LENDERS AND ACCEPTED BY BORROWER IN THE STATE OF NEW YORK, AND THE PROCEEDS OF THE NOTES 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. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THE OTHER LOAN DOCUMENTS, THE PARTIES HEREBY AGREE THAT 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 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 PURSUANT HERETO AND PURSUANT TO THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE IN WHICH THE PROJECT IS LOCATED, 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, EACH OF BORROWER, THE ADMINISTRATIVE AGENT AND EACH LENDER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT AND THE NOTES, AND THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

(2) ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST THE ADMINISTRATIVE AGENT, ANY LENDER OR BORROWER ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS MAY AT THE ADMINISTRATIVE AGENT’S OPTION (WHICH DECISION SHALL BE MADE BY THE MAJORITY LENDERS) BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN THE CITY OF NEW YORK, COUNTY OF NEW YORK, PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW AND

96

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 THE CHIEF LEGAL OFFICER OF MORGANS GROUP LLC, 475 TENTH AVENUE, NEW YORK, NEW YORK 10018 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 (A) SHALL GIVE PROMPT NOTICE TO THE ADMINISTRATIVE AGENT OF ANY CHANGED ADDRESS OF ITS AUTHORIZED AGENT HEREUNDER, (B) 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 (C) 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 12.22 Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement and understanding between the Administrative Agent, the Lenders and Borrower and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. Accordingly, the Loan Documents may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.

Section 12.23 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall constitute an original, but all of which shall constitute one document.

Section 12.24 Assignments and Participations.

(1) Assignments by Borrower. Borrower may not assign any of its rights or obligations hereunder, or under the Notes or under the other Loan Documents without the prior consent of all of the Lenders and the Administrative Agent.

97

(2) Assignments by the Lenders. Each Lender may assign any of its Loans, its Note and its Commitment (but only with the consent of the Administrative Agent and, in the event of a proposed assignment to a Person which is not an Eligible Assignee, the consent of Borrower, which consent shall not be unreasonably withheld and shall be deemed granted if not received within five (5) Business Days following written request therefore); provided that:

(a) no such consent by the Administrative Agent or Borrower shall be required in the case of any assignment by any Lender to another Lender or an Affiliate of such Lender or such other Lender (provided that in the case of an assignment to any such Affiliate, the assigning Lender will not be released from its obligations under the Loan Documents and the Administrative Agent may continue to deal only with such assigning Lender, unless such Affiliate is also an Eligible Assignee);

(b) except to the extent the Administrative Agent shall otherwise consent, any such partial assignment (other than to another Lender or an affiliate of a Lender) shall be in an amount at least equal to $10,000,000;

(c) each such assignment (including an assignment to another Lender or an affiliate of a Lender) by a Lender of its Loans or Commitment shall be made in such manner so that the same portion of its Loans and Commitment is assigned to the respective assignee;

(d) subject to the applicable Lender’s compliance with the provisions of clauses (b) and (c) above, the Administrative Agent’s consent to an assignment shall not be unreasonably withheld, delayed or conditioned if (i) such assignment is made to an Eligible Assignee, and (ii) the provisions of clause (e) have been satisfied; and

(e) upon execution and delivery by the assignee (even if already a Lender) to Borrower and the Administrative Agent of an Assignment and Acceptance pursuant to which such assignee agrees to become a “Lender” hereunder (if not already a Lender) having the Commitment and Loans specified in such instrument, and upon consent thereto by the Administrative Agent to the extent required above, the assignee shall have, to the extent of such assignment (unless otherwise consented to by the Administrative Agent), the obligations, rights and benefits of a Lender hereunder holding the Commitment and Loans (or portions thereof) assigned to it (in addition to the Commitment and Loans, if any, theretofore held by such assignee) and, except as provided in Section 12.24(2)(a), the assigning Lender shall, to the extent of such assignment, be released from the Commitment (or portion thereof) so assigned. Upon each such assignment the assigning Lender shall pay the Administrative Agent a processing and recording fee of $3,500 and the reasonable fees and disbursements of the Administrative Agent’s counsel incurred in connection therewith.

(3) Participations.

(a) A Lender may sell or agree to sell to one or more other Persons (each a “Participant”) a participation in all or any part of any Loans held by it, or in its Commitment, provided (A) such Lender’s obligations under this Agreement and the other Loan Documents shall remain unchanged, (B) such Lender shall remain solely responsible to the other applicable parties hereto for the performance of such obligations and (C) Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement and the other Loan Documents. In no event shall a Lender that sells a participation agree with the Participant to take or refrain from taking any action hereunder or under any other Loan Document except that such Lender may agree with the Participant that it

98

will not, without the consent of the Participant, agree to (i) increase or extend the term of such Lender’s Commitment, (ii) extend the date fixed for the payment of principal of or interest on the related Loan or Loans or any portion of any fee hereunder payable to the Participant, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon, or any fee hereunder payable to the Participant, to a level below the rate at which the Participant is entitled to receive such interest or fee or (v) consent to any modification, supplement or waiver hereof or of any of the other Loan Documents to the extent that the same, under Section 12.2, requires the consent of each Lender. Subject to subsection (3)(b) of this Section 12.24, Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.9(1), 2.9(5), and 2.9(6) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (2) of this Section 12.24. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 12.24 as though it were a Lender; provided that such Participant agrees to be subject to Section 12.24 as though it were a Lender.

(b) A Participant shall not be entitled to receive any greater payment under Section 2.9(1) or 2.9(6) than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with Borrower’s prior written consent. A Participant that is a non-U.S. Person that would become a Lender shall not be entitled to the benefits of Section 2.9(6) unless Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of Borrower, to comply with Section 2.9(6) as though it were a Lender.

(4) Certain Pledges. In addition to the assignments and participations permitted under the foregoing provisions of this Section 12.24 (but without being subject thereto), any Lender may (without notice to Borrower, the Administrative Agent or any other Lender and without payment of any fee) assign and pledge all or any portion of its Loans and its Note to any Federal Reserve Bank as collateral security pursuant to Regulation A and any operating circular issued by such Federal Reserve Bank, and such Loans and Note shall be fully transferable as provided therein. No such assignment shall release the assigning Lender from its obligations hereunder.

(5) Provision of Information to Assignees and Participants. A Lender may furnish any information concerning Borrower, any Borrower Party or any of their respective Affiliates or the Project in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants).

(6) No Assignments to Borrower or Affiliates. Anything in this Section 12.24 to the contrary notwithstanding, no Lender may assign or participate any interest in any Loan held by it hereunder to Borrower or any of its Affiliates without the prior consent of each Lender.

Section 12.25 Brokers. Borrower hereby represents to the Administrative Agent and each Lender Borrower has not dealt with any broker, underwriters, placement agent, or finder in connection with the transactions contemplated by this Agreement and the other Loan Documents, other than Ditmas Capital (the “Broker”). Borrower hereby agrees to pay all fees and commissions due and payable to Broker and to indemnify and hold the Administrative Agent and each Lender harmless from and against any and all claims, liabilities, costs and expenses of any kind in any way relating to or arising from a claim by any Person (including Broker) that such Person acted on behalf of such Borrower in connection with the transactions contemplated herein.

99

Section 12.26 Right of Setoff.

(1) Upon the occurrence and during the continuance of any Event of Default, each of the Lenders is, subject (as between the Lenders) to the provisions of subsection (3) of this Section 12.26, hereby authorized at any time and from time to time, without notice to Borrower (any such notice being expressly waived by Borrower) and to the fullest extent permitted by law, to setoff and apply any and all deposits (general or special, time or demand, provisional or final) at any time held, and other indebtedness at any time owing, by such Lender in any of its offices, in Dollars or in any other currency, to or for the credit or the account of Borrower against any and all of the respective obligations of Borrower now or hereafter existing under the Loan Documents, irrespective of whether or not such Lender or any other Lender shall have made any demand hereunder and although such obligations may be contingent or unmatured and such deposits or indebtedness may be unmatured. Each Lender hereby acknowledges that the exercise by any Lender of offset, setoff, banker’s lien, or similar rights against any deposit or other indebtedness of Borrower whether or not located in California or any other state with certain laws restricting lenders from pursuing multiple collection methods, could result under such laws in significant impairment of the ability of all the Lenders to recover any further amounts in respect of the Loan. Therefore, each Lender agrees that no Lender shall exercise any such right of setoff, banker’s lien, or otherwise, against any assets of Borrower (including all general or special, time or demand, provisional or other deposits and other indebtedness owing by such Lender to or for the credit or the account of Borrower) without the prior written consent of the Administrative Agent and the Majority Lenders.

(2) Each Lender shall promptly notify Borrower and the Administrative Agent after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights of the Lenders under this Section 12.26 are in addition to other rights and remedies (including other rights of setoff) which the Lenders may have.

(3) If an Event of Default has resulted in the Loans becoming due and payable prior to the stated maturity thereof, each Lender agrees that it shall turn over to the Administrative Agent any payment (whether voluntary or involuntary, through the exercise of any right of setoff or otherwise) on account of the Loans held by it in excess of its ratable portion of payments on account of the Loans obtained by all the Lenders.

Section 12.27 Reserved.

Section 12.28 Mortgage Loan Defaults.

(1) Without limiting the generality of the other provisions of this Agreement, and without waiving or releasing Borrower from any of its obligations hereunder, if there shall exist any Event of Default under the Mortgage Loan Documents or if Mortgage Loan Administrative Agent asserts that an Event of Default has occurred and is continuing under the Mortgage Loan Documents (whether or not Mortgage Loan Administrative Agent shall have delivered proper notice to Mortgage Borrower, and without regard to any other defenses or offset rights Mortgage Borrower may have against Mortgage Loan Administrative Agent (on behalf of Mortgage Lender), Borrower hereby expressly agrees that Administrative Agent (on behalf of Lenders) shall have the immediate right, without notice to or demand on Borrower or Mortgage Borrower, but shall be under no obligation: (i) to pay

100

all or any part of the Mortgage Loan, and any other sums, that are then due and payable and to perform any act or take any action on behalf of Mortgage Borrower, as may be appropriate, to cause all of the terms, covenants and conditions of the Mortgage Loan Documents on the part of Mortgage Borrower to be performed or observed thereunder to be promptly performed or observed; and (ii) to pay any other amounts and take any other action as Administrative Agent, in its sole and absolute discretion, shall deem advisable to protect or preserve the rights and interests of Lenders in the Loans and/or the Collateral. Administrative Agent shall have no obligation to complete any cure or attempted cure undertaken or commenced by Administrative Agent. All sums so paid and the costs and expenses incurred by Administrative Agent in exercising rights under this Section 12.28(1) (including, without limitation, reasonable attorneys’ and other professional fees), with interest at the Default Rate, for the period from the date of demand by Administrative Agent to Borrower for such payments to the date of payment to Administrative Agent, shall constitute a portion of the Debt, shall be secured by the Pledge Agreement and shall be due and payable to Administrative Agent within two Business Days following demand therefor.

(2) Subject to the rights of tenants and the owners of Units, Borrower hereby grants, and shall cause Mortgage Borrower to grant, Administrative Agent and any Person designated by Administrative Agent the right to enter upon the Project at any time for the purpose of carrying out the rights granted to Administrative Agent under this Section 12.28. Borrower shall not, and shall not cause or permit Mortgage Borrower or any other Person to impede, interfere with, hinder or delay, any effort or action on the part of Administrative Agent to cure any default or asserted default under the Mortgage Loan, or to otherwise protect or preserve Administrative Agent’s interests in the Loans and the Collateral, including the Project in accordance with the provisions of this Agreement and the other Loan Documents.

(3) Borrower hereby indemnifies Lenders and Administrative Agent from and against all out-of-pocket liabilities, obligations, losses, damages, penalties, assessments, actions, or causes of action, judgments, suits, claims, demands, costs, expenses (including, without limitation, reasonable attorneys’ and other professional fees, whether or not suit is brought, and settlement costs), and disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against Administrative Agent as a result of the foregoing actions described in Section 12.28(1). Administrative Agent shall have no obligation to Borrower, Mortgage Borrower or any other party to make any such payment or performance. Borrower shall not impede, interfere with, hinder or delay, and shall cause Mortgage Borrower to not impede, interfere with, hinder or delay, any effort or action on the part of Administrative Agent to cure any default or asserted default under the Mortgage Loan, or to otherwise protect or preserve Administrative Agent’s interests in the Loans and the Collateral following a default or asserted default under the Mortgage Loan.

101

(4) If Administrative Agent shall receive a copy of any notice of default under the Mortgage Loan Documents sent by Mortgage Loan Administrative Agent to Mortgage Borrower, such notice shall constitute full protection to Lender for any action taken or omitted to be taken by Administrative Agent, in good faith, in reliance thereon. As a material inducement to Administrative Agent making the Loans, Borrower hereby absolutely and unconditionally release and waive all claims against Administrative Agent arising out of Administrative Agent’s exercise of its rights and remedies provided in this Section 12.28(4) other than claims arising out of the fraud, illegal acts, gross negligence or willful misconduct of Administrative Agent. In the event that Administrative Agent (on behalf of Lenders) makes any payment in respect of the Mortgage Loan, Administrative Agent (on behalf of Lenders) shall be subrogated to all of the rights of Mortgage Loan Administrative Agent (on behalf of Mortgage Lender) under the Mortgage Loan Documents against the Project, in addition to all other rights it may have under the Loan Documents.

(5) Any default under the Mortgage Loan which is cured by Administrative Agent (on behalf of Lenders), whether or not such cure is prior to the expiration of any applicable grace, notice or cure period under the Mortgage Loan Documents, shall constitute an immediate Event of Default under this Agreement without any notice, grace or cure period otherwise applicable under this Agreement.

(6) In the event that Administrative Agent (on behalf of Lenders) makes any payment in respect of the Mortgage Loan, Administrative Agent (on behalf of Lenders) shall be subrogated to all of the rights of Mortgage Loan Administrative Agent (on behalf of Mortgage Lender) under the Mortgage Loan Documents against the Project and Mortgage Borrower in addition to all other rights Lender may have under the Loan Documents or applicable law.

Section 12.29 Intercreditor Agreement.

(1) Lenders and Mortgage Lender are parties to a certain intercreditor agreement dated as of the Original Closing Date (the “Intercreditor Agreement”) memorializing their relative rights and obligations with respect to the Mortgage Loan, the Loans, Mortgage Borrower, Borrower, the Collateral and the Project. Borrower and Mortgage Borrower hereby acknowledge and agree that (i) such Intercreditor Agreement is intended solely for the benefit of Lenders and Mortgage Lender and (ii) Borrower and Mortgage Borrower are not intended third-party beneficiaries of any of the provisions therein and shall not be entitled to rely on any of the provisions contained therein. Lenders and Mortgage Lender shall have no obligation to disclose to Borrower the contents of the Intercreditor Agreement. Borrower’s obligations hereunder are independent of such Intercreditor Agreement and remain unmodified by the terms and provisions thereof.

(2) In the event the Administrative Agent (on behalf of the Lenders) is required pursuant to the terms of the Intercreditor Agreement to pay over any payment or distribution of assets, whether in cash, property or securities which is applied to the Debt, including, without limitation, any proceeds of the Project previously received by Administrative Agent (on behalf of the Lenders) on account of the Loans to the Mortgage Loan Administrative Agent (on behalf of the Mortgage Lender), then Borrower agrees to indemnify Administrative Agent (on behalf of the Lenders) and Lenders for any amounts so paid, and any amount so paid shall continue to be owing pursuant to the Loan Documents as part of the Debt notwithstanding the prior receipt of such payment by Administrative Agent (on behalf of the Lenders).

102

Section 12.30 Discussions with Mortgage Lender. In connection with the exercise of its rights set forth in the Loan Documents, Administrative Agent shall have the right at any time to discuss the Project, the Mortgage Loan, the Loans or any other matter directly with Mortgage Lender, Mortgage Loan Administrative Agent or Mortgage Lender’s consultants, agents or representatives without notice to or permission from Borrower or any other Borrower Party, nor shall Administrative Agent have any obligation to disclose such discussions or the contents thereof with Borrower or any other Borrower Party.

Section 12.31 Independent Approval Rights. If any action, proposed action or other decision is consented to or approved by Mortgage Loan Administrative Agent, such consent or approval shall not be binding or controlling on Administrative Agent. Borrower hereby acknowledges and agrees that (i) the risks of Mortgage Lender in making the Mortgage Loan are different from the risks of Lenders in making the Loans, (ii) in determining whether to grant, deny, withhold or condition any requested consent or approval Mortgage Loan Administrative Agent and the Administrative Agent may reasonably reach different conclusions, and (iii) Administrative Agent has an absolute independent right to grant, deny, withhold or condition any requested consent or approval based on its own point of view. Further, the denial by the Administrative Agent of a requested consent or approval shall not create any liability or other obligation of Lenders or Administrative Agent if the denial of such consent or approval results directly or indirectly in a default under the Mortgage Loan, and Borrower hereby waives any claim of liability against Lenders or Administrative Agent arising from any such denial.

ARTICLE 13

LIMITATIONS ON LIABILITY

Section 13.1 Limitation on Liability. Except as provided below, Borrower shall not be personally liable for amounts due under the Loan Documents. Borrower shall be personally liable to the Administrative Agent and the Lenders for any deficiency, loss or damage suffered by the Administrative Agent or any Lender because of: (1) Borrower’s or Mortgage Borrower’s commission of a criminal act, (2) the willful misapplication by Borrower or any other Borrower Party of any funds derived from the Project, including security deposits, Net Sales Proceeds, escrow account funds, insurance proceeds and condemnation awards; (3) the fraud or material misrepresentation by Borrower or any other Borrower Party made in or in connection with the Loan Documents or the Loan; (4) Mortgage Borrower’s collection of rents more than one month in advance or entering into or modifying leases, or receipt of monies by Borrower or any other Borrower Party in connection with the modification of any leases, in violation of this Agreement or any of the other Loan Documents; (5) Borrower’s or Mortgage Borrower’s failure to apply proceeds of rents or any other payments in respect of the leases and other income of the Project or any other collateral to the costs of maintenance and operation of the Project and to the payment of taxes, lien claims, insurance premiums, Debt Service and other amounts due under the Loan Documents; (6) any Borrower Party’s failure to comply with provisions of the Loan Documents prohibiting the sale, transfer or encumbrance of the Project, the collateral, or any direct or indirect ownership interest in Borrower or Mortgage Borrower; (7) to the extent of sufficient Operating Revenues, Mortgage Borrower’s failure to maintain insurance as required by this Agreement or to pay any taxes or assessments affecting the Project or any mortgage recording or

103

similar taxes required to be paid by any Person in connection with the execution, delivery, recordation, filing, registration, perfection or enforcement of any of the Loan Documents; (8) intentional or grossly negligent damage or destruction to the Project caused by the acts or omissions of Borrower, Mortgage Borrower or their respective agents, employees, or contractors; (9) a breach of Borrower’s obligations with respect to environmental matters under Article 5; (10) Borrower’s failure to pay for any loss, liability or expense (including attorneys’ fees) incurred by the Administrative Agent or any Lender arising out of any claim or allegation made by Borrower, its successors or assigns, or any creditor of Borrower, that this Agreement or the transactions contemplated by the Loan Documents establish a joint venture, partnership or other similar arrangement between Borrower, the Administrative Agent and any Lender; (11) any brokerage commission or finder’s fees claimed in connection with the transactions contemplated by the Loan Documents; or (12) Borrower’s or Mortgage Borrower’s intentional interference with the Administrative Agent’s exercise of rights and remedies under the Loan Documents. None of the foregoing limitations on the personal liability of Borrower shall modify, diminish or discharge the personal liability of any Joinder Party. Notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents: (a) neither the Administrative Agent nor the Lenders shall be deemed to have waived any right which the Administrative Agent or any Lender may have under Sections 506(a), 506(b), 1111(b) or any other provision of the Bankruptcy Code, or corresponding or superseding sections of the Bankruptcy Amendments and Federal Judgeship Act of 1984, as such sections may be amended, to file a claim for the full amount due to the Administrative Agent or such Lender under the Loan Documents or to require that all collateral shall continue to secure the amounts due under the Loan Documents; and (b) the Secured Indebtedness shall be fully recourse to Borrower and Joinder Parties in the event that: (i) there is a default under Section 10.9 and the involuntary case or other proceeding against a Bankruptcy Party referred to therein has been commenced by or with the collusion of another Bankruptcy Party; (ii) there is a default under Section 10.10; (iii) Borrower fails to obtain the Administrative Agent’s prior written consent to any subordinate financing or other voluntary Lien encumbering the Collateral or the Project; (iv) Borrower fails to obtain the Administrative Agent’s prior written consent to any assignment, transfer, or conveyance of the Project or any interest therein or of any direct or indirect interest in Borrower, Mortgage Borrower, or any other Borrower Party, as required by the Loan Documents; or (v) Mortgage Borrower or any other Borrower Party which is a party to the Forward Purchase Contract shall be default in the performance of its obligations thereunder or shall bring any action alleging that the Forward Purchase Contract is invalid or unenforceable in any respect.

Section 13.2 Limitation on Liability of the Administrative Agent’s and the Lenders’ Officers, Employees, etc. Any obligation or liability whatsoever of the Administrative Agent or any Lender which may arise at any time under this Agreement or any other Loan Document shall be satisfied, if at all, out of the Administrative Agent’s or such Lender’s respective assets 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 the Administrative Agent’s or any Lender’s shareholders, directors, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort or otherwise.

104

ARTICLE 14

BUILDING CONVERSION; PAYMENT OF
RELEASE PRICES; SALE OF UNITS

Section 14.1 Completion of Building Conversion.

(1) Borrower shall cause Mortgage Borrower to diligently pursue to completion the Building Conversion in accordance with the Plans and Specifications, the Project Budget, Applicable Law, the Mortgage Loan Documents and this Agreement, free and clear of Liens or claims for Liens for materials supplied and for labor or services performed in connection therewith. Without limiting the generality of the forgoing, Borrower shall cause Mortgage Borrower to cause (a) the Hotel Opening to occur by not later than the Hotel Opening Deadline, and (b) Building Conversion to occur by not later than the Construction Completion Deadline, provided that the Construction Completion Deadline may be extended for a period of time, not to exceed sixty (60) days, as a result of Unavoidable Delay. Borrower shall or shall cause Mortgage Borrower to pay all the expenses and costs of the Administrative Agent in connection with the Building Conversion, including without limitation, the Administrative Agent’s reasonable attorneys’ fees, intangible taxes, additional title insurance premiums, recording fees and all other costs connected with the funding of advances.

(2) Borrower shall not permit Mortgage Borrower to modify the Plans and Specifications in any material respect, nor shall Borrower permit Mortgage Borrower to modify the Project Budget, in each case without the Administrative Agent’s prior written consent; provided, however, no such consent shall be required with respect to increases in that portion of the Project Budget setting forth the cost to complete the Building Conversion which, when combined with any other increases in such portion of the Project Budget occurring after the Amendment Closing Date, do not exceed $1,700,000. Administrative Agent shall provide its approval (or disapproval with specific reasons therefor) within ten (10) Business Days of its receipt of Borrower’s submissions hereunder and such consent shall not be unreasonably withheld.

Section 14.2 Marketing and Sales Program; Sales of Units; Deposits. Borrower shall cause Mortgage Borrower to diligently pursue the sale of all Units in good faith and in accordance with the sales and marketing program in effect at the Project as of the Amendment Closing Date, as well as, to the extent requested by Administrative Agent, in accordance with a formal written sales program delivered to and approved in writing by the Administrative Agent subsequent to the Original Closing Date (the “Approved Sales Program”). Borrower shall cause Mortgage Borrower to obtain the Administrative Agent’s prior written approval for any material deviation from the sales and marketing program currently being employed at the Project by Mortgage Borrower, as well as to any material deviation from the Approved Sales Program. All reservations, marketing, and sales, including the Approved Sales Program, shall be in compliance with all Applicable Laws, including the Condominium Act. Borrower shall cause Mortgage Borrower to timely and fully comply with all of its obligation under the Purchase Contracts. Without limiting the generality of the foregoing, each deposit under a Purchase Contract shall be held in escrow in the Condominium Escrow in accordance with Applicable Law and a Condominium Escrow Agreement approved by the

105

Administrative Agent until the earlier of (a) the closing of the sale of the respective Unit, at which time it shall be applied to the purchase price for such Unit in accordance with such Purchase Contract, or (b) such deposit becomes payable to Mortgage Borrower other than as a result of the closing of such Unit (e.g., as a result of a default by the purchaser under such Purchase Contract), at which time Borrower shall cause Mortgage Borrower to cause such deposit to be released from the Condominium Escrow to the Mortgage Loan Administrative Agent to be applied in accordance with Section 14.2 of the Mortgage Loan Agreement until such time as the Mortgage Loan has been repaid in full (thereafter, Borrower shall pay such deposit to the Administrative Agent to be applied to the outstanding principal under the Loans).

Section 14.3 Sale of Units and Payment of Release Price. Borrower shall not allow Mortgage Borrower to permit the release of any Units from the Liens of the Mortgage Loan Documents except upon satisfaction of the “Partial Release Conditions” set forth in the Mortgage Loan Agreement. In the event that the Mortgage Loan is fully repaid prior to the Maturity Date, Borrower shall not permit the Mortgage Loan Borrower to consummate the sale of any Unit unless the Administrative Agent has determined that each of the following conditions shall have been satisfied:

(1) No Event of Default or Potential Default shall exist;

(2) Borrower shall pay to the Administrative Agent the Release Price for such Unit, which payment shall be applied in accordance with the provisions of this Agreement;

(3) The Administrative Agent shall be given not less than fifteen (15) Business Day’s prior written notice of such sale, which notice shall describe the Unit and the name of the purchaser and which notice shall be accompanied by a copy of the fully executed Purchase Contract and a copy of the certificate of occupancy or its equivalent for any Unit that has been the subject of construction work for which a building permit was required or issued; and

(4) Borrower shall pay all costs and expenses incurred by the Administrative Agent in connection with any partial release, including without limitation, the Administrative Agent’s attorneys’ fees and costs, recording fees and escrow fees.

Section 14.4 Application of Excess Cash Flow. Borrower shall cause all Excess Cash Flow to be applied in accordance with Section 14.4 of the Mortgage Loan Agreement. In the event that the Mortgage Lender waives the requirements of Sections 14.4 or 14.6 of the Mortgage Loan Agreement or the Mortgage Loan has been repaid in full, Borrower shall comply with Sections 14.4 and 14.6 of the Mortgage Loan Agreement as though they are a part of this Agreement.

Section 14.5 Sale of Parking Spaces. During the term of this Agreement, Borrower shall not permit Mortgage Borrower to sell or convey any Parking Space to any Person who is not also a purchaser or owner of a Unit. The foregoing prohibition shall not prohibit Borrower or Mortgage Borrower from entering into parking agreements with tenants of the Project, provided that the term of any such agreement shall extend no longer than the term of the respective lease. The Parking Space Release Price from any sale or conveyance of a Parking Space other than pursuant to a Qualified Purchase Contract shall be paid to the Mortgage Loan Administrative Agent and applied to reduce the principal outstanding balance under the Mortgage Loan until such time as the Mortgage Loan has been repaid in full. Thereafter, in the event Borrower is permitted to sell a Parking Space separate from a sale of a Unit, as a condition to such sale, Borrower shall pay to the Administrative Agent an amount equal to the Parking Space Release Price for such Parking Space.

106

ARTICLE 15

THE ADMINISTRATIVE AGENT

Section 15.1 Appointment, Powers and Immunities. Each Lender hereby appoints and authorizes the Administrative Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to the Administrative Agent by the terms of this Agreement and of the other Loan Documents, together with such other powers as are reasonably incidental thereto. The Administrative Agent (which term as used in this sentence and in Section 15.5 and the first sentence of Section 15.6 shall include reference to its affiliates and its own and its affiliates’ officers, directors, employees and agents):

(1) shall have no duties or responsibilities except those expressly set forth in this Agreement and in the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee for any Lender except to the extent that the Administrative Agent acts as an agent with respect to the receipt or payment of funds, nor shall the Administrative Agent have any fiduciary duty to Borrower nor shall any Lender have any fiduciary duty to Borrower or any other Lender;

(2) shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement or in any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Loan Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any Note or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by Borrower or any other Person to perform any of its obligations hereunder or thereunder; and

(3) as among Lenders (and not as it relates to Borrower) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other Loan Document or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except to the extent any such action taken or omitted violates the Administrative Agent’s standard of care set forth in the first sentence of Section 15.5.

(4) shall not, except to the extent expressly instructed by the Majority Lenders with respect to collateral security under the Pledge Agreement, be required to initiate or conduct any litigation or collection proceedings hereunder or under any other Loan Document; and

(5) shall not be required to take any action which is contrary to this Agreement or any other Loan Document or Applicable Law.

107

The relationship between the Administrative Agent and each Lender is a contractual relationship only, and nothing herein shall be deemed to impose on the Administrative Agent any obligations other than those for which express provision is made herein or in the other Loan Documents. The Administrative Agent may employ agents and attorneys in fact, and may delegate all or any part of its obligations hereunder, to third parties and shall not be responsible for the negligence or misconduct of any such agents, attorneys in fact or third parties selected by it in good faith. The Administrative Agent may deem and treat the payee of a Note as the holder thereof for all purposes hereof unless and until a notice of the assignment or transfer thereof shall have been filed with the Administrative Agent, any such assignment or transfer to be subject to the provisions of Section 12.24. Except to the extent expressly provided in Section 15.8, the provisions of this Article 15 are solely for the benefit of the Administrative Agent and the Lenders, and Borrower shall not have any rights as a third-party beneficiary of any of the provisions hereof and the Lenders may modify or waive such provisions of this Article 15 in their sole and absolute discretion.

Section 15.2 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon any certification, notice or other communication (including, without limitation, any thereof by telephone, telecopy, telegram or cable) reasonably believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent. As to any matters not expressly provided for by this Agreement or any other Loan Document, the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or thereunder in accordance with instructions given by the Majority Lenders, and such instructions of the Majority Lenders and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders.

Section 15.3 Defaults.

(1) The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of a Potential Default or Event of Default unless the Administrative Agent has received notice from a Lender or Borrower specifying such Potential Default or Event of Default and stating that such notice is a “Notice of Default”. In the event that the Administrative Agent receives such a notice of the occurrence of a Potential Default or Event of Default, the Administrative Agent shall give prompt notice thereof to the Lenders. Within ten (10) days of delivery of such notice of Potential Default or Event of Default from the Administrative Agent to the Lenders (or such shorter period of time as the Administrative Agent determines is necessary), the Administrative Agent and the Lenders shall consult with each other to determine a proposed course of action. The Administrative Agent shall (subject to Section 15.7) take such action with respect to such Potential Default or Event of Default as shall be directed by the Majority Lenders, provided that, (A) unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, including decisions (1) to make protective advances that the Administrative Agent determines are necessary to protect or maintain the Project and (2) to foreclose on any of the Project or exercise any other remedy, with respect to such Potential Default or Event of Default as it shall deem advisable in the interest of the Lenders except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of all of the Lenders

108

and (B) no actions approved by the Majority Lenders shall violate the Loan Documents or Applicable Law. Each of the Lenders acknowledges and agrees that no individual Lender may separately enforce or exercise any of the provisions of any of the Loan Documents (including the Notes) other than through the Administrative Agent. The Administrative Agent shall advise the Lenders of all material actions which the Administrative Agent takes in accordance with the provisions of this Section 15.3(1) and shall continue to consult with the Lenders with respect to all of such actions. Notwithstanding the foregoing, if the Majority Lenders shall at any time direct that a different or additional remedial action be taken from that already undertaken by the Administrative Agent, including the commencement of foreclosure proceedings, such different or additional remedial action shall be taken in lieu of or in addition to, the prosecution of such action taken by the Administrative Agent; provided that all actions already taken by the Administrative Agent pursuant to this Section 15.3(1) shall be valid and binding on each Lender. All money (other than money subject to the provisions of Section 15.7) received from any enforcement actions, including the proceeds of a foreclosure sale of the Project or Collateral, shall be applied, first, to the payment or reimbursement of the Administrative Agent for expenses incurred in accordance with the provisions of Sections 15.3(2), (3) and (4) and 15.5, second, to the payment or reimbursement of the Lenders for expenses incurred in accordance with the provisions of Sections 15.3(2), (3) and (4) and 15.5; third, to the payment or reimbursement of the Lenders for any advances made pursuant to Section 15.3(2); and fourth, pari passu to the Lenders in accordance with their respective Proportionate Shares, unless an Unpaid Amount is owed pursuant to Section 15.12, in which event such Unpaid Amount shall be deducted from the portion of such proceeds of the Defaulting Lender and be applied to payment of such Unpaid Amount to the Special Advance Lender.

(2) All losses with respect to interest (including interest at the Default Rate) and other sums payable pursuant to the Notes or incurred in connection with the Loans shall be borne by the Lenders in accordance with their respective proportionate shares of the Loans. All losses incurred in connection with the Loans, the enforcement thereof or the realization of the security therefor, shall be borne by the Lenders in accordance with their respective proportionate shares of the Loan, and the Lenders shall promptly, upon request, remit to the Administrative Agent their respective proportionate shares of (i) any expenses incurred by the Administrative Agent in connection with any Default to the extent any expenses have not been paid by Borrower, (ii) any advances made to pay taxes or insurance or otherwise to preserve the Lien of the Pledge Agreement or to preserve and protect the Collateral, (iii) any other expenses incurred in connection with the enforcement of the Pledge Agreement or other Loan Documents, and (iv) any expenses incurred in connection with the consummation of the Loans not paid or provided for by Borrower. To the extent any such advances are recovered in connection with the enforcement of the Pledge Agreement or the other Loan Documents, each Lender shall be paid its proportionate share of such recovery after deduction of the expenses of the Administrative Agent and the Lenders.

(3) If, at the direction of the Majority Lenders or otherwise as provided in Section 15.3(1), any action(s) is brought to collect on the Notes or enforce the Pledge Agreement or any other Loan Document, such action shall (to the extent permitted under Applicable Law and the decisions of the court in which such action is brought) be an action brought by the Administrative Agent and the Lenders, collectively, to collect on all or a portion of the Notes or enforce the Pledge Agreement or any other

109

Loan Document and counsel selected by the Administrative Agent shall prosecute any such action on behalf of the Administrative Agent and the Lenders, and the Administrative Agent and the Lenders shall consult and cooperate with each other in the prosecution thereof. All decisions concerning the appointment of a receiver while such action is pending, the conduct of such receivership, the conduct of such action, the collection of any judgment entered in such action and the settlement of such action shall be made by the Administrative Agent. The costs and expenses of any such action shall be borne by the Lenders in accordance with each of their respective proportionate shares.

(4) If, at the direction of the Majority Lenders or otherwise as provided in Section 15.3(1), any action(s) is brought to foreclose the Pledge Agreement such action shall (to the extent permitted under Applicable Law and the decisions of the court in which such action is brought) be an action brought by the Administrative Agent and the Lenders, collectively, to foreclose all or a portion of the Pledge Agreement and collect on the Notes. Counsel selected by the Administrative Agent shall prosecute any such foreclosure on behalf of the Administrative Agent and the Lenders and the Administrative Agent and the Lenders shall consult and cooperate with each other in the prosecution thereof. All decisions concerning the conduct of such foreclosure and the manner of taking and holding title to the Collateral (other than as set forth in subsection (5) below), the sale of the Collateral after realization of the Collateral under the Pledge Agreement, and the commencement and conduct of any deficiency judgment proceeding shall be made by the Administrative Agent. The costs and expenses of foreclosure will be borne by the Lenders in accordance with their respective proportionate shares.

(5) If title to the Collateral is acquired after a realization of the Collateral under the Pledge Agreement, title shall be held by the Administrative Agent in its own name in trust for the Lenders or, at the Administrative Agent’s election, in the name of a wholly owned subsidiary of the Administrative Agent on behalf of the Lenders.

(6) If the Administrative Agent (or its subsidiary) acquires title to the Collateral, all material decisions with respect to the possession, ownership, development, construction, control, operation, leasing, management and sale of the Project shall be made by the Administrative Agent. All income or other money received after so acquiring title to or taking possession of the Collateral, including income from the operation and management of the Project and the proceeds of a sale of the Project, shall be applied, first, to the payment or reimbursement of the Administrative Agent and the expenses incurred in accordance with the provisions of this Article 15, second, to the payment of operating expenses with respect to the Project; third, to the establishment of reasonable reserves for the operation of the Project; fourth, to the payment or reimbursement of the Lenders for any advances made pursuant to Section 15.3(2); fifth to fund any capital improvement, leasing and other reserves; and sixth, to the Lenders in accordance with their respective proportionate shares, unless an Unpaid Amount is owed pursuant to Section 15.12, in which event such Unpaid Amount shall be deducted from the portion of such proceeds of the Defaulting Lender and be applied to payment of such Unpaid Amount to the Special Advance Lender.

110

Section 15.4 Rights as a Lender. With respect to its Commitment and the Loans made by it Eurohypo (and any successor acting as Administrative Agent) in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Administrative Agent, and the term “Lender” or “Lenders” shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. Eurohypo (and any successor acting as Administrative Agent) and its affiliates may (without having to account therefor to any Lender) lend money to, make investments in and generally engage in any kind of lending, trust or other business with Borrower (and any of its Affiliates) as if it were not acting as the Administrative Agent, and Eurohypo and its affiliates may accept fees and other consideration from Borrower for services in connection with this Agreement or otherwise without having to account for the same to the Lenders.

Section 15.5 Standard of Care; Indemnification. In performing its duties under the Loan Documents, the Administrative Agent will exercise the same degree of care as it normally exercises in connection with real estate loans in which no syndication or participations are involved, but the Administrative Agent shall have no further responsibility to any Lender except as expressly provided herein and except for its own gross negligence or willful misconduct which resulted in actual loss to such Lender, and, except to such extent, the Administrative Agent shall have no responsibility to any Lender for the failure by the Administrative Agent to comply with any of the Administrative Agent’s obligations to Borrower under the Loan Documents or otherwise. The Lenders agree to indemnify the Administrative Agent (to the extent not reimbursed under Section 12.5, but without limiting the obligations of Borrower under Section 12.5) ratably in accordance with the aggregate principal amount of the Loans held by the Lenders (or, if no Loans are at the time outstanding, ratably in accordance with their respective Commitments), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Administrative Agent (including by any Lender) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other Loan Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses that Borrower is obligated to pay under Section 12.5, but excluding, unless a Event of Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the Administrative Agent’s breach of its standard of care set forth in the first sentence of this Section 15.5.

Section 15.6 Non Reliance on Administrative Agent and Other Lenders. Each Lender agrees that it has, independently and without reliance on the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of Borrower and its Affiliates and decision to enter into this Agreement and that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or under any other Loan Document. Subject to the provisions of the first sentence of Section 15.5, the Administrative Agent shall not be required to keep itself informed as to the performance or observance by Borrower of this Agreement or any of the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the Project or the books of Borrower or any of its Affiliates. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Administrative Agent hereunder or as otherwise agreed by the Administrative Agent and the Lenders, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of Borrower or any of its Affiliates that may come into the possession of the Administrative Agent or any of its affiliates.

111

Section 15.7 Failure to Act. Except for action expressly required of the Administrative Agent hereunder, and under the other Loan Documents, the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction from the Lenders of their indemnification obligations under Section 15.5 against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action.

Section 15.8 Resignation of Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Lenders and Borrower. Upon any such resignation, the Majority Lenders shall have the right to appoint a successor Administrative Agent that shall be a Person that meets the qualifications of an Eligible Assignee. Such successor Administrative Agent shall be approved by Borrower, which approval shall not be unreasonably withheld, delayed or conditioned. If no successor Administrative Agent shall have been so appointed by the Majority Lenders and shall have accepted such appointment within thirty (30) days after the retiring Administrative Agent’s giving of notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, that shall be an institutional lender that meets the requirements of the immediately preceding sentence. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder (if not already discharged therefrom as provided above in this Section 15.8). The fees payable by Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between Borrower and such successor. After any retiring Administrative Agent’s resignation hereunder as Administrative Agent, the provision of this Article 15 and Section 12.5 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent.

Section 15.9 Consents under Loan Documents. As between Borrower and Lenders, the Administrative Agent may as expressly provided in the Loan Documents and, if not expressly provided, with the consent of the Majority Lenders (a) grant any consent or approval required of it or (b) consent to any modification, supplement or waiver under any of the Loan Documents. If the Administrative Agent solicits any consents or approvals from the Lenders under any of the Loan Documents, each Lender shall within ten (10) Business Days of receiving such request, give the Administrative Agent written notice of its consent or approval or denial thereof; provided that, if any Lender does not respond within such ten (10) Business Days, such Lender shall be deemed to have authorized the Administrative Agent to vote such Lender’s interest with respect to the matter which was the subject of the Administrative Agent’s solicitation as the Administrative Agent elects. Any such solicitation by the Administrative Agent for a consent or approval shall be in writing and shall include a description of the matter or thing as to which such consent or approval is requested and shall include the Administrative Agent’s recommended course of action or determination in respect thereof. After Administrative Agent’s resignation hereunder as Administrative Agent, the provisions of this Article 15 and Section 12.5 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent.

112

Section 15.10 Authorization. The Administrative Agent is hereby authorized by the Lenders to execute, deliver and perform in accordance with the terms of each of the Loan Documents to which the Administrative Agent is or is intended to be a party and each Lender agrees to be bound by all of the agreements of the Administrative Agent contained in such Loan Documents. Borrower shall be entitled to rely on all written agreements, approvals and consents received from the Administrative Agent as being that also of the Lenders, without obtaining separate acknowledgment or proof of authorization of same.

Section 15.11 Reserved.

Section 15.12 Defaulting Lenders.

(1) If any Lender (a “Defaulting Lender”) shall for any reason fail to (i) make any respective Loan required pursuant to the terms of this Agreement or (ii) pay its proportionate share of an advance or disbursement to protect the Collateral or the Lien of the Pledge Agreement, any of the other Lenders may, but shall not be obligated to, make all or a portion of the Defaulting Lender’s Loan or proportionate share of such advance, provided that such Lender gives the Defaulting Lender and the Administrative Agent prior notice of its intention to do so. The right to make such advances in respect of the Defaulting Lender shall be exercisable first by the Lender holding the greatest proportionate share and thereafter to each of the Lenders in descending order of their respective proportionate shares of the Loans or in such other manner as the Majority Lenders (excluding the Defaulting Lender) may agree on. Any Lender making all or any portion of the Defaulting Lender’s proportionate share of the applicable Loan or advance in accordance with the foregoing terms and conditions shall be referred to as a “Special Advance Lender”.

(2) In any case where a Lender becomes a Special Advance Lender (i) the Special Advance Lender shall be deemed to have purchased, and the Defaulting Lender shall be deemed to have sold, a senior participation in the Defaulting Lender’s respective Loan to the extent of the amount so advanced or disbursed (the “Advanced Amount”) bearing interest (including interest at the Default Rate, if applicable) and (ii) the Defaulting Lender shall have no voting rights under this Agreement or any other Loan Documents so long as it is a Defaulting Lender. It is expressly understood and agreed that each of the respective obligations under this Agreement and the other Loan Documents, including advancing Loans, losses incurred in connection with the Loan, including costs and expenses of enforcement, advancing to preserve the Lien of the Pledge Agreement or to preserve and protect the Collateral, shall be without regard to any adjustment in the proportionate shares occasioned by the acts of a Defaulting Lender. The Special Advance Lender shall be entitled to recover from the Defaulting Lender an amount (the “Unpaid Amount”) equal to the applicable Advanced Amount, plus any unpaid interest due and owing with respect thereto, less any repayments thereof made by the Defaulting Lender immediately upon demand. The Defaulting Lender shall have the right to repurchase the senior participation in its Loan from the Special Advance Lender at any time by the payment of the Unpaid Amount.

113

(3) A Special Advance Lender shall (i) give notice to the Defaulting Lender, the Administrative Agent and each of the other Lenders (provided that failure to deliver said notice to any party other than the Defaulting Lender shall not constitute a default under this Agreement) of the Advance Amount and the percentage of the Special Advance Lender’s senior participation in the Defaulting Lender’s Loan and (ii) in the event of the repayment of any of the Unpaid Amount by the Defaulting Lender, give notice to the Defaulting Lender and the Administrative Agent of the fact that the Unpaid Amount has been repaid (in whole or in part), the amount of such repayment and, if applicable, the revised percentage of the Special Advance Lender’s senior participation. Provided that the Administrative Agent has received notice of such participation, the Administrative Agent shall have the same obligations to distribute interest, principal and other sums received by the Administrative Agent with respect to a Special Advance Lender’s senior participation as the Administrative Agent has with respect to the distribution of interest, principal and other sums under this Agreement; and at the time of making any distributions to the Lenders, shall make payments to the Special Advance Lender with respect to a Special Advance Lender’s senior participation in the Defaulting Lender’s Loan out of the Defaulting Lender’s share of any such distributions.

(4) A Defaulting Lender shall immediately pay to a Special Advance Lender all sums of any kind paid to or received by the Defaulting Lender from Borrower, whether pursuant to the terms of this Agreement or the other Loan Documents or in connection with the realization of the security herefor until the Unpaid Amount is fully repaid. Notwithstanding the fact that the Defaulting Lender may temporarily hold such sums, the Defaulting Lender shall be deemed to hold same as a trustee for the benefit of the Special Advance Lender, it being the express intention of the Lenders that the Special Advance Lender shall have an ownership interest in such sums to the extent of the Unpaid Amount.

(5) Each Defaulting Lender shall indemnify, defend and hold the Administrative Agent and each of the other Lenders harmless from and against any and all losses, damages, liabilities or expenses (including reasonable attorneys’ fees and expenses and interest at the Default Rate) which they may sustain or incur by reason of the Defaulting Lender’s failure or refusal to abide by its obligations under this Agreement or the other Loan Documents, except to the extent a Defaulting Lender became a Defaulting Lender due to the gross negligence or willful misconduct of the Administrative Agent and/or any Lender. The Administrative Agent shall, after payment of any amounts due to any Special Advance Lender pursuant to the terms of subsection (3) above, setoff against any payments due to such Defaulting Lender for the claims of the Administrative Agent and the other Lenders pursuant to this indemnity.

Section 15.13 Liability of the Administrative Agent. The Administrative Agent shall not have any liabilities or responsibilities to Borrower on account of the failure of any Lender (other than the Administrative Agent in its capacity as a Lender) to perform its obligations hereunder or to any Lender on account of the failure of Borrower to perform its obligations hereunder or under any other Loan Document.

114

Section 15.14 Transfer of Agency Function. Without the consent of Borrower or any Lender, the Administrative Agent may at any time or from time to time transfer its functions as the Administrative Agent hereunder to any of its offices wherever located in the United States; provided that the Administrative Agent shall promptly notify Borrower and the Lenders thereof.

ARTICLE 16

AMENDMENT AND RESTATEMENT

This Agreement amends, restates, supersedes and replaces the Existing Loan Agreement in its entirety, and all references in the Loan Documents to the “Loan Agreement” shall hereafter refer to this Agreement. Except as expressly set forth in this Agreement and/or in any amendments or modifications to the other Loan Documents entered into on or after the date hereof, the other Loan Documents shall remain in full force and effect in accordance with their respective terms.

ARTICLE 17

RELEASE

In consideration of Administrative Agent’s and each Lender’s execution and delivery of this Agreement, Borrower and (by its execution of the Joinder attached hereto) each Joinder Party, on behalf of itself and its heirs, successors and assigns (collectively, the “Releasing Parties”), remises, releases, acquits, satisfies and forever discharges Administrative Agent and each Lender, Administrative Agent’s and each Lender’s predecessors in interest, and all of the respective past, present and future officers, directors, employees, agents, servicers, attorneys, representatives, participants, heirs, successors and assigns of Administrative Agent and each Lender and Administrative Agent’s and each Lender’s predecessors in interest (collectively, “Lender Parties”), from any and all manner of debts, accountings, bonds, warranties, representations, covenants, promises, contracts, controversies, agreements, liabilities, obligations, expenses, damages, judgments, executions, actions, claims, demands and causes of action of any nature whatsoever, at law or in equity, known or unknown, either now accrued or subsequently maturing, which Borrower or any of the other Releasing Parties now has or hereafter can, shall or may have by reason of any matter, cause or thing, from the beginning of the world to and including the date of this Agreement arising out of or relating to (a) the Loans, including, but not limited to, its administration or funding, (b) the Loan Documents, (c) the Project or its development, financing and operation, and (d) any other agreement or transaction between Borrower or any of the other Releasing Parties and any of Lender Parties relating to the matters described in (a) through (c) above. Borrower and (by its execution of the Joinder attached hereto) each Joinder Party, for itself and the other Releasing Parties, covenants and agrees never to institute or cause to be instituted or continue prosecution of any suit or other form of action or proceeding of any kind or nature whatsoever against any of Lender Parties by reason of or in connection with any of the foregoing matters, claims or causes of action.

[Signature Pages Follow]

115

EXECUTED as of the date first written above.

LENDER:	EUROHYPO AG, NEW YORK BRANCH
	By:	/s/ John Lippmann
		Name:	John Lippmann
		Title:	Director
	By:	/s/ Stephen Cox
		Name:	Stephen Cox
		Title:	Director

Address for Notices to Eurohypo AG,
New York Branch:

Eurohypo AG, New York Branch
1114 Avenue of the Americas, 29^th Floor
New York, New York 10036
Attention: Peter Tzelios
Telecopier No.: (866) 267-7680

With copies to:

Eurohypo AG, New York Branch
1114 Avenue of the Americas, 29^th Floor
New York, New York 10036
Attention: Head of Portfolio Operations
Telecopier No.: (866) 267-7680

- and —

Morrison & Foerster LLP
555 West Fifth Street, Suite 3500
Los Angeles, California 90013
Attention: Marc D. Young, Esq.
Telecopier No.: (213) 892-5454

S-1

BORROWER:	1100 WEST HOLDINGS, LLC, a Delaware limited liability company
	By:	1100 West Holdings II, LLC, a Delaware limited liability company
		By:	Mondrian Miami Investment LLC, a Delaware limited liability company
			By:	Morgans Group LLC, a Delaware limited liability company
				By:	/s/ Marc Gordon
					Name: Marc Gordon
					Title:   Authorized Signatory
		By:	Sanctuary West Avenue LLC, a Delaware limited liability company
			By:	/s/ Abraham Galbut
				Name:	Abraham Galbut
				Title:

Address for Notices:	- and -
c/o Sanctuary Holdings 4770 Biscayne Boulevard Miami, Florida 33137 Attention: Abraham Galbut Telecopier: (786) 427-6203	Greenburg Traurig 1221 Brickell Avenue Miami, Florida 33131 Attention: Steven Goldman, Esq. Telecopier: (305) 961-5561
With copies to:	- and -
Mondrian Miami Investment LLC c/o Morgans Hotel Group 475 10th Avenue New York, New York 10018 Attention: Marc Gordon Telecopier: (212) 277-4270	McDermott Will & Emery LLP 340 Madison Avenue New York, New York 10017 Attention: Keith M. Pattiz, Esq. Telecopier: (212) 547-5444

S-2

FOR PURPOSES OF SECTIONS 9.6 and 9.8

MONDRIAN MIAMI INVESTMENT LLC,
a Delaware limited liability company

	By:	MORGANS GROUP LLC, a Delaware limited liability company
		By:	Morgans Hotel Group Co., a Delaware corporation
			By:	/s/ Marc Gordon
				Name:	Marc Gordon
				Title:	Authorized Signatory
SANCTUARY WEST AVENUE LLC, a Delaware limited liability company
By:	/s/ Abraham Galbut
	Name: Abraham Galbut
	Title:

S-3

ADMINISTRATIVE AGENT:	EUROHYPO AG, NEW YORK BRANCH, as Administrative Agent
	By:	/s/ John Lippmann
		Name:	John Lippmann
		Title:	Director
	By:	/s/ Stephen Cox
		Name:	Stephen Cox
		Title:	Director

Address for Notices to Eurohypo AG,
New York Branch:

Eurohypo AG, New York Branch
1114 Avenue of the Americas, 29^th Floor
New York, New York 10036

Attention: Peter Tzelios
Telecopier No.: (866) 267-7680

With copies to:

Eurohypo AG, New York Branch
1114 Avenue of the Americas, 29^th Floor
New York, New York 10036

Attention: Head of Portfolio Operations
Telecopier No.: (866) 267-7680

- and -

Morrison & Foerster LLP
555 West Fifth Street, Suite 3500
Los Angeles, California 90013
Attention: Marc D. Young, Esq.
Telecopier No.: (213) 892-5454

S-4

JOINDER

By executing this Joinder (the “Joinder”), each of the undersigned (collectively referred to herein as the “Joinder Parties”; individually referred to herein as “Joinder Party”) hereby (i) unconditionally, irrevocably and jointly and severally guaranty the performance by Borrower of Borrower’s obligations with respect to Borrower’s indemnification obligations under Sections 9.12(2)(a) through and including 9.12(2)(e) and Section 12.5 of this Agreement and all obligations and liabilities for which Borrower is personally liable under Section 13.1 of this Agreement, (ii) agrees to cause Borrower and Mortgage Borrower to at all times be Single Purpose Entities and to otherwise comply with each of the covenants contained in Section 9.6 of this Agreement and (iii) joins in and agrees to be bound by the provisions of Article 17 hereof. This Joinder is a guaranty of full and complete payment and performance and not of collectability. The Joinder Parties are (a) Abraham Galbut, an individual (b) Keith Menin, an individual, (c) Seth Frohlich, an individual, and (d) Morgans Group LLC, a Delaware limited liability company.

(1) Waivers. To the fullest extent permitted by Applicable Law, Joinder Parties waive all rights and defenses of sureties, guarantors, accommodation parties and/or co-makers and agree that their obligations under this Joinder shall be primary, absolute and unconditional, and that their obligations under this Joinder shall be unaffected by any of such rights or defenses, including:

(a) the unenforceability of any Loan Document against Borrower and/or any guarantor or other Joinder Party;

(b) any release or other action or inaction taken by the Administrative Agent or any Lender with respect to the collateral under any Loan Document, the Loan, Borrower, any guarantor and/or other Joinder Party, whether or not the same may impair or destroy any subrogation rights of any Joinder Party, or constitute a legal or equitable discharge of any surety or indemnitor;

(c) the existence of any collateral or other security for the Loan, and any requirement that the Administrative Agent or any Lender pursue any of such collateral or other security, or pursue any remedies it may have against Borrower, any guarantor and/or any other Joinder Party;

(d) any requirement that the Administrative Agent or any Lender provide notice to or obtain a Joinder Party’s consent to any modification, increase, extension or other amendment of the Loan, including the guaranteed obligations;

(e) any right of subrogation (until payment in full of the Loan, including the guaranteed obligations, and the expiration of any applicable preference period and statute of limitations for fraudulent conveyance claims);

(f) any defense based on any statute of limitations;

(g) any payment by Borrower to the Administrative Agent or any Lender if such payment is held to be a preference or fraudulent conveyance under bankruptcy laws or the Administrative Agent or such Lender is otherwise required to refund such payment to Borrower or any other party; and

(h) any voluntary or involuntary bankruptcy, receivership, insolvency, reorganization or similar proceeding affecting Borrower or any of its assets.

1

(2) Agreements. Joinder Parties further represent, warrant and agree that:

(a) Neither the exercise of any remedies by the Administrative Agent or any Lender nor any other action taken by the Administrative Agent or any Lender shall affect or in any manner alleviate the obligations of the Joinder Parties hereunder.

(b) The obligations under this Joinder are enforceable against each such party and are not subject to any defenses, offsets or counterclaims.

(c) The provisions of this Joinder are for the benefit of the Administrative Agent, Lenders and their respective successors and assigns.

(d) The Administrative Agent and Lenders shall have the right to (i) renew, modify, extend or accelerate the Loan, (ii) pursue some or all of its remedies against Borrower, any guarantor or any Joinder Party, (iii) add, release or substitute any collateral for the Loan or party obligated thereunder, and (iv) release Borrower, any guarantor or any Joinder Party from liability, all without notice to or consent of any Joinder Party (or other Joinder Party) and without affecting the obligations of any Joinder Party (or other Joinder Party) hereunder.

(e) Each Joinder Party shall deliver to the Administrative Agent (for delivery to the Lenders) not later than one hundred and twenty (120) days after the close of each fiscal year of such Joinder Party, annual financial statements of such Joinder Party for each such fiscal year, such financial statements to be substantially in the form of the financial statements delivered by such Joinder Party to the Administrative Agent in connection with the closing of the Loans or such other form reasonably acceptable to the Administrative Agent, including (other than with respect to an individual) a balance sheet and statement of profit and loss certified by such Joinder Party in accordance with Section 8.1 of this Agreement.

(f) To the maximum extent permitted by law, each Joinder Party hereby knowingly, voluntarily and intentionally waives the right to a trial by jury in respect of any litigation based hereon. This waiver is a material inducement to the Administrative Agent and the Lenders to enter into this Agreement.

(g) The obligations of the Joinder Parties are joint and several, and the Administrative Agent and the Lenders shall not be required to pursue or exhaust any remedies against any Joinder Party or Borrower as a condition to the pursuit and realization of remedies against either Joinder Party.

(h) In the event Borrower files or has filed against it any case in bankruptcy or similar proceedings, the Administrative Agent and the Lenders shall not be required to enforce this Joinder in connection with such proceedings and shall not be required to appear in such proceedings prior to enforcing the provisions of this Joinder.

2

(3) Counterparts. This Joinder may be executed in multiple counterparts, each of which shall constitute an original, but all of which shall constitute one document.

(4) Governing Law. This Joinder shall be governed by the laws of the State of New York.

(5) Amendment and Restatement. This Joinder amends, supersedes and replaces in its entirely the Joinder attached to the Existing Loan Agreement.

[Signature Pages Follow]

3

Executed and sealed as of November  25, 2008.

JOINDER PARTIES:
/s/	Abraham Galbut
ABRAHAM GALBUT
/s/	Keith Menin
KEITH MENIN
/s/	Seth Frohlich
SETH FROHLICH
MORGANS GROUP LLC,
a Delaware limited liability company
By:	Morgans Hotel Group Co.,
	a Delaware corporation,
	its managing member

By:	/s/ Marc Gordon
	Name:	Marc Gordon
	Title:	CIO

S-1

EXHIBIT A

LEGAL DESCRIPTION OF PROJECT

Parcel 1:

Lots 7 and 8 and the North 50 feet of Lot 9, Block 80, SUBDIVISION OF BLOCK EIGHTY OF THE ALTON BEACH REALTY COMPANY, A PART OF ALTON BEACH BAY FRONT SUBDIVISION, according to the Plat thereof, as recorded in Plat Book 6, at Page 12, of the Public Records of Miami-Dade County, Florida; also described as:

Commence at the Northwest corner of West Avenue and 10^th Street in Miami Beach, Florida, said corner also being the intersection of Tangents at the Southeast corner of Block 80, and run Northerly along the Easterly line of said Block 80, along the Westerly line of West Avenue, a distance of 350.00 feet to the Southerly line of the North 50.00 feet of said Lot 9 and the Point of Beginning (P.O.B.) of the tract of land hereinafter described: Thence continue along the Easterly line of said Block 80, along the Westerly line of West Avenue, a distance of 299.85 feet to the Northeast corner of the above referenced Lot 7; thence deflecting 90°00’00” to the left, run Westerly along the Northerly line of said Lot 7, a distance of 337.96 feet to the face of a concrete bulkhead cap and the face of deck; thence run Southerly along the face of deck and cap, a distance of 301.70 feet to the Southerly line of the North 50.00 feet of Lot 9; thence run Easterly along the Southerly line of the North 50.00 feet of said Lot 9, a distance of 304.67 feet to the Point of Beginning.

Together with the easement rights as contained in Master Declaration of Covenants, Conditions and Restrictions for Mirador South Beach, filed December 30, 2004, in Official Records Book 22959, at Page 886, of the Public Records of Miami-Dade County, Florida.

Parcel 2:

Condominium Unit CU12, MIRADOR 1000, A CONDOMINIUM, together with an undivided interest in the common elements, according to the Declaration of Condominium thereof, as recorded in Official Records Book 22959, at Page 1727, as amended from time to time, of the Public Records of Miami-Dade County, Florida.

Together with the Leasehold Estate, as created by Sovereignty Submerged Lands Lease Renewal and Modification to Reflect Change in Ownership between the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida, as Lessor, and Mirador 1000, LLC, a Delaware limited liability company, as Lessee, filed December 16, 2004, in Official Records Book 22913, at Page 825, as assigned by Assignment of Submerged Land Lease, dated August 7, 2006, recorded August 8, 2006 in Official Records Book 24801, Page 3362, as modified by that certain Sovereignty Submerged Lands Lease Modification to Reflect Change in Ownership and Change in Upland Use (No.130004276) between the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida, as Lessor, and 1100 West Properties, LLC, a Delaware limited liability company, as Lessee, filed December 1, 2006, in Official Records Book 25146, at Page 3269, all of the Public Records of Miami-Dade County, Florida.

A-1

Parcel 3:

Condominium Unit CU10, MIRADOR 1200, A CONDOMINIUM, together with an undivided interest in the common elements, according to the Declaration of Condominium thereof, as recorded in Official Record Book 23543, at Page 3930, as amended from time to time, of the Public Records of Miami-Dade County, Florida.

Together with the Leasehold Estate, as created by Sovereignty Submerged Lands Lease Renewal between the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida, as Lessor, and 1200 West Realty, LLC, a Delaware limited liability company, as Lessee, filed January 12, 2006, in Official Records Book 24141, at Page 1866, as assigned by Assignment of Submerged Land Lease, dated August 7, 2006, recorded August 8, 2006 in Official Records Book 24801, Page 3368, as modified by that certain Sovereignty Submerged Lands Lease Modification to Reflect Change in Ownership and Change in Upland Use (No.13000120T) between the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida, as Lessor, and 1100 West Properties, LLC, a Delaware limited liability company, as Lessee, filed December 1, 2006, in Official Records Book 25146, at Page 3282, all of the Public Records of Miami-Dade County, Florida.

A-2

EXHIBIT B

RESERVED

B-1

EXHIBIT C

RESERVED

Note

EXHIBIT D

FORM OF ASSIGNMENT AND ACCEPTANCE

Reference is made to the Amended and Restated Mezzanine Loan Agreement dated as of [_____], 2008 (as amended and in effect on the date hereof, the “Agreement”), between 1100 WEST HOLDINGS, LLC, a Delaware limited liability company, the Lenders named therein, and EUROHYPO AG, NEW YORK BRANCH, as Administrative Agent for the Lenders. Terms defined in the Agreement are used herein with the same meanings. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Acceptance as if set forth herein in full.

The Assignor named below hereby sells and assigns, without recourse, to the Assignee named below, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Assignment Date set forth below, the interests set forth below (the “Assigned Interest”) in the Assignor’s rights and obligations under the Agreement, including, without limitation, the interests set forth below in the Commitment of the Assignor on the Assignment Date and Loans owing to the Assignor which are outstanding on the Assignment Date, together with (a) interest on the assigned Loans from and after the Assignment Date and (b) the amount, if any, set forth below of the fees accrued to the Assignment Date for account of the Assignor. The Assignee hereby acknowledges receipt of a copy of the Agreement. From and after the Assignment Date (i) the Assignee shall be a party to and be bound by the provisions of the Agreement and, to the extent of the interests assigned by this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent of the interests assigned by this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Agreement and the Agency Agreement.

This Assignment and Acceptance is being delivered to the Administrative Agent together with, if the Assignee is not already a Lender under the Agreement, an administrative questionnaire in the form supplied by the Administrative Agent, duly completed by the Assignee. The [Assignor][Assignee] shall pay the fee payable to the Administrative Agent pursuant to Section 12.24(2)(e) of the Agreement.

This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York.

The Assignor represents and warrants to the Assignee that the Assignor is the legal and beneficial owner of the Assigned Interest and has not created any adverse interest therein. The Assignor and the Assignee represent and warrant to each other that they are, respectively, authorized to execute and deliver this Assignment and Acceptance.

D-1

Date of Assignment:

Legal Name of Assignor:

Legal Name of Assignee:

Assignee’s Address for Notices:

Effective Date of Assignment (“Assignment Date”)¹:

			Percentage Assigned of Facility/Commitment (set forth, to at least 4 decimals, as a percentage of the Facility and the aggregate Commitments of all Lenders thereunder)
	Principal Amount Assigned
Current Outstanding
Loans Assigned:		$	% 2
Future Funding Commitment:		$
[Fees Assigned (if any):]				%

The terms set forth above and below are hereby agreed to:

[NAME OF ASSIGNOR], as Assignor
By:
	Name:
	Title:
[NAME OF ASSIGNEE], as Assignee
By:
	Name:
	Title:

The undersigned hereby consent to the within assignment: ³

1	Must be at least five Business Days after execution hereof by all required parties.
2	Delete if no future advances are involved.

D-2

EUROHYPO AG, NEW YORK BRANCH, as Administrative Agent
By:
	Name:
	Title:
By:
	Name:
	Title:

³ Consent to be included to the extent required by Section 11.24(2) of the Agreement.

D-3

ANNEX 1

STANDARD TERMS AND CONDITIONS FOR

ASSIGNMENT AND ACCEPTANCE

1. Representations and Warranties.

1.1 Assignor. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Acceptance and to consummate the Transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Loan Agreement or any other Loan Document (as defined in the Agreement), (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.

1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Acceptance and to consummate the Transactions contemplated hereby and to become a Lender under the Agreement, (ii) it satisfies the requirements, if any, specified in the Agreement that are required to be satisfied by it in order to acquire the Assigned Interest and become a Lender, (iii) from and after the Assignment Date, it shall be bound by the provisions of the Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it has received a copy of the Agreement, together with copies of the most recent financial statements delivered pursuant to Section 8.1 thereof, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, (v) it satisfies the requirements of an Eligible Assignee as defined in the Agreement, and (vi) if it is a Non-U.S. Person, attached to the Assignment and Acceptance is any documentation required to be delivered by it pursuant to the terms of the Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.

Annex 1-1

2. Payments. From and after the Assignment Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Assignment Date and to the Assignee for amounts which have accrued from and after the Assignment Date.

3. General Provisions. This Assignment and Acceptance shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Acceptance may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Acceptance by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Acceptance. This Assignment and Acceptance shall be governed by, and construed in accordance with, the law of the State of New York.

Annex 1-2

EXHIBIT E

FORM OF NOTICE OF CONVERSION/CONTINUATION

                    , 200___

Eurohypo AG, New York Branch,
     as Administrative Agent
1114 Avenue of the Americas, 29^th Floor
New York, New York 10036
Attn: Loan Servicing

Re: Amended and Restated Mezzanine Loan Agreement dated as of [_________], 2008 (as the same may be amended, modified or supplemented from time to time, the “Agreement”) by and among 1100 WEST HOLDINGS, LLC, a Delaware limited liability company (the “Borrower”), the lenders from time to time party to the Agreement (the “Lenders”), and EUROHYPO AG, NEW YORK BRANCH, as Administrative Agent on behalf of the Lenders (the “Administrative Agent”)

Ladies and Gentlemen:

Reference is made to the Agreement. Capitalized terms used in this Notice of Conversion/Continuation without definition have the meanings specified in the Agreement.

Pursuant to Section 2.8(5) of the Agreement, the Borrower hereby elects to convert or continue the loans described in attached Schedule 1 (the “Loans”). In connection therewith, the Borrower and the undersigned authorized officer of the Borrower hereby certify that:

(1) Representations and Warranties. All representations and warranties of the Borrower contained in the Loan Documents, including those contained in Article 7 of the Agreement, are true and correct as of the date hereof and shall be true and correct on the date of the continuation/conversion of the Loans, both before and after giving effect to such continuation/conversion;

(2) No Potential Default/Event of Default. No Potential Default or Event of Default exists as of the date hereof or will result from the continuation/conversion of the Loans; and

E-1

(3) No Material Adverse Effect. No act, omission, change or event which has a Material Adverse Effect has occurred since the date of the Agreement.

1100 WEST HOLDINGS, LLC, a Delaware limited liability company
By:
	Name:
	Title:
By:
	Name:
	Title:

E-2

Schedule 1
to Notice of Conversion/Continuation

LOAN TO BE CONVERTED OR CONTINUED

A. All conversions and continuations must be of a Loan, or portion thereof, in a principal amount of $1,000,000 or a multiple of $100,000 in excess thereof.

B. Conversions/continuations to a Eurodollar Loan under paragraphs (2) and (3) below are not permitted if, after giving effect to thereto, (a) there would be more than five (5) different Eurodollar Loans in effect, or (b) the aggregate outstanding principal amount of all Eurodollar Loans would be reduced to be less than $1,000,000.

(1)	Conversion of a Eurodollar Loan into a Base Rate Loan.
	The following Eurodollar Loan to a Base Rate Loan:

Amount:	$
Requested Conversion Date: (must be a Business Day at least three (3) Business Days after date of notice)
Last day of current Interest Period:

(2)	Conversion of a Base Rate Loan into a Eurodollar Loan.
	The following Base Rate Loan to a Eurodollar Loan:

Amount:	$
Requested Conversion Date: (must be a Business Day at least three (3) Business Days after date of notice)
Requested Interest Period: (14 days or 1, 2, 3, or 6 months)

(3)	Continuation of a Eurodollar Loan into a Subsequent Interest Period.
	The following Eurodollar Loan into a subsequent Interest Period:

Amount:	$
Last day of current Interest Period: (must be a Business Day at least three (3) Business Days after date of notice)
Requested Interest Period: (14 days or 1, 2, 3, or 6 months)

1-1

SCHEDULE 1(a)

COMMITMENTS

LENDER	COMMITMENT
Eurohypo AG, New York Branch	$	28,000,000

Schedule 1(a) - 1

SCHEDULE 1(b)

MINIMUM SALES PRICE SCHEDULE

Schedule 1(b) - 1

SCHEDULE 1(c)

UNIT RELEASE SCHEDULE

Schedule 1(c) - 1

SCHEDULE 2.1

ADVANCE AND CONSTRUCTION COMPLETION CONDITIONS

Part A – Advance Conditions

Part B – Construction Completion Conditions

PART A. ADVANCE CONDITIONS

Each Loan shall be subject to the Administrative Agent’s receipt, review, approval and/or confirmation of the following, each in form and content satisfactory to the Administrative Agent in its sole discretion:

1. There shall exist no Potential Default or Event of Default (currently or after giving effect to the requested advance).

2. The representations and warranties contained in this Loan Agreement and in all other Loan Documents are true and correct.

3. Such Loan shall be secured by the Loan Documents.

4. Borrower shall have paid the Administrative Agent’s (and the Lenders’) costs and expenses in connection with such Loan (including title charges, and costs and expenses of the Administrative Agent’s inspecting engineer and attorneys).

5. No change shall have occurred in the financial condition of Borrower or any other Borrower Party, which would have, in the Administrative Agent’s judgment, have a material adverse effect on the Loans, the Project, or Borrower’s or any other Borrower Party’s ability to perform its obligations under the Loan Documents.

6. No condemnation or adverse possession, as determined by the Administrative Agent, zoning or usage change proceeding shall have occurred or shall have been threatened against the Project; the Project shall not have suffered any damage by fire or other casualty which has not been repaired or is not being restored in accordance with this Agreement; no law, regulation, ordinance, moratorium, injunctive proceeding, restriction, litigation, action, citation or similar proceeding or matter shall have been enacted, adopted, or threatened by any governmental authority, which would have, in the Administrative Agent’s judgment, a material adverse effect on the Project or Borrower’s or any Borrower Party’s ability to perform its obligations under the Loan Documents.

7. Borrower shall immediately deposit all proceeds of such Loan in a separate and exclusive account to be used solely for the purposes specified in this Agreement and in Borrower’s advance request and, upon the Administrative Agent’s request, shall promptly furnish the Administrative Agent with evidence thereof.

8. Each Loan shall only be made on a Payment Date.

Schedule 2.1 - 1

PART B – CONSTRUCTION COMPLETION CONDITIONS

The following shall have been completed to the satisfaction of the Administrative Agent in its discretion prior to the occurrence of Construction Completion:

1. The Hotel Opening shall have occurred by the Hotel Opening Deadline;

2. The Building Conversion shall have occurred by the Construction Completion Deadline; and

3. The Administrative Agent shall have received the following items in connection with the Building Conversion:

(a) Evidence of the approval by the applicable Governmental Authorities of the Project for operation in accordance with the Plans and Specifications to the extent any such approval is a condition of the lawful use of Project;

(b) Endorsements to the Title Policy which are satisfactory to the Administrative Agent and which describe the improvements located on the Project (CLTA 116 series) and insure the lien-free completion of such improvements (CLTA 101 series, as required by the Administrative Agent);

(c) Unconditional waivers of lien and sworn statements from all contractors, subcontractors, materialmen, suppliers and vendors with respect to the Building Conversion, in each case in compliance with the Applicable Laws;

(d) Certificates from Borrower and its architect to Administrative Agent and the Lenders stating that (i) the Building Conversion (A) has been substantially completed in accordance with the Plans and Specifications and (B) is available for occupancy, and (ii) the Project complies with all applicable building codes;

(e) Violation searches, if available and requested by the Administrative Agent, with Governmental Authorities indicating no notices of violation have been issued with respect to the Project;

(f) Current searches of all Uniform Commercial Code financing statements filed with the Secretary of State of the state of formation/organization of Borrower and the office of Recorder of Miami County in the State of Florida, and the Office of the Delaware Secretary of State, showing that no Uniform Commercial Code financing statements are filed or recorded against Borrower in which the collateral is personal property or fixtures located on the Project or used in connection with the Project other than financing statements with respect to the Loans;

(g) A certificate of an Authorized Officer of Borrower certifying that:

(i) no condemnation of any portion of the Project or any action which could result in a relocation of any roadways abutting the Project or the denial of access, which, in the Administrative Agent’s sole judgment, adversely affects the Lenders’ security or the operation of the Project, has commenced or, to the best of Borrower’s knowledge, is contemplated by any Governmental Authority;

Schedule 2.1 - 2

(ii) all fixtures, attachments and equipment necessary for the operation of the Hotel Improvements have been installed or incorporated into the Project and are operational and in good working order, free from defects; all guarantees and warranties have been transferred/assigned to Borrower; and Borrower is the absolute owner of all of said property free and clear of all Liens; and

(iii) all costs and expenses relating to such Building Conversion have been paid in full.

(h) Evidence that all of the Licenses have been obtained and are in full force and effect.

Schedule 2.1 - 3

SCHEDULE 2.4(1)

WIRE INSTRUCTIONS

Bank of New York

ABA#        

A/C#        

F/B/O: Eurohypo

Re: Mondrian Miami

Attention: Valerie Rodriguez        

Schedule 2.4 - 1

SCHEDULE 7.3

LITIGATION

None

Schedule 7.3

SCHEDULE 7.23

CONSTRUCTION BUDGET

Schedule 7.23 - 1

SCHEDULE 7.27

ORGANIZATIONAL CHART

Schedule 7.27

SCHEDULE 7.30

MORTGAGE LOAN DOCUMENTS

1. Amended and Restated Loan Agreement dated as of the date hereof, between Mortgage Borrower, Mortgage Loan Administrative Agent, Mortgage Lenders, and Borrower, together with Joinder Agreement executed by Joinder Parties.

2. Amended and Restated Substitute Promissory Note A-1 dated as of the date hereof, in the principal amount of $27,024,385.82, executed by Mortgage Borrower in favor of CIT Lending Services.

3. Amended and Restated Substitute Promissory Note A-2 dated as of the date hereof, in the principal amount of $26,373,195.74, executed by Mortgage Borrower in favor of KBC Bank NV.

4. Amended and Restated Substitute Promissory Note B dated as of the date hereof, in the principal amount of $31,278,947.05, executed by Mortgage Borrower in favor of Eurohypo AG, New York Branch.

5. Mortgage, Security Agreement, Fixture Filing and Assignment of Rents and Leases dated as of August 8, 2006, by Mortgage Borrower to Mortgage Loan Administrative Agent.

6. Assignment of Leases, Rents and Security Deposits dated as of August 8, 2006, by Mortgage Borrower in favor of Mortgage Loan Administrative Agent.

7. Collateral Assignment of Contracts, Developer Rights, Licenses, Permits, Warranties and Approvals dated as of August 8, 2006, by Mortgage Borrower to Mortgage Loan Administrative Agent.

8. Hazardous Substances Indemnity Agreement dated as of August 8, 2006, by Mortgage Borrower, Galbut, and Morgans LLC to and for the benefit of Mortgage Loan Administrative Agent.

9. Limited Guarantee dated as of August 8, 2006, by Galbut in favor of Mortgage Loan Administrative Agent.

10. Second Amended and Restated Completion Guaranty dated as of the date hereof, by Joinder Parties in favor of Mortgage Loan Administrative Agent.

11. Hotel Manager’s Consent and Subordination of Management Agreement dated as of August 8, 2006, by Mortgage Borrower and Hotel Manager in favor of Mortgage Loan Administrative Agent.

12. Project Manager’s Consent and Subordination of Management Agreement dated as of August 8, 2006, by Mortgage Borrower and Hotel Manager in favor of Mortgage Loan Administrative Agent.

Schedule 7.30

13. Agency and Arrangement Fee Letter dated as of August 8, 2006, by Mortgage Loan Administrative Agent and agreed and accepted by Mortgage Borrower.

14. Amendment to Fee Letter dated as of September 6, 2007, by Mortgage Loan Administrative Agent and agreed and accepted by Mortgage Borrower.

15. Second Amended and Restated Cash Management and Security Agreement dated as of the date hereof, among Mortgage Borrower, Mortgage Loan Administrative Agent, Hotel Manager, and Regions Bank.

16. First Amendment to Mortgage, Security Agreement, Fixture Filing and Assignment of Rents and Leases dated as of December 19, 2006, by Mortgage Borrower to Mortgage Loan Administrative Agent.

17. Second Amendment to Mortgage, Security Agreement, Fixture Filing and Assignment of Rents and Leases dated as of September 6, 2007, by Mortgage Borrower to Mortgage Loan Administrative Agent

18. Third Amendment to Mortgage, Security Agreement, Fixture Filing and Assignment of Rents and Leases dated as of April 25, 2008, by Mortgage Borrower to Mortgage Loan Administrative Agent.

19. Fourth Amendment to Mortgage, Security Agreement, Fixture Filing and Assignment of Rents and Leases dated as of the date hereof, by Mortgage Borrower to Mortgage Loan Administrative Agent.

20. Subordination and Standstill Agreement dated as of the date hereof, by Mortgage Loan Administrative Agent, Administrative Agent, Mortgage Borrower, Borrower, 1100 West Holdings II, LLC and RMF Capital LLC.

21. Omnibus Amendment to and Reaffirmation of Loan Documents dated as of the date hereof, by Mortgage Borrower, Borrower, and Joinder Parties for the benefit of Mortgage Loan Administrative Agent.

22. Assignment of Construction Contract dated as of the date hereof, by Mortgage Borrower to Mortgage Loan Administrative Agent.

23. Consent and Agreement of Construction Manager dated as of the date hereof, by G.T. Construction and Development, Inc. to Mortgage Loan Administrative Agent.

24. Reaffirmation of Hotel Manager’s Consent and Subordination of Manager’s Agreement and Technical Services Agreement dated as of the date hereof, by Hotel Manager for the benefit of Mortgage Loan Administrative Agent.

25. Assignment, Pledge and Security Agreement (Hedge Agreement) dated as of the date hereof, by Mortgage borrower for the benefit of Mortgage Loan Administrative Agent.

26. Intercreditor Agreement dated as of April 25, 2008 by and between Mortgage Loan Administrative Agent and Administrative Agent agreed and acknowledged by KBC Bank NV and CIT Lending Services.

Schedule 7.30

EX-10.61

Exhibit 10.61

FORM OF RSU AGREEMENT (DIRECTORS)

MORGANS HOTEL GROUP CO.
AMENDED AND RESTATED 2007 OMNIBUS INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT

Morgans Hotel Group Co. (the “Company”), hereby grants restricted stock units relating to shares of its common stock (the “Stock”), to the individual named below as the Grantee, subject to the vesting conditions set forth in the attachment. Additional terms and conditions of the grant are set forth in this cover sheet, in the attachment and in the Company’s Amended and Restated 2007 Omnibus Incentive Plan (the “Plan”).

Grant Date:                      __, 200_

Name of Grantee: State of Residence:

Grantee’s Social Security Number: _____-____-_____

Number of Restricted Stock Units (RSUs) Covered by Grant:

Vesting Start Date:

Vesting Schedule:

	Number of RSUs that vest, as
	a fraction of the number of
Vesting Date	RSUs granted
[The 1 year anniversary of the Vesting Start Date		1/3
The 2 year anniversary of the Vesting Start Date		1/3
The 3 year anniversary of the Vesting Start Date		1/3	]

By signing this cover sheet, you agree to all of the terms and conditions described in this Agreement and in the Plan (a copy of which will be provided on request). You acknowledge that you have carefully reviewed the Plan and agree that the Plan will control in the event any provision of this Agreement should appear to be inconsistent with the terms of the Plan.

Grantee:
		(Signature)
Company:
		(Signature)
	Title:

This is not a stock certificate or a negotiable instrument.

MORGANS HOTEL GROUP CO.
AMENDED AND RESTATED 2007 OMNIBUS INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT

Restricted Stock Unit Transferability	This grant is an award of stock units in the number of units set forth on the cover sheet, subject to the vesting conditions described below (“Restricted Stock Units”). Your Restricted Stock Units may not be transferred in any manner other than by will, by laws of descent and distribution, by instruments to an inter vivos testamentary trust or by gift to Family Members, which shall include for purposes of this Agreement a family limited partnership or any similar entity which is primarily for your benefit or for your Family Members. These terms shall be binding upon your executors, administrators, successors and assigns.
Definitions	Capitalized terms not defined in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
Vesting	Your Restricted Stock Unit grant vests as to the number of Stock Units indicated in the vesting schedule on the cover sheet, on the Vesting Dates shown on the cover sheet, provided you are in Service on the Vesting Date and meet the applicable vesting requirements set forth on the cover sheet. No additional Stock Units will vest after your Service has terminated for any reason.
Share Delivery Pursuant to Vested Units	Shares underlying the vested shares of Stock represented by the Restricted Stock Units will be delivered to you by the Company upon the termination of your Service.
Forfeiture of Unvested Units	In the event that your Service terminates for any reason, you will forfeit to the Company all of the Restricted Stock Units that have not yet vested or with respect to which all applicable restrictions and conditions have not lapsed.
Death	If your Service terminates because of your death, then your Restricted Stock Units shall become 100% vested.
Disability	If your Service terminates because of your Disability, then your Restricted Stock Units shall become 100% vested.

- 2 -

Corporate Transaction	Notwithstanding the vesting schedule set forth above, upon the consummation of a Corporate Transaction, this award will become 100% vested.
Retention Rights	This Agreement does not give you the right to be retained by the Company (or any Affiliates) in any capacity. The Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Shareholder Rights	You do not have any of the rights of a shareholder with respect to the Restricted Stock Units unless and until the Stock relating to the Restricted Stock Units has been delivered to you. In the event of a cash dividend on outstanding Stock, you will be entitled to receive a cash payment for each Restricted Stock Unit. The Company may in its sole discretion require that dividends will be reinvested in additional stock units at Fair Market Value on the dividend payment date, subject to vesting and delivered at the same time as the Restricted Stock Unit.
Adjustments	In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Restricted Stock Units covered by this grant will be adjusted (and rounded down to the nearest whole number) in accordance with the terms of the Plan.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of New York, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to the information provided in this Agreement and any changes thereto, other appropriate personal and financial data about you such as home address and business addresses and other contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting these Restricted Stock Units, you give explicit consent to the Company to process any such personal data. You also give explicit consent to the Company to transfer any such personal data outside the country in which you are employed, including, with respect to non-U.S. resident grantees, to the United States, to transferees who shall include the Company and other persons who are designated by the Company to administer the Plan.

- 3 -

Consent to Electronic Delivery	The Company may choose to deliver certain statutory materials relating to the Plan in electronic form. By accepting this grant you agree that the Company may deliver the Plan prospectus and the Company’s annual report to you in an electronic format. If at any time you would prefer to receive paper copies of these documents, as you are entitled to receive, the Company would be pleased to provide copies.
Electronic Signature	All references to signatures and delivery of documents in this Agreement can be satisfied by procedures the Company has established or may establish for an electronic signature system for delivery and acceptance of any such documents, including this Agreement. Your electronic signature is the same as, and shall have the same force and effect as, your manual signature. Any such procedures and delivery may be effected by a third party engaged by the Company to provide administrative services related to the Plan.
The Plan	The text of the Plan is incorporated in this Agreement by reference. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this grant of Restricted Stock Units. Any prior agreements, commitments or negotiations concerning this grant are superseded.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the Plan.

- 4 -

EX-10.62

Exhibit 10.62

FORM OF RSU AGREEMENT (OFFICERS AND EMPLOYEES)

MORGANS HOTEL GROUP CO.
AMENDED AND RESTATED 2007 OMNIBUS INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT

Morgans Hotel Group Co. (the “Company”), hereby grants restricted stock units relating to shares of its common stock (the “Stock”), to the individual named below as the Grantee, subject to the vesting conditions set forth in the attachment. Additional terms and conditions of the grant are set forth in this cover sheet, in the attachment and in the Company’s Amended and Restated 2007 Omnibus Incentive Plan (the “Plan”).

Grant Date: ________ __, 200_

Name of Grantee: State of Residence:

Grantee’s Social Security Number: _____-____-_____

Number of Restricted Stock Units (RSUs) Covered by Grant:                     

Vesting Start Date:                     

Vesting Schedule:

	Number of RSUs that vest, as
	a fraction of the number of
Vesting Date	RSUs granted
[The 1 year anniversary of the Vesting Start Date		1/3
The 2 year anniversary of the Vesting Start Date		1/3
The 3 year anniversary of the Vesting Start Date		1/3	]

You agree to all of the terms and conditions described in this Agreement and in the Plan (a copy of which will be provided on request) unless you deliver a notice in writing within 30 days of receipt of this award agreement to the Company stating that you do not accept the terms and conditions described in this Agreement and in the Plan. You acknowledge that you have carefully reviewed the Plan and agree that the Plan will control in the event any provision of this Agreement should appear to be inconsistent with the terms of the Plan.

This is not a stock certificate or a negotiable instrument.

MORGANS HOTEL GROUP CO.
AMENDED AND RESTATED 2007 OMNIBUS INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT

Restricted Stock Unit Transferability	This grant is an award of stock units in the number of units set forth on the cover sheet, subject to the vesting conditions described below (“Restricted Stock Units”). Your Restricted Stock Units may not be transferred, assigned, pledged or hypothecated, whether by operation of law or otherwise, nor may the Restricted Stock Units be made subject to execution, attachment or similar process.
Definitions	Capitalized terms not defined in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
Vesting	Your Restricted Stock Unit grant vests as to the number of Stock Units indicated in the vesting schedule on the cover sheet, on the Vesting Dates shown on the cover sheet, provided you are in Service on the Vesting Date and meet the applicable vesting requirements set forth on the cover sheet. No additional Stock Units will vest after your Service has terminated for any reason.
Book Entry of Stock Pursuant to Vested Units	A book entry for the vested shares of Stock represented by the Restricted Stock Units will be made for you and the shares will be credited to your account with the plan administrator by the Company within three (3) days of the applicable anniversary of the Vesting Date; provided, that, if such Vesting Date occurs during a period in which you are (i) subject to a lock-up agreement restricting your ability to sell Stock in the open market or (ii) are restricted from selling Stock in the open market because a trading window is not available, transfer of such vested shares will be delayed until the date immediately following the expiration of the lock-up agreement or the opening of a trading window but in no event beyond 21/2 months after the end of the calendar year in which the shares would have been otherwise transferred.
Forfeiture of Unvested Units	In the event that your Service terminates for any reason, you will forfeit to the Company all of the Restricted Stock Units that have not yet vested or with respect to which all applicable restrictions and conditions have not lapsed.

- 2 -

Death	If your Service terminates because of your death, then your Restricted Stock Units shall become 100% vested.
Disability	If your Service terminates because of your Disability, then your Restricted Stock Units shall become 100% vested.
Leaves of Absence	For purposes of this option, your Service does not terminate when you go on a bona fide employee leave of absence that was approved by the Company in writing, if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. However, your Service will be treated as terminating 90 days after you went on employee leave, unless your right to return to active work is guaranteed by law or by a contract. Your Service terminates in any event when the approved leave ends unless you immediately return to active employee work.
	The Company determines, in its sole discretion, which leaves count for this purpose, and when your Service terminates for all purposes under the Plan.
Withholding Taxes	You agree, as a condition of this grant, that you will make acceptable arrangements, which must be consistent with and permitted by the rules and regulations established by the Company and the plan administrator, to pay any withholding or other taxes that may be due as a result of vesting in Restricted Stock Units or your acquisition of Stock under this grant. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to this grant, the Company will have the right to: (i) require that you arrange such payments to the Company, or (ii) cause an immediate forfeiture of shares of Stock subject to the Restricted Stock Units granted pursuant to this Agreement in an amount equal to the withholding or other taxes due. In addition, in the Company’s sole discretion and consistent with the Company’s rules and regulations, the Company may permit you to pay the withholding or other taxes due as a result of the vesting of your Restricted Stock Units by delivery (on a form acceptable to the Board) of an irrevocable direction to a licensed securities broker selected by the Company to sell shares of Stock and to deliver all or part of the sales proceeds to the Company in payment of the withholding taxes.

- 3 -

Corporate Transaction	Notwithstanding the vesting schedule set forth above, upon the consummation of a Corporate Transaction, this award will become 100% vested (i) if it is not assumed, or equivalent awards are not substituted for the award, by the Company or its successor, or (ii) if assumed or substituted for, upon your Involuntary Termination within the 12-month period following the consummation of the Corporate Transaction. Notwithstanding any other provision in this Agreement, if assumed or substituted for, the award will expire one year after the date of termination of Service.
	“Involuntary Termination” means termination of your Service by reason of (i) your involuntary dismissal by the Company or its successor for reasons other than Cause; or (ii) your voluntary resignation for Good Reason as defined in any applicable employment or severance agreement, plan, or arrangement between you and the Company, or if none, then as set forth in the Plan following (x) a substantial adverse alteration in your title or responsibilities from those in effect immediately prior to the Corporate Transaction; (y) a material reduction in your annual base salary as of immediately prior to the Corporate Transaction (or as the same may be increased from time to time) or a material reduction in your annual target bonus opportunity as of immediately prior to the Corporate Transaction; or (z) the relocation of your principal place of employment to a location more than 35 miles from your principal place of employment as of the Corporate Transaction or the Company’s requiring you to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company’s business to an extent substantially consistent with your business travel obligations as of immediately prior to the Corporate Transaction. To qualify as an “Involuntary Termination” you must provide notice to the Company of any of the foregoing occurrences within 90 days of the initial occurrence and the Company shall have 30 days to remedy such occurrence.
Retention Rights	This Agreement does not give you the right to be retained or employed by the Company (or any Affiliates) in any capacity. The Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.

- 4 -

Shareholder Rights	You do not have any of the rights of a shareholder with respect to the Restricted Stock Units unless and until the Stock relating to the Restricted Stock Units has been transferred to you. In the event of a cash dividend on outstanding Stock, you will be entitled to receive a cash payment for each Restricted Stock Unit. The Company may in its sole discretion require that dividends will be reinvested in additional stock units at Fair Market Value on the dividend payment date, subject to vesting and delivered at the same time as the Restricted Stock Unit.
Adjustments	In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Restricted Stock Units covered by this grant will be adjusted (and rounded down to the nearest whole number) in accordance with the terms of the Plan.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to the information provided in this Agreement and any changes thereto, other appropriate personal and financial data about you such as home address and business addresses and other contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting these Restricted Stock Units, you give explicit consent to the Company to process any such personal data. You also give explicit consent to the Company to transfer any such personal data outside the country in which you are employed, including, with respect to non-U.S. resident grantees, to the United States, to transferees who shall include the Company and other persons who are designated by the Company to administer the Plan.

- 5 -

Consent to Electronic Delivery	The Company may choose to deliver certain statutory materials relating to the Plan in electronic form. By accepting this grant you agree that the Company may deliver the Plan prospectus and the Company’s annual report to you in an electronic format. If at any time you would prefer to receive paper copies of these documents, as you are entitled to receive, the Company would be pleased to provide copies.
Electronic Signature	All references to signatures and delivery of documents in this Agreement can be satisfied by procedures the Company has established or may establish for an electronic signature system for delivery and acceptance of any such documents, including this Agreement. Your electronic signature is the same as, and shall have the same force and effect as, your manual signature. Any such procedures and delivery may be effected by a third party engaged by the Company to provide administrative services related to the Plan.
The Plan	The text of the Plan is incorporated in this Agreement by reference. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this grant of Restricted Stock Units. Any prior agreements, commitments or negotiations concerning this grant are superseded.

- 6 -

EX-10.63

Exhibit 10.63

FORM OF STOCK OPTION AGREEMENT (DIRECTORS)

Option No.: _______

MORGAN HOTELS GROUP CO.
AMENDED AND RESTATED 2007 OMNIBUS INCENTIVE PLAN

NON-QUALIFIED STOCK OPTION AGREEMENT

Morgan Hotels Group Co., a Delaware corporation (the “Company”), hereby grants an option to purchase shares of its common stock, $.01 par value, (the “Stock”) to the optionee named below. Additional terms and conditions of the grant are set forth in this cover sheet and in the attachment (collectively the “Agreement”), and in the Company’s Amended and Restated 2007 Omnibus Incentive Plan (the “Plan”).

Grant Date: __________________, 200__

Name of Optionee:

Optionee’s Employee Identification Number: _____-____-_____

Number of Shares Covered by Option: ______________

Option Price per Share: $_____.___ (At least 100% of Fair Market Value)

Vesting Start Date: _________________, ____

By signing this cover sheet, you agree to all of the terms and conditions described in the attached Agreement and in the Plan, a copy of which is also attached. You acknowledge that you have carefully reviewed the Plan, and agree that the Plan will control in the event any provision of this Agreement should appear to be inconsistent with the Plan. Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.

Optionee:
		(Signature)
Company:
		(Signature)
	Title:

This is not a stock certificate or a negotiable instrument.

MORGAN HOTELS GROUP CO.
AMENDED AND RESTATED 2007 OMNIBUS INCENTIVE PLAN

NON-QUALIFIED STOCK OPTION AGREEMENT

Non-Qualified Stock Option	This option is not intended to be an incentive stock option under Section 422 of the Internal Revenue Code and will be interpreted accordingly.
Vesting	This option is only exercisable before it expires and then only with respect to the vested portion of the option. Subject to the preceding sentence, you may exercise this option, in whole or in part, to purchase a whole number of vested shares not less than 100 shares, unless the number of shares purchased is the total number available for purchase under the option, by following the procedures set forth in the Plan and below in this Agreement.
	Your right to the Stock under this Incentive Stock Option Agreement vests as to [one-third (1/3rd) of the total number of shares of Stock covered by this grant, as shown on the cover sheet, each year on each of the first three one-year anniversaries of the Vesting Start Date], provided you then continue in Service. The resulting aggregate number of vested shares will be rounded down to the nearest whole number, and you cannot vest in more than the number of shares covered by this option. No additional shares of Stock will vest after your Service has terminated for any reason.
Term	Your option will expire in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Grant Date, as shown on the cover sheet. Your option will expire earlier if your Service terminates, as described below.
Regular Termination	If your Service terminates for any reason, other than death, Disability or Cause, then your option will expire at the close of business at Company headquarters on the 90th day after your termination date.
Termination for Cause	If your Service is terminated for Cause, then you shall immediately forfeit all rights to your option and the option shall immediately expire.

2

Death	If your Service terminates because of your death, then your option will expire at the close of business at Company headquarters on the date twelve (12) months after the date of death. During that twelve month period, your estate or heirs may exercise the vested portion of your option.
	In addition, if you die during the 90-day period described in connection with a regular termination (i.e., a termination of your Service not on account of your death, Disability or Cause), and a vested portion of your option has not yet been exercised, then your option will instead expire on the date twelve (12) months after your termination date. In such a case, during the period following your death up to the date twelve (12) months after your termination date, your estate or heirs may exercise the vested portion of your option.
Disability	If your Service terminates because of your Disability, then your option will expire at the close of business at Company headquarters on the date twelve (12) months after your termination date.
Notice of Exercise	When you wish to exercise this option, you must notify the Company by filing the proper “Notice of Exercise” form at the address given on the form. Your notice must specify how many shares you wish to purchase (in a parcel of at least 100 shares generally). Your notice must also specify how your shares of Stock should be registered (e.g. in your name only or in your and your spouse’s names as joint tenants with right of survivorship). The notice will be effective when it is received by the Company.
	If someone else wants to exercise this option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.
Form of Payment	When you submit your notice of exercise, you must include payment of the option price for the shares you are purchasing. Payment may be made in one (or a combination) of the following forms:
	• Cash, your personal check, a cashier’s check, a money order or another cash equivalent acceptable to the Company.
	• Shares of Stock which have already been owned by you and which are surrendered to the Company. The value of the shares, determined as of the effective date of the option exercise, will be applied to the option price.
	• By delivery (on a form prescribed by the Company) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell Stock and to deliver all or part of the sale proceeds to the Company in payment of the aggregate option price and any withholding taxes.

3

Withholding Taxes	You will not be allowed to exercise this option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the option exercise or sale of Stock acquired under this option. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the exercise or sale of shares arising from this grant, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate. Subject to the prior approval of the Company, which may be withheld by the Company, in its sole discretion, you may elect to satisfy this withholding obligation, in whole or in part, by causing the Company to withhold shares of Stock otherwise issuable to you or by delivering to the Company shares of Stock already owned by you. The shares of Stock so delivered or withheld must have an aggregate Fair Market Value equal to the withholding obligation and may not be subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements.
Corporate Transaction	Notwithstanding the vesting schedule set forth above, upon the consummation of a Corporate Transaction, this option will become 100% vested if it is not assumed, or equivalent options are not substituted for the options, by the Company or its successor. If assumed or substituted for, the option will expire one year after the date of termination.
Transfer of Option	During your lifetime, only you (or, in the event of your legal incapacity or incompetency, your guardian or legal representative) may exercise the option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will or it may be transferred upon your death by the laws of descent and distribution. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your spouse, nor is the Company obligated to recognize your spouse’s interest in your option in any other way.
Retention Rights	Neither your option nor this Agreement give you the right to be retained by the Company (or any Parent, Subsidiaries or Affiliates) in any capacity. The Company (and any Parent, Subsidiaries or Affiliates) reserve the right to terminate your Service at any time and for any reason.

4

Shareholder Rights	You, or your estate or heirs, have no rights as a shareholder of the Company until a certificate for your option’s shares has been issued (or an appropriate book entry has been made). No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued (or an appropriate book entry has been made), except as described in the Plan.
Adjustments	In the event of a stock split, a stock dividend or a similar change in the Stock, the number of shares covered by this option and the option price per share shall be adjusted (and rounded down to the nearest whole number) pursuant to the Plan. Your option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity in accordance with the terms of the Plan.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan	The text of the Plan is incorporated in this Agreement by reference. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes but is not limited to the information provided in this Agreement and any changes thereto, other appropriate personal and financial data about you such as home address and business addresses and other contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan. By accepting this option, you give explicit consent to the Company to process any such personal data. You also give explicit consent to the Company to transfer any such personal data outside the country in which you work or are employed, including, with respect to non-U.S. resident Optionees, to the United States, to transferees who shall include the Company and other persons who are designated by the Company to administer the Plan.

5

Consent to Electronic Delivery

The Company may choose to deliver certain statutory materials relating to the Plan in electronic form. By accepting this option grant you agree that the Company may deliver the Plan prospectus and the Company’s annual report to you in an electronic format. If at any time you would prefer to receive paper copies of these documents, as you are entitled to, the Company would be pleased to provide copies.

Electronic Signature

All references to signatures and delivery of documents in this Agreement can be satisfied by procedures the Company has established or may establish for an electronic signature system for delivery and acceptance of any such documents, including this Agreement. Your electronic signature is the same as, and shall have the same force and effect as, your manual signature. Any such procedures and delivery may be effected by a third party engaged by the Company to provide administrative services related to the Plan.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the Plan.

6

EX-10.64

Exhibit 10.64

FORM OF STOCK OPTION AGREEMENT

Option No.: _______

MORGAN HOTELS GROUP CO.
AMENDED AND RESTATED 2007 OMNIBUS INCENTIVE PLAN

INCENTIVE STOCK OPTION AGREEMENT

Morgan Hotels Group Co., a Delaware corporation (the “Company”), hereby grants an option to purchase shares of its common stock, $.01 par value, (the “Stock”) to the optionee named below. Additional terms and conditions of the grant are set forth in this cover sheet and in the attachment (collectively the “Agreement”), and in the Company’s Amended and Restated 2007 Omnibus Incentive Plan (the “Plan”).

Grant Date: __________________, 200__

Name of Optionee: _________________________________________________

Optionee’s Employee Identification Number: _____-____-_____

Number of Shares Covered by Option: ______________

Option Price per Share: $______.___ (At least 100% of Fair Market Value)

Vesting Start Date: _________________, ____

By signing this cover sheet, you agree to all of the terms and conditions described in the attached Agreement and in the Plan, a copy of which is also attached. You acknowledge that you have carefully reviewed the Plan, and agree that the Plan will control in the event any provision of this Agreement should appear to be inconsistent with the Plan. Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.

Optionee:
		(Signature)
Company:
		(Signature)
	Title:

This is not a stock certificate or a negotiable instrument.

MORGAN HOTELS GROUP CO.
2007 AMENDED AND RESTATED OMNIBUS INCENTIVE PLAN

INCENTIVE STOCK OPTION AGREEMENT

Incentive Stock Option	This option is intended to be an incentive stock option under Section 422 of the Internal Revenue Code and will be interpreted accordingly. If you cease to be an employee of the Company, its parent or a subsidiary (“Employee”) but continue to provide Service, this option will be deemed a nonstatutory stock option three months after you cease to be an Employee. In addition, to the extent that all or part of this option exceeds the $100,000 rule of section 422(d) of the Internal Revenue Code, this option or the lesser excess part will be deemed to be a nonstatutory stock option.
Vesting	This option is only exercisable before it expires and then only with respect to the vested portion of the option. Subject to the preceding sentence, you may exercise this option, in whole or in part, to purchase a whole number of vested shares not less than 100 shares, unless the number of shares purchased is the total number available for purchase under the option, by following the procedures set forth in the Plan and below in this Agreement.
	Your right to the Stock under this Incentive Stock Option Agreement vests as to [one-third (1/3rd) of the total number of shares of Stock covered by this grant, as shown on the cover sheet, each year on each of the first three one-year anniversaries of the Vesting Start Date], provided you then continue in Service. The resulting aggregate number of vested shares will be rounded down to the nearest whole number, and you cannot vest in more than the number of shares covered by this option. No additional shares of Stock will vest after your Service has terminated for any reason.
Term	Your option will expire in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Grant Date, as shown on the cover sheet. Your option will expire earlier if your Service terminates, as described below.
Regular Termination	If your Service terminates for any reason, other than death, Disability or Cause, then your option will expire at the close of business at Company headquarters on the 90th day after your termination date.

2

Termination for Cause	If your Service is terminated for Cause, then you shall immediately forfeit all rights to your option and the option shall immediately expire.
Death	If your Service terminates because of your death, then your option will expire at the close of business at Company headquarters on the date twelve (12) months after the date of death. During that twelve month period, your estate or heirs may exercise the vested portion of your option. In addition, if you die during the 90-day period described in connection with a regular termination (i.e., a termination of your Service not on account of your death, Disability or Cause), and a vested portion of your option has not yet been exercised, then your option will instead expire on the date twelve (12) months after your termination date. In such a case, during the period following your death up to the date twelve (12) months after your termination date, your estate or heirs may exercise the vested portion of your option.
Disability	If your Service terminates because of your Disability, then your option will expire at the close of business at Company headquarters on the date twelve (12) months after your termination date.
Leaves of Absence	For purposes of this option, your Service does not terminate when you go on a bona fide employee leave of absence that was approved by the Company in writing, if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. However, your Service will be treated as terminating 90 days after you went on employee leave, unless your right to return to active work is guaranteed by law or by a contract. Your Service terminates in any event when the approved leave ends unless you immediately return to active employee work. The Company determines, in its sole discretion, which leaves count for this purpose, and when your Service terminates for all purposes under the Plan.
Notice of Exercise	When you wish to exercise this option, you must notify the Company by filing the proper “Notice of Exercise” form at the address given on the form. Your notice must specify how many shares you wish to purchase (in a parcel of at least 100 shares generally). Your notice must also specify how your shares of Stock should be registered (e.g. in your name only or in your and your spouse’s names as joint tenants with right of survivorship). The notice will be effective when it is received by the Company.
	If someone else wants to exercise this option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.

3

Form of Payment	When you submit your notice of exercise, you must include payment of the option price for the shares you are purchasing. Payment may be made in one (or a combination) of the following forms:
	• Cash, your personal check, a cashier’s check, a money order or another cash equivalent acceptable to the Company.
	• Shares of Stock which have already been owned by you and which are surrendered to the Company. The value of the shares, determined as of the effective date of the option exercise, will be applied to the option price.
	• By delivery (on a form prescribed by the Company) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell Stock and to deliver all or part of the sale proceeds to the Company in payment of the aggregate option price and any withholding taxes.
Withholding Taxes	You will not be allowed to exercise this option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the option exercise or sale of Stock acquired under this option. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the exercise or sale of shares arising from this grant, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate. Subject to the prior approval of the Company, which may be withheld by the Company, in its sole discretion, you may elect to satisfy this withholding obligation, in whole or in part, by causing the Company to withhold shares of Stock otherwise issuable to you or by delivering to the Company shares of Stock already owned by you. The shares of Stock so delivered or withheld must have an aggregate Fair Market Value equal to the withholding obligation and may not be subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements.
Corporate Transaction	Notwithstanding the vesting schedule set forth above, upon the consummation of a Corporate Transaction, this option will become 100% vested (i) if it is not assumed, or equivalent options are not substituted for the options, by the Company or its successor, or (ii) upon your Involuntary Termination within the 12-month period following the consummation of the Corporate Transaction. Notwithstanding any other provision in this agreement, if assumed or substituted for, the option will expire one year after the date of termination.

4

	“Involuntary Termination” means termination of your Service by reason of (i) your involuntary dismissal by the Company or its successor for reasons other than Cause; or (ii) your voluntary resignation for Good Reason as defined in any applicable employment or severance agreement, plan, or arrangement between you and the Company, or if none, then as set forth in the Plan following (x) a substantial adverse alteration in your title or responsibilities from those in effect immediately prior to the Corporate Transaction; (y) a reduction in your annual base salary as of immediately prior to the Corporate Transaction (or as the same may be increased from time to time) or a material reduction in your annual target bonus opportunity as of immediately prior to the Corporate Transaction; or (z) the relocation of your principal place of employment to a location more than 35 miles from your principal place of employment as of the Corporate Transaction or the Company’s requiring you to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company’s business to an extent substantially consistent with your business travel obligations as of immediately prior to the Corporate Transaction.
Transfer of Option	During your lifetime, only you (or, in the event of your legal incapacity or incompetency, your guardian or legal representative) may exercise the option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will or it may be transferred upon your death by the laws of descent and distribution.
	Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your spouse, nor is the Company obligated to recognize your spouse’s interest in your option in any other way.
Retention Rights	Neither your option nor this Agreement give you the right to be retained by the Company (or any Parent, Subsidiaries or Affiliates) in any capacity. The Company (and any Parent, Subsidiaries or Affiliates) reserve the right to terminate your Service at any time and for any reason.
Shareholder Rights	You, or your estate or heirs, have no rights as a shareholder of the Company until a certificate for your option’s shares has been issued (or an appropriate book entry has been made). No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued (or an appropriate book entry has been made), except as described in the Plan.

5

Forfeiture of Rights	If during your term of Service you should take actions in competition with the Company, the Company shall have the right to cause a forfeiture of your rights, including, but not limited to, the right to cause: (i) a forfeiture of any outstanding option, and (ii) with respect to the period commencing twelve (12) months prior to your termination of Service with the Company and ending twelve (12) months following such termination of Service (A) a forfeiture of any gain recognized by you upon the exercise of an option or (B) a forfeiture of any Stock acquired by you upon the exercise of an option (but the Company will pay you the option price without interest). Unless otherwise specified in an employment or other agreement between the Company and you, you take actions in competition with the Company if you directly or indirectly, own, manage, operate, join or control, or participate in the ownership, management, operation or control of, or are a proprietor, director, officer, stockholder, member, partner or an employee or agent of, or a consultant to any business, firm, corporation, partnership or other entity which competes with any business in which the Company or any of its Affiliates is engaged during your employment or other relationship with the Company or its Affiliates or at the time of your termination of Service. Under the prior sentence, ownership of less than 1% of the securities of a public company shall not be treated as an action in competition with the Company.
Adjustments	In the event of a stock split, a stock dividend or a similar change in the Stock, the number of shares covered by this option and the option price per share shall be adjusted (and rounded down to the nearest whole number) pursuant to the Plan. Your option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity in accordance with the terms of the Plan.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan	The text of the Plan is incorporated in this Agreement by reference.
	This Agreement and the Plan constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded.

6

Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes but is not limited to the information provided in this Agreement and any changes thereto, other appropriate personal and financial data about you such as home address and business addresses and other contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting this option, you give explicit consent to the Company to process any such personal data. You also give explicit consent to the Company to transfer any such personal data outside the country in which you work or are employed, including, with respect to non-U.S. resident Optionees, to the United States, to transferees who shall include the Company and other persons who are designated by the Company to administer the Plan.
Consent to Electronic Delivery	The Company may choose to deliver certain statutory materials relating to the Plan in electronic form. By accepting this option grant you agree that the Company may deliver the Plan prospectus and the Company’s annual report to you in an electronic format. If at any time you would prefer to receive paper copies of these documents, as you are entitled to, the Company would be pleased to provide copies.
Certain Dispositions	If you sell or otherwise dispose of Stock acquired pursuant to the exercise of this option sooner than the one year anniversary of the date you acquired the Stock, then you agree to notify the Company in writing of the date of sale or disposition, the number of share of Stock sold or disposed of and the sale price per share within 30 days of such sale or disposition.
Electronic Signature	All references to signatures and delivery of documents in this Agreement can be satisfied by procedures the Company has established or may establish for an electronic signature system for delivery and acceptance of any such documents, including this Agreement. Your electronic signature is the same as, and shall have the same force and effect as, your manual signature. Any such procedures and delivery may be effected by a third party engaged by the Company to provide administrative services related to the Plan.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the Plan.

7

EX-10.65

Exhibit 10.65

FORM OF LTIP UNIT VESTING AGREEMENT (DIRECTORS with immediate vesting)

LTIP UNIT VESTING AGREEMENT

UNDER THE MORGANS HOTEL GROUP CO.
AMENDED AND RESTATED 2007 OMNIBUS INCENTIVE PLAN

Name of Grantee:	(“Grantee”)
No. of LTIP Units:
Grant Date:	(the “Grant Date”)
Final Acceptance Date:	(the “Final Acceptance Date”)

Pursuant to the Morgans Hotel Group Co. Amended and Restated 2007 Omnibus Incentive Plan (the “Plan”) and the Limited Liability Company Agreement (the “LLC Agreement”) of Morgans Group LLC (the “LLC”), a Delaware limited liability company, Morgans Hotel Group Co. (the “Company”), a Delaware corporation and the managing member of the LLC, hereby grants to the Grantee named above an Other Stock-Based Award (as defined in the Plan, referred to herein as an “Award”) in the form of, and by causing the LLC to issue to the Grantee, the number of LTIP Units (as defined in the LLC Agreement) set forth above (the “Award LTIP Units”) having the rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption and conversion set forth herein and in the LLC Agreement. Upon the close of business on the Final Acceptance Date, if this LTIP Unit Vesting Agreement (this “Agreement”) is accepted, the Grantee shall receive the number of LTIP Units specified above, subject to the restrictions and conditions set forth herein, in the Plan and in the LLC Agreement. Unless otherwise indicated, capitalized terms used herein but not defined shall have the meanings given to those terms in the Plan.

1. Acceptance of Agreement.

(a) Unless the Grantee is already a Member (as defined in the LLC Agreement), Grantee must sign, as a Member, and deliver to the LLC a counterpart signature page to the LLC Agreement (attached hereto as Exhibit A). Upon signing and delivery of the signature page, to the extent required, the Grantee shall be admitted as a Member of the LLC, as of the Grant Date, with beneficial ownership of the number of LTIP Units specified above, the LLC Agreement shall be amended to reflect the issuance to the Grantee of the Award LTIP Units and the LLC shall deliver to the Grantee a certificate of the Company certifying the number of LTIP Units then issued to the Grantee. Thereupon, the Grantee shall have all the rights of a Member of the LLC with respect to the number of LTIP Units specified above, as set forth in the LLC Agreement, subject, however, to the restrictions and conditions specified herein and in the LLC Agreement.

(b) In order to confirm receipt of this Agreement, Grantee must sign and deliver to the Company a copy of this Agreement.

2. Vesting of LTIP Units.

(a) Except as provided in Sections 2(b) and 2(c) below, the Award LTIP Units shall vest immediately upon grant on the Grant Date, (each such date on which Award LTIP Units vest is referred to herein as a “Vesting Date”).

(b) Notwithstanding any other term or provision of this Agreement, if a Corporate Transaction occurs and the LTIP Units subject to this Agreement are not assumed or substituted for, any restrictions and conditions on all LTIP Units subject to this Agreement shall be deemed waived by the Company. Notwithstanding any other provision in this Agreement, if assumed or substituted for, the award will expire one year after the date of termination.

(c) Other Vesting Terms. Notwithstanding anything to the contrary in this Section 2, to the extent the Grantee is a party to another agreement or arrangement with the Company that provides more favorable vesting provisions than provided for in this Agreement, the more favorable vesting terms of such other agreement or arrangement shall control.

3. Distributions. Distributions on the LTIP Units shall be paid currently to the Grantee in accordance with the terms of the LLC Agreement.

4. Rights with Respect to LTIP Units. If (i) the Company shall at any time be involved in a merger, consolidation, dissolution, liquidation, reorganization, exchange of shares, sale of all or substantially all of the assets or stock of the Company or a transaction similar thereto, (ii) any stock dividend, stock split, reverse stock split, stock combination, reclassification, recapitalization, significant repurchases of stock or other similar change in the capital structure of the Company, or any distribution to holders of Common Stock other than regular cash dividends, shall occur or (iii) any other event shall occur which in the judgment of the Administrator necessitates action by way of adjusting the terms of the Agreement, then and in that event, the Administrator shall take any such action as in its discretion shall be necessary to maintain the Grantee’s rights hereunder so that they are substantially proportionate to the rights existing under this Agreement prior to such event, including but not limited to, adjustments in the number of LTIP Units then subject to this Agreement.

5. Legend. The records of the LLC evidencing the Award LTIP Units shall bear an appropriate legend, as determined by the LLC in its sole discretion, to the effect that such LTIP Units are subject to restrictions as set forth herein, in the Plan and in the LLC Agreement.

6. Restrictions on Transfer. None of the Award LTIP Units shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of, encumbered, whether voluntarily or by operation of law (each such action a “Transfer”), or converted into Membership Units in accordance with the LLC Agreement (a) prior to Grantee’s termination of service as a director, unless otherwise provided by the Compensation Committee of the Board of Directors, or (b) unless such Transfer is in compliance with all applicable securities laws (including, without limitation, the Securities Act of 1933, as amended (the “Securities Act”)), and such Transfer is in accordance with the applicable terms and conditions of the LLC Agreement; provided that, upon the approval of, and subject to the terms and conditions specified by, the Administrator, Award LTIP Units may be Transferred to members of the Grantee’s Immediate Family at anytime, including before termination of Grantee’s service, which for purposes of this Agreement shall include family limited partnerships and similar entities which are primarily for the benefit of the Grantee and his or her Immediate Family, provided that the transferee agrees in writing with the Company and the LLC to be bound by all of the terms and conditions of this Agreement. In connection with any Transfer of Award LTIP Units, the LLC may require the Grantee to provide an opinion of counsel, satisfactory to the LLC, that such Transfer is in compliance with all federal and state securities laws (including, without limitation, the Securities Act). Any attempted Transfer of Award LTIP Units not in accordance with the terms and conditions of this Section 6 shall be null and void, and the LLC shall not reflect on its records any change in record ownership of any LTIP Units as a result of any such Transfer, shall otherwise refuse to recognize any such Transfer and shall not in any way give effect to any such Transfer of any LTIP Units. This Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will, the laws of descent and distribution or the transfer provisions specified above in this Section 6.

2

7. Incorporation of Plan. The provisions of the Plan are hereby incorporated by reference as if set forth herein. If and to the extent that any provision contained in this Agreement is inconsistent with the Plan, this Agreement shall govern.

8. Investment Representation; Registration. The Grantee hereby makes the covenants, representations and warranties set forth on Exhibit B attached hereto as of the date of acceptance of this Agreement and each Vesting Date. All of such covenants, warranties and representations shall survive the execution and delivery of this Agreement by the Grantee. The Grantee shall immediately notify the LLC upon discovering that any of the representations or warranties set forth on Exhibit B were false when made or have, as a result of changes in circumstances, become false. The LLC will have no obligation to register under the Securities Act any LTIP Units or any other securities issued pursuant to this Agreement or upon conversion or exchange of the LTIP Units.

9. Section 83(b) Election. The Grantee hereby agrees to make an election to include in gross income in the year of transfer the Award LTIP Units pursuant to Section 83(b) of the Code substantially in the form attached hereto as Exhibit C and to supply the necessary information in accordance with the regulations promulgated thereunder.

10. Amendment. The Grantee acknowledges that the Plan may be amended or discontinued in accordance with Section 12 thereof and that this Agreement may be amended or canceled by the Administrator of the Plan, on behalf of the LLC, for the purpose of satisfying changes in law or for any other lawful purpose, provided that no such action shall impair the Grantee’s rights under this Agreement without the Grantee’s written consent.

11. Withholding and Taxes. No later than the date as of which an amount first becomes includible in the gross income of the Grantee for income tax purposes or subject to the Federal Insurance Contributions Act withholding with respect to the Award LTIP Units, the Grantee will pay to the Company or, if appropriate, any of its affiliates, or make arrangements satisfactory to the Administrator regarding the payment of, any United States federal, state or local or foreign taxes of any kind required by law to be withheld with respect to such amount, if any. The obligations of the Company under this Agreement will be conditional on such payment or arrangements, and the Company and its affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Grantee.

12. No Obligation to Continue Services. Neither the Company, the LLC nor any subsidiary of any of them is obligated by or as a result of the Plan or this Agreement to continue to have the Grantee provide services to it and neither the Plan nor this Agreement shall interfere in any way with the right of the Company, the LLC or any subsidiary of any of them to terminate its relationship with the Grantee at any time.

3

13. Notices. Notices hereunder shall be mailed or delivered to the LLC at its principal place of business and shall be mailed or delivered to the Grantee at the address on file with the LLC or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

14. Section 409A. If any compensation provided by this Agreement may result in the application of Section 409A of the Code, the Company shall, in consultation with the Grantee, modify the Agreement in the least restrictive manner necessary in order to, where applicable, (a) exclude such compensation from the definition of “deferred compensation” within the meaning of such Section 409A or (b) comply with the provisions of Section 409A, other applicable provision(s) of the Code and/or any rules, regulations or other regulatory guidance issued under such statutory provisions and to make such modifications, in each case, without any diminution in the value of the payments to the Grantee.

15. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, applied without regard to conflict of law principles. The parties hereto agree that any action or proceeding arising directly, indirectly or otherwise in connection with, out of, related to or from this Agreement, any breach hereof or any action covered hereby, shall be resolved within the State of New York and the parties hereto consent and submit to the jurisdiction of the federal and state courts located within the City of New York, New York. The parties hereto further agree that any such action or proceeding brought by either party to enforce any right, assert any claim, obtain any relief whatsoever in connection with this Agreement shall be brought by such party exclusively in federal or state courts located within the State of New York.

16. Electronic Signature. All references to signatures and delivery of documents in this Agreement can be satisfied by procedures the Company has established or may establish for an electronic signature system for delivery and acceptance of any such documents, including this Agreement. The Grantee’s electronic signature is the same as, and shall have the same force and effect as, Grantee’s manual signature. Any such procedures and delivery may be effected by a third party engaged by the Company to provide administrative services related to the Plan.

(Signature Page Follows)

4

IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed as of the _____ day of ____, 200__.

MORGANS HOTEL GROUP CO.
By:
	Name:
	Title:
MORGANS GROUP LLC
By:	Morgans Hotel Group Co., its managing member
	By:
		Name:
		Title:
GRANTEE
Name:
Address:

5

EXHIBIT A

FORM OF MEMBER SIGNATURE PAGE

The Grantee, desiring to become one of the within named Members of Morgans Group LLC, hereby accepts all of the terms and conditions of, and becomes a party to, the Limited Liability Company Agreement of Morgans Group LLC (the “LLC Agreement”). The Grantee agrees that this signature page may be attached to any counterpart of the LLC Agreement.

Signature Line for Member:

Name:

Date:

Address of Member:

6

EXHIBIT B

GRANTEE’S COVENANTS, REPRESENTATIONS AND WARRANTIES

The Grantee hereby represents, warrants and covenants as follows:

(a) The Grantee has received and had an opportunity to review the following documents (the “Background Documents”):

(i) The Company’s latest Annual Report to Stockholders that has been provided to stockholders after the Company’s initial public offering, if available;

(ii) The Company’s Proxy Statement for its most recent Annual Meeting of Stockholders following the Company’s initial public offering, if available;

(iii) The Company’s Report on Form 10-K for the fiscal year most recently ended following the Company’s initial public offering, if available;

(iv) If any of the documents described in clauses (i) — (iii) above or (v) or (vi) below is not available, the Company’s Registration Statement on Form S-1 registering the Company’s initial public offering of its common stock;

(v) The Company’s Form 10-Q for the most recently ended quarter if one has been filed by the Company with the Securities and Exchange Commission since the filing of the Form 10-K described in clause (iii) above or, if a Form 10-K has not been filed by the Company, since the filing of the Form S-1 described in clause (iv) above;

(vi) Each of the Company’s Current Report(s) on Form 8-K, if any, filed since the later of the end of the fiscal year most recently ended for which a Form 10-K has been filed by the Company or the filing of the Form S-1 described in clause (iv) above;

(vii) The LLC Agreement;

(viii) The Plan; and

(ix) The Company’s Certificate of Incorporation, as amended.

The Grantee also acknowledges that any delivery of the Background Documents and other information relating to the Company and the LLC prior to the determination by the LLC of the suitability of the Grantee as a holder of LTIP Units shall not constitute an offer of LTIP Units until such determination of suitability shall be made.

(b) The Grantee hereby represents and warrants that

(i) The Grantee either (A) is an “accredited investor” as defined in Rule 501(a) under the Securities Act of 1933, as amended (the “Securities Act”), or (B) by reason of the business and financial experience of the Grantee, together with the business and financial experience of those persons, if any, retained by the Grantee to represent or advise him, her or it with respect to the grant to him, her or it of LTIP Units, the potential conversion of LTIP Units into common units of the LLC (“Common Units”) and the potential redemption of such Common Units for shares of common stock (“Shares”), has such knowledge, sophistication and experience in financial and business matters and in making investment decisions of this type that the Grantee (I) is capable of evaluating the merits and risks of an investment in the LLC and potential investment in the Company and of making an informed investment decision, (II) is capable of protecting his, her or its own interest or has engaged representatives or advisors to assist him, her or it in protecting his, her or its interests, and (III) is capable of bearing the economic risk of such investment.

7

(ii) The Grantee understands that (A) the Grantee is responsible for consulting his, her or its own tax advisors with respect to the application of the U.S. federal income tax laws, and the tax laws of any state, local or other taxing jurisdiction to which the Grantee is or by reason of the award of LTIP Units may become subject, to his, her or its particular situation; (B) the Grantee has not received or relied upon business or tax advice from the Company, the LLC or any of their respective employees, agents, consultants or advisors, in their capacity as such; (C) the Grantee provides or will provide services to the LLC on a regular basis and in such capacity has access to such information, and has such experience of and involvement in the business and operations of the LLC, as the Grantee believes to be necessary and appropriate to make an informed decision to accept this Award of LTIP Units; and (D) an investment in the LLC and/or the Company involves substantial risks. The Grantee has been given the opportunity to make a thorough investigation of matters relevant to the LTIP Units and has been furnished with, and has reviewed and understands, materials relating to the LLC and the Company and their respective activities (including, but not limited to, the Background Documents). The Grantee has been afforded the opportunity to obtain any additional information (including any exhibits to the Background Documents) deemed necessary by the Grantee to verify the accuracy of information conveyed to the Grantee. The Grantee confirms that all documents, records, and books pertaining to his, her or its receipt of LTIP Units which were requested by the Grantee have been made available or delivered to the Grantee. The Grantee has had an opportunity to ask questions of and receive answers from the LLC and the Company, or from a person or persons acting on their behalf, concerning the terms and conditions of the LTIP Units. The Grantee has relied upon, and is making its decision solely upon, the Background Documents and other written information provided to the Grantee by the LLC or the Company. The Grantee did not receive any tax, legal or financial advice from the LLC or the Company and, to the extent it deemed necessary, has consulted with its own advisors in connection with its evaluation of the Background Documents and this Agreement and the Grantee’s receipt of LTIP Units.

(iii) The LTIP Units to be issued, the Common Units issuable upon conversion of the LTIP Units and any Shares issued in connection with the redemption of any such Common Units will be acquired for the account of the Grantee for investment only and not with a current view to, or with any intention of, a distribution or resale thereof, in whole or in part, or the grant of any participation therein, without prejudice, however, to the Grantee’s right (subject to the terms of the LTIP Units, the Plan and this Agreement) at all times to sell or otherwise dispose of all or any part of his or her LTIP Units, Common Units or Shares in compliance with the Securities Act, and applicable state securities laws, and subject, nevertheless, to the disposition of his or her assets being at all times within his or her control.

8

(iv) The Grantee acknowledges that (A) neither the LTIP Units to be issued, nor the Common Units issuable upon conversion of the LTIP Units, have been registered under the Securities Act or state securities laws by reason of a specific exemption or exemptions from registration under the Securities Act and applicable state securities laws and, if such LTIP Units or Common Units are represented by certificates, such certificates will bear a legend to such effect, (B) the reliance by the LLC and the Company on such exemptions is predicated in part on the accuracy and completeness of the representations and warranties of the Grantee contained herein, (C) such LTIP Units, or Common Units, therefore, cannot be resold unless registered under the Securities Act and applicable state securities laws, or unless an exemption from registration is available, (D) there is no public market for such LTIP Units and Common Units and (E) neither the LLC nor the Company has any obligation or intention to register such LTIP Units or the Common Units issuable upon conversion of the LTIP Units under the Securities Act or any state securities laws or to take any action that would make available any exemption from the registration requirements of such laws, except, that, upon the redemption of the Common Units for Shares, the Company currently intends to issue such Shares under the Plan and pursuant to a Registration Statement on Form S-8 under the Securities Act, to the extent that (I) the Grantee is eligible to receive such Shares under the Plan at the time of such issuance, (II) the Company has filed an effective Form S-8 Registration Statement with the Securities and Exchange Commission registering the issuance of such Shares. The Grantee hereby acknowledges that because of the restrictions on transfer or assignment of such LTIP Units acquired hereby and the Common Units issuable upon conversion of the LTIP Units which are set forth in the LLC Agreement or this Agreement, the Grantee may have to bear the economic risk of his, her or its ownership of the LTIP Units acquired hereby and the Common Units issuable upon conversion of the LTIP Units for an indefinite period of time.

(v) The Grantee has determined that the LTIP Units are a suitable investment for the Grantee.

(vi) No representations or warranties have been made to the Grantee by the LLC or the Company, or any officer, director, shareholder, agent, or affiliate of any of them, and the Grantee has received no information relating to an investment in the LLC or the LTIP Units except the information specified in Paragraph (b) above.

(c) So long as the Grantee holds any LTIP Units, the Grantee shall disclose to the LLC in writing such information as may be reasonably requested with respect to ownership of LTIP Units as the LLC may deem reasonably necessary to ascertain and to establish compliance with provisions of the Internal Revenue Code of 1986, as amended (the “Code”), applicable to the LLC or to comply with requirements of any other appropriate taxing authority.

9

(d) The Grantee hereby agrees to make an election under Section 83(b) of the Code with respect to the LTIP Units awarded hereunder, and has delivered with this Agreement a completed, executed copy of the election form attached hereto as Exhibit C. The Grantee agrees to file the election (or to permit the LLC to file such election on the Grantee’s behalf) within thirty (30) days after the Award of the LTIP Units hereunder with the IRS Service Center at which such Grantee files his or her personal income tax returns, and to file a copy of such election with the Grantee’s U.S. federal income tax return for the taxable year in which the LTIP Units are awarded to the Grantee.

(e) The address set forth on the signature page of this Agreement is the address of the Grantee’s principal residence, and the Grantee has no present intention of becoming a resident of any country, state or jurisdiction other than the country and state in which such residence is sited.

(f) The representations of the Grantee as set forth above are true and complete to the best of the information and belief of the Grantee, and the LLC shall be notified promptly of any changes in the foregoing representations.

10

EXHIBIT C

ELECTION TO INCLUDE IN GROSS INCOME IN YEAR OF
TRANSFER OF PROPERTY PURSUANT TO SECTION 83(B)
OF THE INTERNAL REVENUE CODE

The undersigned hereby makes an election pursuant to Section 83(b) of the Internal Revenue Code with respect to the property described below and supplies the following information in accordance with the regulations promulgated thereunder:

1.	The name, address and taxpayer identification number of the undersigned are:
	Name:                      (the “Taxpayer”)
	Address:
	Social Security No./Taxpayer Identification No.:
2.	Description of property with respect to which the election is being made:
	The election is being made with respect to  _____  LTIP Units in Morgans Group LLC (the “LLC”).
3.	The date on which the LTIP Units were transferred is  _____, 200___. The taxable year to which this election relates is calendar year 200___.
4.	Nature of restrictions to which the LTIP Units are subject:

(a)	With limited exceptions, until the Grantee terminates service with the Company, the Taxpayer may not transfer in any manner any portion of the LTIP Units without the consent of the LLC.
(b)	The Taxpayer’s LTIP Units are immediately vested upon grant.

5.	The fair market value at time of transfer (determined without regard to any restrictions other than restrictions which by their terms will never lapse) of the LTIP Units with respect to which this election is being made was $0 per LTIP Unit.
6.	The amount paid by the Taxpayer for the LTIP Units was $0 per LTIP Unit.
7.	A copy of this statement has been furnished to the LLC and to its managing member, Morgans Hotel Group Co.

Dated: ___________, 200__

Name:

11

EX-10.66

Exhibit 10.66

FORM OF LTIP UNIT VESTING AGREEMENT

LTIP UNIT VESTING AGREEMENT

UNDER THE MORGANS HOTEL GROUP CO.
AMENDED AND RESTATED 2007 OMNIBUS INCENTIVE PLAN

Name of Grantee:	(“Grantee”)
No. of LTIP Units:
Grant Date:	(the “Grant Date”)
Final Acceptance Date:	(the “Final Acceptance Date”)

Pursuant to the Morgans Hotel Group Co. Amended and Restated 2007 Omnibus Incentive Plan (the “Plan”) and the Limited Liability Company Agreement (the “LLC Agreement”) of Morgans Group LLC (the “LLC”), a Delaware limited liability company, Morgans Hotel Group Co. (the “Company”), a Delaware corporation and the managing member of the LLC, hereby grants to the Grantee named above an Other Stock-Based Award (as defined in the Plan, referred to herein as an “Award”) in the form of, and by causing the LLC to issue to the Grantee, the number of LTIP Units (as defined in the LLC Agreement) set forth above (the “Award LTIP Units”) having the rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption and conversion set forth herein and in the LLC Agreement. Upon the close of business on the Final Acceptance Date, if this LTIP Unit Vesting Agreement (this “Agreement”) is accepted, the Grantee shall receive the number of LTIP Units specified above, subject to the restrictions and conditions set forth herein, in the Plan and in the LLC Agreement. Unless otherwise indicated, capitalized terms used herein but not defined shall have the meanings given to those terms in the Plan.

1. Acceptance of Agreement.

(a) Unless the Grantee is already a Member (as defined in the LLC Agreement), Grantee must sign, as a Member, and deliver to the LLC a counterpart signature page to the LLC Agreement (attached hereto as Exhibit A). Upon signing and delivery of the signature page, to the extent required, the Grantee shall be admitted as a Member of the LLC, as of the Grant Date, with beneficial ownership of the number of LTIP Units specified above, the LLC Agreement shall be amended to reflect the issuance to the Grantee of the Award LTIP Units and the LLC shall deliver to the Grantee a certificate of the Company certifying the number of LTIP Units then issued to the Grantee. Thereupon, the Grantee shall have all the rights of a Member of the LLC with respect to the number of LTIP Units specified above, as set forth in the LLC Agreement, subject, however, to the restrictions and conditions specified herein and in the LLC Agreement.

(b) In order to confirm receipt of this Agreement, Grantee must sign and deliver to the Company a copy of this Agreement.

2. Vesting of LTIP Units.

[(a) Except as provided in Sections 2(b) and 2(c) below, the Award LTIP Units shall vest one-third (1/3) each year on each of the first three one-year anniversaries of the Grant Date, (each such date on which Award LTIP Units vest is referred to herein as a “Vesting Date”)]; provided that upon termination of Grantee’s employment with, cessation of consulting relationship with or cessation of service to the Company and its Subsidiaries for any reason, the LTIP Units that have not yet vested shall, without payment of any consideration by the LLC, automatically and without notice terminate, be forfeited and be and become null and void, and neither the Grantee nor any of his successors, heirs, assigns, or personal representatives will thereafter have any further rights or interests in such LTIP Units. In the event Grantee becomes a consultant, advisor or Non-Employee Director, such change in status shall not be deemed a termination of employment or service with the Company at the time of such change in status or thereafter so long as the Grantee continues in one of such positions.

(b) Notwithstanding any other term or provision of this Agreement, if a Corporate Transaction occurs and the LTIP Units subject to this Agreement are not assumed or substituted for, or if assumed or substituted for, upon the Grantee’s Involuntary Termination within the 12 month period following the Corporate Transaction, any restrictions and conditions on all LTIP Units subject to this Agreement shall be deemed waived by the Company and all LTIP Units granted hereby that have not previously been forfeited shall automatically become fully vested. Notwithstanding any other provision in this Agreement, if assumed or substituted for, the award will expire one year after the date of termination.

“Involuntary Termination” means termination by reason of (i) the Grantee’s involuntary dismissal by the Company or its successor for reasons other than Cause; or (ii) the Grantee’s voluntary resignation for Good Reason as defined in any applicable employment or severance agreement, plan, or arrangement between the Grantee and the Company, or if none, then as set forth in the Plan following (x) a substantial adverse alteration in the Grantee’s title or responsibilities from those in effect immediately prior to the Corporate Transaction; (y) a material reduction in the Grantee’s annual base salary as of immediately prior to the Corporate Transaction (or as the same may be increased from time to time) or a material reduction in the Grantee’s annual target bonus opportunity as of immediately prior to the Corporate Transaction; or (z) the relocation of the Grantee’s principal place of employment to a location more than 35 miles from the Grantee’s principal place of employment as of the Corporate Transaction or the Company’s requiring the Grantee to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company’s business to an extent substantially consistent with the Grantee’s business travel obligations as of immediately prior to the Corporate Transaction. To qualify as an “Involuntary Termination” the Grantee must provide notice to the Company of any of the foregoing occurrences within 90 days of the initial occurrence and the Company shall have 30 days to remedy such occurrence.

(c) Other Vesting Terms. Notwithstanding anything to the contrary in this Section 2, to the extent the Grantee is a party to another agreement or arrangement with the Company that provides accelerated vesting of the Award LTIP Units in the event of certain types of employment terminations or any other applicable vesting-related events or provides more favorable vesting provisions than provided for in this Agreement, the more favorable vesting terms of such other agreement or arrangement shall control.

3. Distributions. Distributions on the LTIP Units shall be paid currently to the Grantee in accordance with the terms of the LLC Agreement.

2

4. Rights with Respect to LTIP Units. If (i) the Company shall at any time be involved in a merger, consolidation, dissolution, liquidation, reorganization, exchange of shares, sale of all or substantially all of the assets or stock of the Company or a transaction similar thereto, (ii) any stock dividend, stock split, reverse stock split, stock combination, reclassification, recapitalization, significant repurchases of stock or other similar change in the capital structure of the Company, or any distribution to holders of Common Stock other than regular cash dividends, shall occur or (iii) any other event shall occur which in the judgment of the Administrator necessitates action by way of adjusting the terms of the Agreement, then and in that event, the Administrator shall take any such action as in its discretion shall be necessary to maintain the Grantee’s rights hereunder so that they are substantially proportionate to the rights existing under this Agreement prior to such event, including but not limited to, adjustments in the number of LTIP Units then subject to this Agreement.

5. Legend. The records of the LLC evidencing the Award LTIP Units shall bear an appropriate legend, as determined by the LLC in its sole discretion, to the effect that such LTIP Units are subject to restrictions as set forth herein, in the Plan and in the LLC Agreement.

6. Restrictions on Transfer. None of the Award LTIP Units shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of, encumbered, whether voluntarily or by operation of law (each such action a “Transfer”), or converted into Membership Units in accordance with the LLC Agreement (a) prior to vesting, or (b) unless such Transfer is in compliance with all applicable securities laws (including, without limitation, the Securities Act of 1933, as amended (the “Securities Act”)), and such Transfer is in accordance with the applicable terms and conditions of the LLC Agreement; provided that, upon the approval of, and subject to the terms and conditions specified by, the Administrator, unvested Award LTIP Units may be Transferred to members of the Grantee’s Immediate Family, which for purposes of this Agreement shall include family limited partnerships and similar entities which are primarily for the benefit of the Grantee and his or her Immediate Family, provided that the transferee agrees in writing with the Company and the LLC to be bound by all of the terms and conditions of this Agreement. In connection with any Transfer of Award LTIP Units, the LLC may require the Grantee to provide an opinion of counsel, satisfactory to the LLC, that such Transfer is in compliance with all federal and state securities laws (including, without limitation, the Securities Act). Any attempted Transfer of Award LTIP Units not in accordance with the terms and conditions of this Section 6 shall be null and void, and the LLC shall not reflect on its records any change in record ownership of any LTIP Units as a result of any such Transfer, shall otherwise refuse to recognize any such Transfer and shall not in any way give effect to any such Transfer of any LTIP Units. This Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will, the laws of descent and distribution or the transfer provisions specified above in this Section 6.

7. Incorporation of Plan. The provisions of the Plan are hereby incorporated by reference as if set forth herein. If and to the extent that any provision contained in this Agreement is inconsistent with the Plan, this Agreement shall govern.

3

8. Investment Representation; Registration. The Grantee hereby makes the covenants, representations and warranties set forth on Exhibit B attached hereto as of the date of acceptance of this Agreement and each Vesting Date. All of such covenants, warranties and representations shall survive the execution and delivery of this Agreement by the Grantee. The Grantee shall immediately notify the LLC upon discovering that any of the representations or warranties set forth on Exhibit B were false when made or have, as a result of changes in circumstances, become false. The LLC will have no obligation to register under the Securities Act any LTIP Units or any other securities issued pursuant to this Agreement or upon conversion or exchange of the LTIP Units.

9. Section 83(b) Election. The Grantee hereby agrees to make an election to include in gross income in the year of transfer the Award LTIP Units pursuant to Section 83(b) of the Code substantially in the form attached hereto as Exhibit C and to supply the necessary information in accordance with the regulations promulgated thereunder.

10. Amendment. The Grantee acknowledges that the Plan may be amended or discontinued in accordance with Section 12 thereof and that this Agreement may be amended or canceled by the Administrator of the Plan, on behalf of the LLC, for the purpose of satisfying changes in law or for any other lawful purpose, provided that no such action shall impair the Grantee’s rights under this Agreement without the Grantee’s written consent.

11. Withholding and Taxes. No later than the date as of which an amount first becomes includible in the gross income of the Grantee for income tax purposes or subject to the Federal Insurance Contributions Act withholding with respect to the Award LTIP Units, the Grantee will pay to the Company or, if appropriate, any of its affiliates, or make arrangements satisfactory to the Administrator regarding the payment of, any United States federal, state or local or foreign taxes of any kind required by law to be withheld with respect to such amount. The obligations of the Company under this Agreement will be conditional on such payment or arrangements, and the Company and its affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Grantee.

12. No Obligation to Continue Employment. Neither the Company, the LLC nor any subsidiary of any of them is obligated by or as a result of the Plan or this Agreement to continue to have the Grantee provide services to it or to continue the Grantee in employment and neither the Plan nor this Agreement shall interfere in any way with the right of the Company, the LLC or any subsidiary of any of them to terminate its relationship with the Grantee or the employment of the Grantee at any time.

13. Notices. Notices hereunder shall be mailed or delivered to the LLC at its principal place of business and shall be mailed or delivered to the Grantee at the address on file with the LLC or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

4

14. Section 409A. If any compensation provided by this Agreement may result in the application of Section 409A of the Code, the Company shall, in consultation with the Executive, modify the Agreement in the least restrictive manner necessary in order to, where applicable, (a) exclude such compensation from the definition of “deferred compensation” within the meaning of such Section 409A or (b) comply with the provisions of Section 409A, other applicable provision(s) of the Code and/or any rules, regulations or other regulatory guidance issued under such statutory provisions and to make such modifications, in each case, without any diminution in the value of the payments to the Executive.

15. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, applied without regard to conflict of law principles. The parties hereto agree that any action or proceeding arising directly, indirectly or otherwise in connection with, out of, related to or from this Agreement, any breach hereof or any action covered hereby, shall be resolved within the State of New York and the parties hereto consent and submit to the jurisdiction of the federal and state courts located within the City of New York, New York. The parties hereto further agree that any such action or proceeding brought by either party to enforce any right, assert any claim, obtain any relief whatsoever in connection with this Agreement shall be brought by such party exclusively in federal or state courts located within the State of New York.

16. Electronic Signature. All references to signatures and delivery of documents in this Agreement can be satisfied by procedures the Company has established or may establish for an electronic signature system for delivery and acceptance of any such documents, including this Agreement. The Grantee’s electronic signature is the same as, and shall have the same force and effect as, Grantee’s manual signature. Any such procedures and delivery may be effected by a third party engaged by the Company to provide administrative services related to the Plan.

(Signature Page Follows)

5

IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed as of the                      day of                     , 200_____.

MORGANS HOTEL GROUP CO.
By:
	Name:
	Title:
MORGANS GROUP LLC
By:	Morgans Hotel Group Co.,
	its managing member
	By:
		Name:
		Title:
GRANTEE
Name:
Address:

6

EXHIBIT A

FORM OF MEMBER SIGNATURE PAGE

The Grantee, desiring to become one of the within named Members of Morgans Group LLC, hereby accepts all of the terms and conditions of, and becomes a party to, the Limited Liability Company Agreement of Morgans Group LLC (the “LLC Agreement”). The Grantee agrees that this signature page may be attached to any counterpart of the LLC Agreement.

Signature Line for Member:

Name:

Date:

Address of Member:

7

EXHIBIT B

GRANTEE’S COVENANTS, REPRESENTATIONS AND WARRANTIES

The Grantee hereby represents, warrants and covenants as follows:

(a) The Grantee has received and had an opportunity to review the following documents (the “Background Documents”):

(i) The Company’s latest Annual Report to Stockholders that has been provided to stockholders after the Company’s initial public offering, if available;

(ii) The Company’s Proxy Statement for its most recent Annual Meeting of Stockholders following the Company’s initial public offering, if available;

(iii) The Company’s Report on Form 10-K for the fiscal year most recently ended following the Company’s initial public offering, if available;

(iv) If any of the documents described in clauses (i) — (iii) above or (v) or (vi) below is not available, the Company’s Registration Statement on Form S-1 registering the Company’s initial public offering of its common stock;

(v) The Company’s Form 10-Q for the most recently ended quarter if one has been filed by the Company with the Securities and Exchange Commission since the filing of the Form 10-K described in clause (iii) above or, if a Form 10-K has not been filed by the Company, since the filing of the Form S-1 described in clause (iv) above;

(vi) Each of the Company’s Current Report(s) on Form 8-K, if any, filed since the later of the end of the fiscal year most recently ended for which a Form 10-K has been filed by the Company or the filing of the Form S-1 described in clause (iv) above;

(vii) The LLC Agreement;

(viii) The Plan; and

(ix) The Company’s Certificate of Incorporation, as amended.

The Grantee also acknowledges that any delivery of the Background Documents and other information relating to the Company and the LLC prior to the determination by the LLC of the suitability of the Grantee as a holder of LTIP Units shall not constitute an offer of LTIP Units until such determination of suitability shall be made.

8

(b) The Grantee hereby represents and warrants that

(i) The Grantee either (A) is an “accredited investor” as defined in Rule 501(a) under the Securities Act of 1933, as amended (the “Securities Act”), or (B) by reason of the business and financial experience of the Grantee, together with the business and financial experience of those persons, if any, retained by the Grantee to represent or advise him, her or it with respect to the grant to him, her or it of LTIP Units, the potential conversion of LTIP Units into common units of the LLC (“Common Units”) and the potential redemption of such Common Units for shares of common stock (“Shares”), has such knowledge, sophistication and experience in financial and business matters and in making investment decisions of this type that the Grantee (I) is capable of evaluating the merits and risks of an investment in the LLC and potential investment in the Company and of making an informed investment decision, (II) is capable of protecting his, her or its own interest or has engaged representatives or advisors to assist him, her or it in protecting his, her or its interests, and (III) is capable of bearing the economic risk of such investment.

(ii) The Grantee understands that (A) the Grantee is responsible for consulting his, her or its own tax advisors with respect to the application of the U.S. federal income tax laws, and the tax laws of any state, local or other taxing jurisdiction to which the Grantee is or by reason of the award of LTIP Units may become subject, to his, her or its particular situation; (B) the Grantee has not received or relied upon business or tax advice from the Company, the LLC or any of their respective employees, agents, consultants or advisors, in their capacity as such; (C) the Grantee provides or will provide services to the LLC on a regular basis and in such capacity has access to such information, and has such experience of and involvement in the business and operations of the LLC, as the Grantee believes to be necessary and appropriate to make an informed decision to accept this Award of LTIP Units; and (D) an investment in the LLC and/or the Company involves substantial risks. The Grantee has been given the opportunity to make a thorough investigation of matters relevant to the LTIP Units and has been furnished with, and has reviewed and understands, materials relating to the LLC and the Company and their respective activities (including, but not limited to, the Background Documents). The Grantee has been afforded the opportunity to obtain any additional information (including any exhibits to the Background Documents) deemed necessary by the Grantee to verify the accuracy of information conveyed to the Grantee. The Grantee confirms that all documents, records, and books pertaining to his, her or its receipt of LTIP Units which were requested by the Grantee have been made available or delivered to the Grantee. The Grantee has had an opportunity to ask questions of and receive answers from the LLC and the Company, or from a person or persons acting on their behalf, concerning the terms and conditions of the LTIP Units. The Grantee has relied upon, and is making its decision solely upon, the Background Documents and other written information provided to the Grantee by the LLC or the Company. The Grantee did not receive any tax, legal or financial advice from the LLC or the Company and, to the extent it deemed necessary, has consulted with its own advisors in connection with its evaluation of the Background Documents and this Agreement and the Grantee’s receipt of LTIP Units.

(iii) The LTIP Units to be issued, the Common Units issuable upon conversion of the LTIP Units and any Shares issued in connection with the redemption of any such Common Units will be acquired for the account of the Grantee for investment only and not with a current view to, or with any intention of, a distribution or resale thereof, in whole or in part, or the grant of any participation therein, without prejudice, however, to the Grantee’s right (subject to the terms of the LTIP Units, the Plan and this Agreement) at all times to sell or otherwise dispose of all or any part of his or her LTIP Units, Common Units or Shares in compliance with the Securities Act, and applicable state securities laws, and subject, nevertheless, to the disposition of his or her assets being at all times within his or her control.

9

(iv) The Grantee acknowledges that (A) neither the LTIP Units to be issued, nor the Common Units issuable upon conversion of the LTIP Units, have been registered under the Securities Act or state securities laws by reason of a specific exemption or exemptions from registration under the Securities Act and applicable state securities laws and, if such LTIP Units or Common Units are represented by certificates, such certificates will bear a legend to such effect, (B) the reliance by the LLC and the Company on such exemptions is predicated in part on the accuracy and completeness of the representations and warranties of the Grantee contained herein, (C) such LTIP Units, or Common Units, therefore, cannot be resold unless registered under the Securities Act and applicable state securities laws, or unless an exemption from registration is available, (D) there is no public market for such LTIP Units and Common Units and (E) neither the LLC nor the Company has any obligation or intention to register such LTIP Units or the Common Units issuable upon conversion of the LTIP Units under the Securities Act or any state securities laws or to take any action that would make available any exemption from the registration requirements of such laws, except, that, upon the redemption of the Common Units for Shares, the Company currently intends to issue such Shares under the Plan and pursuant to a Registration Statement on Form S-8 under the Securities Act, to the extent that (I) the Grantee is eligible to receive such Shares under the Plan at the time of such issuance, (II) the Company has filed an effective Form S-8 Registration Statement with the Securities and Exchange Commission registering the issuance of such Shares. The Grantee hereby acknowledges that because of the restrictions on transfer or assignment of such LTIP Units acquired hereby and the Common Units issuable upon conversion of the LTIP Units which are set forth in the LLC Agreement or this Agreement, the Grantee may have to bear the economic risk of his, her or its ownership of the LTIP Units acquired hereby and the Common Units issuable upon conversion of the LTIP Units for an indefinite period of time.

(v) The Grantee has determined that the LTIP Units are a suitable investment for the Grantee.

(vi) No representations or warranties have been made to the Grantee by the LLC or the Company, or any officer, director, shareholder, agent, or affiliate of any of them, and the Grantee has received no information relating to an investment in the LLC or the LTIP Units except the information specified in Paragraph (b) above.

(c) So long as the Grantee holds any LTIP Units, the Grantee shall disclose to the LLC in writing such information as may be reasonably requested with respect to ownership of LTIP Units as the LLC may deem reasonably necessary to ascertain and to establish compliance with provisions of the Internal Revenue Code of 1986, as amended (the “Code”), applicable to the LLC or to comply with requirements of any other appropriate taxing authority.

10

(d) The Grantee hereby agrees to make an election under Section 83(b) of the Code with respect to the LTIP Units awarded hereunder, and has delivered with this Agreement a completed, executed copy of the election form attached hereto as Exhibit C. The Grantee agrees to file the election (or to permit the LLC to file such election on the Grantee’s behalf) within thirty (30) days after the Award of the LTIP Units hereunder with the IRS Service Center at which such Grantee files his or her personal income tax returns, and to file a copy of such election with the Grantee’s U.S. federal income tax return for the taxable year in which the LTIP Units are awarded to the Grantee.

(e) The address set forth on the signature page of this Agreement is the address of the Grantee’s principal residence, and the Grantee has no present intention of becoming a resident of any country, state or jurisdiction other than the country and state in which such residence is sited.

(f) The representations of the Grantee as set forth above are true and complete to the best of the information and belief of the Grantee, and the LLC shall be notified promptly of any changes in the foregoing representations.

11

EXHIBIT C

ELECTION TO INCLUDE IN GROSS INCOME IN YEAR OF
TRANSFER OF PROPERTY PURSUANT TO SECTION 83(B)
OF THE INTERNAL REVENUE CODE

The undersigned hereby makes an election pursuant to Section 83(b) of the Internal Revenue Code with respect to the property described below and supplies the following information in accordance with the regulations promulgated thereunder:

1. The name, address and taxpayer identification number of the undersigned are:

Name:	(the “Taxpayer”)
Address:

Social Security No./Taxpayer Identification No.:

2.	Description of property with respect to which the election is being made:
	The election is being made with respect to                      LTIP Units in Morgans Group LLC (the “LLC”).
3.	The date on which the LTIP Units were transferred is                     , 200  ___. The taxable year to which this election relates is calendar year 200  ___.
4.	Nature of restrictions to which the LTIP Units are subject:

(a) With limited exceptions, until the LTIP Units vest, the Taxpayer may not transfer in any manner any portion of the LTIP Units without the consent of the LLC.

(b) The Taxpayer’s LTIP Units vest in accordance with the vesting provisions described in the Schedule attached hereto. Unvested LTIP Units are forfeited in accordance with the vesting provisions described in the Schedule attached hereto.

5.	The fair market value at time of transfer (determined without regard to any restrictions other than restrictions which by their terms will never lapse) of the LTIP Units with respect to which this election is being made was $0 per LTIP Unit.
6.	The amount paid by the Taxpayer for the LTIP Units was $0 per LTIP Unit.

7. A copy of this statement has been furnished to the LLC and to its managing member, Morgans Hotel Group Co.

Dated:                     , 200__

Name:

12

Schedule to Section 83(b) Election -Vesting Provisions of LTIP Units

LTIP Units are subject to time-based vesting with one-third (1/3) vesting each year on the first three one-year anniversaries of the date of grant, provided that the Taxpayer remains an employee of Morgans Hotel Group Co. (the “Company”) or its subsidiaries through such dates, subject to acceleration in the event of certain extraordinary transactions. Unvested LTIP Units are subject to forfeiture in the event of failure to vest based on the passage of time and continued employment with the Company or its subsidiaries.

13

EX-21.1

Exhibit 21.1

List of Subsidiaries of Morgans Hotel Group Co.
(as of December 31, 2008)

	Jurisdiction of
	Incorporation
Subsidiary	or Organization
Morgans Hotel Group Co.	Delaware
Morgans Group LLC	Delaware
Morgans Hotel Group Management LLC	New York
Morgans Holdings LLC	Delaware
Morgans/Delano Pledgor LLC	Delaware
Madison Bar Company LLC	Delaware
SC Morgans/Delano LLC	Delaware
SC Madison LLC	Delaware
SC Collins LLC	Delaware
Beach Hotel Associates LLC	Delaware
Royalton Pledgor LLC	Delaware
43rd Restaurant LLC	Delaware
Royalton LLC	Delaware
Hudson Pledgor LLC	Delaware
SC 58th Street LLC	Delaware
58th Street Bar Company LLC	Delaware
Mondrian Pledgor LLC	Delaware
8440 LLC	Delaware
Sunset Restaurant LLC	Delaware
Mondrian Holdings LLC	Delaware
Mondrian Senior Mezz LLC	Delaware
Henry Hudson Holdings LLC	Delaware
Hudson Leaseco LLC	New York
Hudson Managing Member LLC	Delaware
Henry Hudson Senior Mezz LLC	Delaware
Shore Club Holdings LLC	Delaware
Philips South Beach LLC	Illinois
SC Restaurant Company LLC	Delaware
Clift Holdings LLC	Delaware
SC Geary LLC	Delaware
495 Geary LLC	Delaware
495 ABC License LLC	Delaware
Morgans/LV Investment LLC	Delaware
Morgans/LV Management LLC	Delaware
Morgans Las Vegas LLC	Delaware
MHG Scottsdale Holdings LLC	Delaware
Mondrian Scottsdale Mezz Holding Company LLC	Delaware
Collins Hotel Associates LLC	Delaware
Mondrian Miami Investment LLC	Delaware
1100 West Holdings, LLC	Delaware
1100 West Properties, LLC	Delaware
MHG North State Street Investment LLC	Delaware
Cedar Hotel Holdings LLC	Delaware
Cedar Hotel LLC	Delaware
MHG 150 Lafayette Investment LLC	Delaware
Cape SoHo Hotel, LLC	New York
Sochin Realty Managers, LLC	Delaware
Sochin Downtown Realty, LLC	New York
Hard Rock Hotel Holdings, LLC	Delaware
HRHH JV Junior Mezz Two, LLC	Delaware
HRHH JV Junior Mezz, LLC	Delaware
HRHH JV Senior Mezz, LLC	Delaware

	Jurisdiction of
	Incorporation
Subsidiary	or Organization
HRHH Café, LLC	Delaware
HRHH Development, LLC	Delaware
Hard Rock Hotel Inc.	Nevada
HRHH Gaming Junior Mezz Two, LLC	Delaware
HRHH Gaming Junior Mezz, LLC	Delaware
HRHH Gaming Senior Mezz, LLC	Delaware
HRHH Hotel/Casino, LLC	Delaware
HRHH Gaming Member, LLC	Delaware
HRHH Gaming, LLC	Delaware
HRHH IP, LLC	Delaware
Hudson Residual Interests Inc.	Delaware
MHG Capital Trust I	Delaware
1100 West Holdings II, LLC	Delaware
Mondrian Miami Capital LLC	Delaware
RMF Capital LLC	Delaware
MC South Beach LLC	Delaware
SC London LLC	Delaware
SC London	United Kingdom
Royalton Europe Holdings LLC	Delaware
Morgans New Co Limited	United Kingdom
Morgans Hotel Group Europe Limited	United Kingdom
Royalton London LLC	New York
Morgans Hotel Group U.K. Management Limited	United Kingdom
Royalton UK Development Limited	United Kingdom
Newco London City Limited	United Kingdom
Collins Hotel Associates Mezz LLC	Delaware
MHG I Court Investment, LLC	Delaware
Normandy Morgans Ames AHP LLC	Delaware
Ames Court Street Mezz, LLC	Delaware
Ames Court Street LLC	Delaware
HRHH Adjacent Buyer, LLC	Delaware
HRHH Development Transferee	Delaware

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

To the Board of Directors
Morgans Hotel Group Co.

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-131834) and on Form S-3 (No. 333-149249) of Morgans Hotel Group Co. of our reports dated March 13, 2009, relating to the consolidated financial statements of Morgans Hotel Group Co. and the effectiveness of Morgans Hotel Group Co.’s internal control over financial reporting and our report dated March 13, 2009, relating to the consolidated financial statements of 1100 West Properties LLC, which appear in this Form 10-K.

/s/ BDO Seidman, LLP  

BDO Seidman, LLP 

New York, New York
March 13, 2009

EX-23.2

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

To the Board of Directors
Morgans Hotel Group Co.

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-131834) and on Form S-3 (No. 333-149249) of Morgans Hotel Group Co. of our report dated February 23, 2009, relating to the consolidated financial statements of Morgans Hotel Group Europe Limited and our report dated February 23, 2009 relating to the financial statements of SC London Limited, which appear in this Form 10-K.

/s/ BDO Stoy Hayward LLP  

BDO Stoy Hayward LLP 

London, UK
March 13, 2009

EX-31.1

Exhibit 31.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO
17 CFR 240.13a-14(a)/15(d)-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Fred J. Kleisner, certify that:

1. I have reviewed this annual report on Form 10-K of Morgans Hotel Group Co. for the fiscal year ended December 31, 2008;

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 officers 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 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 this 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 officers 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 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.

/s/ Fred J. Kleisner  

Fred J. Kleisner 

President and Chief Executive Officer 

Date: March 13, 2009

EX-31.2

Exhibit 31.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO
17 CFR 240.13a-14(a)/15(d)-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Richard Szymanski, certify that:

1. I have reviewed this annual report on Form 10-K of Morgans Hotel Group Co. for the fiscal year ended December 31, 2008;

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 officers 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 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 this 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 officers 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 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.

/s/ Richard Szymanski  

Richard Szymanski 

Chief Financial Officer 

Date: March 13, 2009

EX-32.1

Exhibit 32.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Morgans Hotel Group Co. (the “Company”) for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Fred J. Kleisner, as Chief Executive Officer of the Company hereby certifies, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

/s/ Fred J. Kleisner  

Fred J. Kleisner 

Chief Executive Officer 

Date: March 13, 2009

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Morgans Hotel Group Co. (the “Company”) for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Richard Szymanski, as Chief Financial Officer of the Company hereby certifies, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

/s/ Richard Szymanski  

Richard Szymanski 

Chief Financial Officer 

Date: March 13, 2009

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.1

Exhibit 99.1

Registered No. 3203996

Morgans Hotel Group Europe Limited

Annual report

For the year ended 31 December 2008

Morgans Hotel Group Europe Limited

Annual report
for the year ended 31 December 2008

	Pages
Directors and advisers		1
Independent auditors’ report		2
Consolidated Profit and loss account		3
Consolidated Balance sheet		4 – 5
Consolidated Cash flow Statement		6
Notes to the financial statements		7 – 20

Morgans Hotel Group Europe Limited

Directors and advisers

Directors
R Bloom
J Quicksilver
F Kleisner
D Smail

Secretary and registered office
Bibi Ali
MacFarlanes
10 Norwich Street
London EC4A 1BD

Solicitors
MacFarlanes
10 Norwich Street
London EC4A 1BD

Registered auditors
BDO Stoy Hayward LLP
55 Baker Street
London W1U 7EU

Bankers
National Westminster Bank PLC
135 Bishopsgate
London EC2M 3UR

1

Independent auditors’ report to the members of Morgans Hotel Group Europe Limited

Report of the Independent Registered Public Accounting Firm To the Board of Directors of Morgans Hotel Group Europe Limited

We have audited the accompanying consolidated balance sheets and company balance sheet of Morgans Hotel Group Europe Limited as of December 31, 2008 and 2007 and the related consolidated profit and loss account and consolidated cash flow statement for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 the financial statements are free from material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements and company balance sheet referred to above present fairly, in all material respects, the financial position of Morgans Hotel Group Europe Limited as at December 31, 2008 and, 2007, and the results of its operations and its cash flows for the years ended December 31, 2008, 2007 and 2006, in conformity with generally accepted accounting principles in the United Kingdom. Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 24 to the financial statements.

BDO Stoy Hayward LLP
Chartered Accountants and Registered Auditors
London, UK

February 23, 2009

2

Morgans Hotel Group Europe Limited

Consolidated profit and loss account
for the year ended 31 December 2008

			2008			2007			2006
	Notes		£000			£000			£000
Turnover				30,998			31,967			30,118
Cost of sales				(7,739	)		(7,909	)		(7,560	)
Gross profit				23,259			24,058			22,558
Administrative expenses				(14,367	)		(13,240	)		(13,988	)
Operating profit		3		8,892			10,818			8,570
Interest receivable				750			705			397
Interest payable and similar charges		4		(6,562	)		(7,043	)		(6,721	)
Net interest payable				(5,812	)		(6,338	)		(6,324	)
Profit on ordinary activities before taxation				3,080			4,480			2,246
Tax on profit on ordinary activities		5		(165	)		(412	)		—
Profit for the financial year				2,915			4,068			2,246

All profits arises from continuing operations.

The group has no recognised gains or losses other than the profit for the year.

The historical cost profit and reported profit are the same.

3

Morgans Hotel Group Europe Limited

Consolidated balance sheet
At 31 December 2008

			2008			2008			2007			2007
	Notes		£000			£000			£000			£000
Fixed assets
Tangible assets		8					101,151						102,898
Current assets
Stock		9		249						222
Debtors		11		2,104						2,254
Cash at bank and in hand				2,032						15,019
				4,385						17,495
Creditors: amounts falling due within one year		12		(5,383	)					(5,793	)
Net current assets							(998	)					11,702
Total assets less current liabilities							100,153						114,600
Creditors: amounts falling due after more than one year		13					(99,774	)					(101,636	)
Net assets							379						12,964
Capital and reserves
Called up share capital		15					5,000						5,000
Share premium account		16					10,000						10,000
Other capital reserve		16					1,582						9,460
Profit and loss account		16					(16,203	)					(11,496	)
Shareholders’ funds		18					379						12,964

The financial statements on pages 6 to 22 were approved by the board of directors and authorised for issue on February 23, 2009

F Kleisner
Director

4

Morgans Hotel Group Europe Limited

Company balance sheet
At 31 December 2008

			2008			2008			2007			2007
	Notes		£000			£000			£000			£000
Fixed assets
Investment in subsidiary		10					35,000						35,000
Current assets
Debtors		11		400						400
Cash at bank and in hand				5						5
				405						405
Creditors: amounts falling due within one year		12		(12,634	)					(12,634	)
Net current liabilities							(12,229	)					(12,229	)
Net assets							22,771						22,771
Capital and reserves
Called up share capital		15					5,000						5,000
Share premium account		17					10,000						10,000
Other capital reserve		17					1,582						9,460
Profit and loss account		17					6,189						(1,689	)
Shareholders’ funds		18					22,771						22,771

5

Morgans Hotel Group Europe Limited

Consolidated cash flow statement
for the year ended 31 December 2008

			2008			2007			2006
	Notes		£000			£000			£000
Net cash inflow from operating activities		21		11,395			14,198			12,067
Returns on investments and servicing of finance		22		(5,812	)		(6,338	)		(6,324	)
Capital expenditure		22		(874	)		(3,507	)		(671	)
Net Cash inflow before taxation and financing				4,709			4,353			5,072
Equity Dividend Paid to Shareholders				(15,500	)		(99	)		—
Taxation				(113	)		—			—
Financing		22		(2,083	)		(1,500	)		(1,250	)
(Decrease)/Increase in cash and cash equivalents				(12,987	)		2,754			3,822

Reconciliation of net debt
for the year ended 31 December 2008

			2008			2007			2006
	Notes		£000			£000			£000
(Decrease)/Increase in cash in the year				(12,987	)		2,754			3,822
Net cash outflow from decrease in debt		23		2,083			1,500			1,242
Non cash movements		23		(338	)		(339	)		(339	)
Movements in net debt in the year				(11,242	)		3,915			4,725
Net debt at the start of the year				(88,700	)		(92,615	)		(97,340	)
Net debt at the end of the year		23		(99,942	)		(88,700	)		(92,615	)

6

Morgans Hotel Group Europe Limited

Notes to the financial statements
for the year ended 31 December 2008

1. Principal accounting policies

The consolidated financial statements have been prepared under the historical cost convention and in accordance with applicable Accounting Standards in the United Kingdom. A summary of the more important accounting policies is set out below.

Basis of consolidation

The consolidated financial statements include financial statements of the company and its subsidiary undertaking made up to 31 December 2008.

Investments

Investments are stated at cost or cost less provision where there is a permanent diminution in value.

Fixed assets and depreciation

Tangible fixed assets are stated at cost less depreciation and any provision for impairment. Assets are depreciated to their residual values on a straight line basis over their estimated useful lives as follows:

Freehold buildings (Included in Freehold Buildings are assets for building surface finishes which are depreciated over 25 – 38 years)	50 years
Building surface finishes	25 – 38 years
Plant and machinery	15 years
Fixtures, fittings and equipment	5 – 10 years

No depreciation is provided on freehold land. No residual values are ascribed to building surface finishes.

Interest paid on fixed assets purchases is capitalised up until the time the asset is available for use.

Foreign currency transactions

Translations into sterling are made at the average of rates ruling throughout the period for profit and loss items and at the rate ruling at 31 December 2008 for assets and liabilities. Exchange differences arising in the ordinary course of trading are included in the profit and loss account.

Deferred taxation

Deferred taxation is provided in respect of all timing differences that have originated but not reversed at the balance sheet date, where transactions or events have occurred which result in an obligation to pay more or less tax in the future.

Deferred tax is measured at the average tax rates which apply in the period in which the timing differences are expected to reverse. Deferred tax is measured on a non-discounted basis.

Deferred tax assets are regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it is more likely than not that there will be adequate future taxable profits against which to recover carried forward tax losses.

7

Morgans Hotel Group Europe Limited

Finance costs

Finance costs are included within the carrying value of the loan and are amortised over the term of the loan.

Stocks

Stocks are stated at the lower of cost and net realisable value.

Turnover

Turnover represents the amounts (excluding value added tax) derived from the provision of goods and services to customers. Turnover arises wholly in the United Kingdom.

Pension scheme

The group operates a defined contribution pension scheme. Contributions are charged to the profit and loss account in the period in which they are incurred.

Dividends

Equity dividends are recognised when they become legally payable. Interim equity dividends are recognised when paid. Final equity dividends are recognised when approved by the shareholders at an annual general meeting.

2. Staff numbers and costs

	2008		2007		2006
	Number		Number		Number
The average number of employees in the year was:
Hotel operating staff		149		151		141
Management/administration		31		33		31
Sales and marketing		12		14		11
Maintenance		17		18		20
Total		209		216		203

The aggregate payroll costs for these persons were as follows:

	2008		2007		2006
	£000		£000		£000
Wages and salaries		6,553		6,303		5,730
Social security costs		480		497		444
Pension costs		70		70		44
		7,103		6,870		6,218

None of the directors received any remuneration during the year (2007: Nil).

8

Morgans Hotel Group Europe Limited

Funded defined contribution scheme for employees (group scheme)

Pension costs of £70,000 (2007: £44,000) were charged to the profit and loss account of which £nil (2007: nil) was outstanding at the balance sheet date.

The pension scheme is held with Standard Life and is administered by Origen.

3. Operating profit

This is arrived at after charging:

	2008		2007		2006
	£000		£000		£000
Auditors’ remuneration:
Group — audit		43		54		50
Company – audit		10		10		10
Group — Non-audit services		12		—		—
Depreciation of tangible fixed assets		2,621		2,437		2,778
Loss on disposal of fixed assets		—		—		274

4. Interest payable and similar charges

	2008		2007		2006
	£000		£000		£000
Amounts payable on bank loans and overdrafts		6,562		6,658		6,721
Finance charges		—		385		—
		6,562		7,043		6,721

5. Taxation

(a) Analysis of charge in the year

	2008			2007		2006
	£000			£000		£000
United Kingdom corporation tax at 28.5% (2007:30%, 2006:30%)		174			200		—
Adjustments in respect of prior years		(9	)		212		—
Total tax charge (note 5 (b))		165			412
Deferred taxation (note 14)		—			—		—
Tax on profit on ordinary activities		165			412		—

9

Morgans Hotel Group Europe Limited

There is no movement on the deferred tax asset from 2007.

(b) Factors affecting tax charge for the year

	2008			2007			2006
	£000			£000			£'000
Profit on ordinary activities before tax		3,080			4,480			2,246
Profit on ordinary activities multiplied by standard rate of corporation tax in the UK of 28.5% (2007 : 30%, 2006:30%)		878			1,343			674
Effects of:
Expenses not deductible for tax purposes		162			62			171
Capital allowances in excess of depreciation		(308	)		(552	)		695
Tax losses		(558	)		(653	)		(1,540	)
Adjustment in respect of prior years		(9	)		212			—
Tax charge for the period		165			412			—

6. Dividends

	2008		2007
	£000		£000
Amounts recognised as distributions to equity holders during the year
The dividend payment recognised during 2008 was for the dividend declared in respect of the period ended 31 December 2008 of £15,500,000		15,500		—

7. Profit for the financial year

The company has taken advantage of the exemption allowed under section 230 of the Companies Act 1985 and has not presented it’s own profit & loss account, in these financial statements. The profit before dividend for the year is £15,500,000 (2007: £Nil, 2006:£ Nil)

10

8. Fixed assets — Group

					Fixtures,
	Land and		Plant and		fittings and
	buildings		machinery		equipment			Total
	£000		£000		£000			£000
Cost
At 1 January 2008		102,018		8,426		13,544			123,988
Additions		94		142		638			874
Disposal		—		—		(11	)		(11	)
At 31 December 2008		102,112		8,568		14,171			124,851
Depreciation
At 1 January 2008		7,822		4,286		8,982			21,090
Charge for the year		1,093		589		939			2,621
Disposals		—		—		(11	)		(11	)
At 31 December 2008		8,915		4,875		9,910			23,700
Net book value
At 31 December 2008		93,197		3,693		4,261			101,151
At 31 December 2007		94,196		4,140		4,562			102,898

Included in total net book value of land and buildings is £41,091,000 (2007: £41,955,000) of long leasehold property and £4,193,000 (2007: £4,219,000) of capitalised interest (net of accumulated depreciation).

All tangible fixed assets of the group are held by the subsidiary undertaking, Morgans Hotel Group London Limited.

9. Stock

	Group		Group
	2008		2007
	£000		£000
Consumables		249		222

11

Morgans Hotel Group Europe Limited

10. Investment in subsidiary company

	Company		Company
	£000		£000
At 1 January 2008 and 31 December 2008		35,000		35,000

The company owns 100% of the ordinary shares of Morgans Hotel Group London Limited, a company incorporated in England and Wales, whose principal activity is the operation of two Morgans Hotel Group hotels in London.

11. Debtors: amounts due within one year

	Group		Company		Group		Company
	2008		2008		2007		2007
	£000		£000		£000		£000
Trade debtors		918		—		1,072		—
Amounts due from related parties		569		400		418		400
Prepayments and accrued income		617		—		764		—
		2,104		400		2,254		400

12. Creditors: amounts falling within one year

	Group		Company		Group		Company
	2008		2008		2007		2007
	£000		£000		£000		£000
Bank loans		2,200		—		2,083		—
Trade creditors		529		—		596		—
Amounts due to group undertakings and related parties		407		12,634		605		12,634
Taxation and social security		485		—		559		—
Accruals and deferred income		1,387		—		1,638		—
Corporation Tax		375		—		312		—
		5,383		12,634		5,793		12,634

12

Morgans Hotel Group Europe Limited

13. Creditors: amount falling due after more than one year

	Group		Group
	2008		2007
	£000		£000
Bank loans net of unamortised costs		99,774		101,636
		99,774		101,636

Bank loans are repayable as follows:

	2008		2007
	£000		£000
In one year or less, or on demand		2,200		2,083
In more than one year, but not more than two years		99,774		2,200
In more than two years, but not more than five years		—		99,436
		101,974		103,719

Bank loans are as follows:

	2008		2007
	£000		£000
Sterling bank loans: 6.280%		101,974		103,719
		101,974		103,719

Bank loans are repayable in monthly instalments, are denominated in sterling and bear interest at a fixed rate as noted above.

The bank loan is secured by way of a first ranking legal charge over the properties including fixtures, fittings and property management agreements, and an assignment over all revenues due from operation of the properties.

13

Morgans Hotel Group Europe Limited

14. Deferred taxation

	2008			2007
	£000			£000
Accelerated capital allowances		(5,887	)		(6,182	)
Short term timing differences		29			19
Losses		5,858			6,163
Total deferred tax asset		—			—

In 2008 a retrospective capital allowances claim was agreed with the HMRC, this has resulted in a reduction in the tax written down value of the assets and therefore a provision for accelerated capital allowances has been recognised in the 2008 Financial Statements.

15. Called up share capital

	31 December		31 December
	2008		2007
	£000		£000
Authorised
1,000 ordinary shares of £1 each		1		1
2,499,999 A ordinary shares of £1 each		2,500		2,500
2,499,999 B ordinary shares of £1 each		2,500		2,500
2 preferred non-voting ordinary shares of £1 each		—		—
		5,001		5,001
Allotted, called up and fully paid
2 ordinary shares of £1 each		—		—
2,499,999 A ordinary shares of £1 each		2,500		2,500
2,499,999 B ordinary shares of £1 each		2,500		2,500
1 preferred non-voting ordinary shares of £1 each		—		—
		5,000		5,000

Both the A and B ordinary shares carry equal voting rights, equal rights to dividends and equal rights on winding up and rank pari passu with each other. The preferred ordinary shares carry non-voting rights and rank pari passu with the A and B ordinary shares.

14

Morgans Hotel Group Europe Limited

16. Reserves — group

	Share		Other capital			Profit and
	premium		Reserve			loss account
	£000		£000			£000
At 1 January 2008		10,000		9,460			(11,496	)
Transfer of reserve		—		(7,878	)		7,878
Profit for the financial year		—		—			2,915
Dividend Distribution		—		—			(15,500	)
At 31 December 2008		10,000		1,582			(16,203	)

17. Reserves — company

	Share		Other capital			Profit and
	Premium		Reserve			loss account
	£000		£000			£000
At 1 January 2008		10,000		9,460			(1,689	)
Transfer of reserve		—		(7,878	)		7,878
Profit for the financial year		—		—			15,500
Dividend Distribution		—		—			(15,500	)
At 31 December 2008		10,000		1,582			6,189

18. Reconciliation of movements in shareholders’ funds

	Group			Company			Group		Company
	2008			2008			2007		2007
	£000			£000			£000		£000
Profit for the financial year		2,915			15,500			4,068		—
		(15,500	)		(15,500	)		—		—
Net movement in shareholders’ funds
Opening shareholders’ funds		(12,585	)		—			4,068		—
Closing shareholders’ funds		12,964			22,771			8,896		22,771
		379			22,771			12,964		22,771

In November 2008 Morgans Hotel Group London Limited undertook a re-purchase of shares out of capital. This transaction resulted in Morgans Hotel Group Europe Limited recognising a profit of £15,500,000 which has been distributed to the shareholders. Also £7,878,000 was transferred from other capital reserves to the profit and loss account in accordance with a court order obtained for this purpose.

15

Morgans Hotel Group Europe Limited

19. Immediate and ultimate controlling parties

Morgans Hotel Group Europe Limited is owned 50% by Walton MG Hotels Investors V, LLC, an affiliate of Walton Street Capital LLC., a company incorporated in the state of Delaware in the USA.

The other 50% is owned by Royalton Europe Holdings LLC, a wholly owned subsidiary of Morgans Hotel Group Co, a company incorporated in the USA, whose principal place of business is 475 10^th Avenue New York, NY 10018 USA.

20. Related party transactions

Morgans Hotel Group UK Management Limited

Morgans Hotel Group UK Management Limited is 100% owned by Morgans Hotel Group Co.

Morgans Hotel Group UK Management Limited charge Morgans Hotel Group Europe Limited a management fee and staff costs relating to hotel management, which totalled £2,897,000 (2007: £3,242,000).

SC London Limited

SC London Limited is indirectly owned 50% by Morgans Hotel Group Co and 50% by Chodorow Ventures LLC.

SC London Limited pays rent and recharged expenditure to Morgans Hotel Group Europe Limited, which totalled £3,773,000 (2007: £3,669,000).

	2008		2007
Related party balances and transactions	£000		£000
Debtors: amounts falling within one year
SC London Limited		136		—
Morgans Hotel Group Co		400		400
Other Morgans Hotel Group Co companies		33		18
		569		418

	2008		2007
	£000		£000
Creditors: amounts falling due within one year
Morgans Hotel Group UK Management Limited		258		306
SC London Limited		—		215
Other Morgans Hotel Group Co companies		149		84
		407		605

16

Morgans Hotel Group Europe Limited

The directors confirm that there were no related party transactions other than those disclosed in these financial statements and that all transactions were undertaken on an arms length basis.

21. Reconciliation of operating profit to net cash inflow from operating activities

	2008			2007			2006
	£000			£000			£000
Operating profit		8,892			10,818			8,570
Depreciation and Amortisation		2,970			2,804			2,778
Loss on disposal of assets		—			—			274
(Increase) in stock		(28	)		(14	)		(62	)
Decrease / (Increase) in debtors		150			515			(431	)
(Decrease) / increase in creditors		(589	)		75			938
Net cash inflow from operating activities		11,395			14,198			12,067

22. Analysis of cash flows

	2008			2007			2006
	£000			£000			£000
Return on Investment and servicing of finance
Interest received		750			705			397
Interest on bank loan		(6,562	)		(6,658	)		(6,721	)
Finance charges		—			(385	)		—
		(5,812	)		(6,338	)		(6,324	)
Capital expenditure
Purchase of tangible fixed assets		(874	)		(3,507	)		(671	)
Financing
Repayment of bank loan		(2,083	)		(1,500	)		(1,250	)
		(2,083	)		(1,500	)		(1,250	)

17

Morgans Hotel Group Europe Limited

23. Analysis of changes in net debt

							Other			At 31
	At 1 January						non-cash			December
	2008			Cash flows			movements			2008
	£000			£000			£000			£000
Cash at bank and in hand		15,019			(12,987	)		—			2,032
Debt due within one year		(2,083	)		2,083			(2,200	)		(2,200	)
Debt due after more than one year		(102,623	)		—			2,200			(100,423	)
Deferred finance costs		987			—			(338	)		649
Net debt		(88,700	)		(10,904	)		(338	)		(99,942	)

18

Morgans Hotel Group Europe Limited

24. Summary of differences between United Kingdom Generally Accepted Accounting Practice (“UK GAAP”) and United States Generally Accepted Accounting Principles (“US GAAP”)

The following table contains a summary of the material adjustments to consolidated profit for the financial year between UK GAAP and US GAAP:

			Year Ended			Year Ended			Year Ended
			31 December			31 December			31 December
			2008			2007			2006
	Note		£000			£000			£000
Profit for the financial year as reported under UK GAAP				2,915			4,068			2,246
US GAAP adjustments:
Depreciation of tangible fixed assets		a		(864	)		(864	)		(988	)
Financial instruments		b		(6,565	)		(1,341	)		2,454
Total US GAAP adjustments				(7,429	)		(2,205	)		1,466
Net income as reported under US GAAP				(4,514	)		1,863			3,712

The following table contains a summary of the material adjustments to consolidated shareholders’ funds between UK GAAP and US GAAP:

			Year Ended			Year Ended			Year Ended
			31 December			31 December			31 December
			2008			2007			2006
	Note		£000			£000			£000
Total shareholders’ funds as reported under UK GAAP				379			12,964			8,896
US GAAP adjustments
Depreciation of tangible fixed assets		a		(8,777	)		(7,913	)		(7,157	)
Financial instruments		b		(5,451	)		1,113			2,454
Total US GAAP adjustments				(14,228	)		(6,800	)		(4,703	)
Shareholders’ (deficit)/ funds under US GAAP				(13,849	)		6,164			4,193

19

Morgans Hotel Group Europe Limited

A summary of the principal differences between United Kingdom Generally Accepted Accounting Practice and United States Generally Accepted Accounting Principles is set out below:

(a) Depreciation of tangible fixed assets

Under UK GAAP, the freehold buildings are depreciated on a straight line basis over 50 years to their residual values. Under US GAAP, the freehold building are depreciated on a straight line basis over 40 years and there is considered to be no residual value. The result of this is an accelerated depreciation charge under US GAAP.

(b) Financial instruments

Under US GAAP an entity recognises all of its derivative instruments as either assets or liabilities depending on the rights or obligations under the contracts. All derivative instruments are measured at fair value in accordance with Financial Accounting Standards Board Statement No. 133 “Accounting for Derivative Instruments and Hedging Contracts”. The equivalent UK GAAP is not required to be applied by the Company for the periods under audit. This adjustment reflects the impact of revaluing all the Company derivative financial instruments.

(c) Financial statement presentation

The balance sheet prepared in accordance with UK GAAP differs in certain respects from US GAAP. Under UK GAAP, current assets are netted against current liabilities in the balance sheet whereas US GAAP requires the separate presentation of total assets and total liabilities. UK GAAP requires assets to be presented in ascending order of their liquidity, whereas under US GAAP assets are presented in descending order of liquidity.

(d) Cash flow statement

The cash flow statement presented under UK GAAP has been presented in accordance with FRS1 (revised). “cash flow statements”. There are certain differences from UK GAAP to US GAAP with regard to the classification of items within the cash flow statement and with regard to the definition of cash and cash equivalents. In accordance with FRS1, cash flows are prepared separately for operating activities, returns on investment and servicing of finance, taxation, capital expenditure and financial investment, acquisitions and disposals, equity dividends paid, management of liquid resources and financing.

US GAAP, however, requires only three categories of cash flow activity to be reported. Under SFAS No. 95, “Statement of Cash Flows”, cash flows are classified under operating activities (including cash flows from taxation and returns on investment and servicing of finance), investing activities and financing activities.

A summary of the Company’s operating, investing and financing activities classified in accordance with US GAAP is presented below:

	2008			2007			2006
	£000			£000			£000
Net cash provided by operating activities		5,470			7,761			5,743
Net cash used in investing activities		(874	)		(3,507	)		(671	)
Net cash used in provided by financing activities		(17,583	)		(1,500	)		(1,250	)
Net (decrease) / increase in cash and cash equivalents		(12,987	)		2,754			3,822
Cash and cash equivalents at beginning of period		15,019			12,265			8,443
Cash and cash equivalents at end of period		2,032			15,019			12,265

20

EX-99.2

Exhibit 99.2

Registered No. 3811362

SC London Limited

Annual report

For the year ended 31 December 2008

SC London Limited

Annual report
for the year ended 31 December 2008

	Pages
Directors and advisers		1
Independent auditors’ report		2
Profit and loss account		3
Balance sheet		4
Cash flow statement		5
Reconciliation of net cash flow to movement in net funds		5
Notes to the financial statements		6 – 14

SC London Limited

Directors and advisers

Directors
F Kleisner
J Chodorow

Secretary and registered office
Bibi Ali
MacFarlanes
10 Norwich Street
London
EC4A 1BD

Solicitors
MacFarlanes
10 Norwich Street
London
EC4A 1BD

Registered auditors
BDO Stoy Hayward LLP
55 Baker Street
London
W1U 7EU

Bankers
National Westminster Bank PLC
135 Bishopsgate
London
EC2M 3UR

1

SC London Limited

Report of the Independent Registered Public Accounting Firm To the Board of Directors of SC London Limited

We have audited the accompanying balance sheets of SC London Limited as of December 31, 2008 and 2007 and the related profit and loss account and cash flow statement for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 the financial statements are free from material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SC London Limited as at December 31, 2008 and 2007, and the results of its operations and its cash flows for the years ended December 31, 2008, 2007 and 2006, in conformity with generally accepted accounting principles in the United Kingdom. Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 19 to the financial statements.

BDO Stoy Hayward LLP
Chartered Accountants and Registered Auditors
London, UK

February 23, 2009

2

SC London Limited

Profit and loss account
for the year ended 31 December 2008

			2008			2007			2006
	Notes		£000			£000			£000
Turnover				14,923			15,375			15,793
Cost of sales				(3,629	)		(3,768	)		(3,825	)
Gross profit				11,294			11,607			11,968
Administrative expenses				(10,728	)		(11,689	)		(11,135	)
Operating profit / (loss)		3		566			(82	)		833
Interest receivable				29			47			62
Profit / (loss) on ordinary activities before taxation				595			(35	)		895
Tax on (loss) / profit on ordinary activities		4		(238	)		(222	)		(275	)
Profit / (loss) for the financial year		12		357			(257	)		620

All profits arise from continuing operations.

The company has no recognised gains or losses other than the loss for the period.

There is no difference between the historical cost profit / (loss) and that stated above.

3

SC London Limited

Balance sheet
At 31 December 2008

			2008			2007
	Notes		£000			£000
Tangible fixed assets		6		838			950
Current assets
Stock		7		278			232
Debtors		8		2,241			1,748
Cash at bank and in hand				1,119			1,375
				3,638			3,355
Creditors: amounts falling due within one year		9		(1,853	)		(2,039	)
Net current assets				1,785			1,316
Net assets				2,623			2,266
Capital and reserves
Called up share capital		11		—			—
Capital redemption reserve		12		2,521			2,521
Profit and loss account		12		102			(255	)
Shareholders’ funds		13		2,623			2,266

The financial statements on pages 5 to 16 were approved by the board of directors and authorised for issue on February 23, 2009

F Kleisner
Director

4

SC London Limited

Cash flow statement
for the year ended 31 December 2008

			2008			2007			2006
	Notes		£000			£000			£000
Net cash inflow/(outflow) from operating activities		16		95			(65	)		1,310
Returns on investments and servicing of finance		17		29			47			62
Taxation				(221	)		(294	)		(206	)
Capital expenditure		17		(159	)		(783	)		(219	)
Equity Dividend paid to shareholders				—			(830	)		—
(Decrease)/Increase in cash				(256	)		(1,925	)		947

Reconciliation of net cash flow to movement in net funds for the year ended 31 December 2008

			2008			2007			2006
	Notes		£000			£000			£000
(Decrease)/Increase in cash in the year				(256	)		(1,925	)		947
Movements in net funds in the year				(256	)		(1,925	)		947
Net funds at the start of the year				1,375			3,300			2,353
Net funds at the end of the year		18		1,119			1,375			3,300

5

SC London Limited

Notes to the financial statements
for the year ended 31 December 2008

1 Principal accounting policies

The financial statements have been prepared under the historical cost convention and in accordance with applicable Accounting Standards in the United Kingdom. A summary of the more important accounting policies are set out below.

Turnover

Turnover represents food and beverage sales, stated net of value added tax. Turnover is wholly generated in the United Kingdom.

Fixed assets

Tangible fixed assets are stated at cost less depreciation and any provision for impairment. Assets are depreciated to their residual values on a straight line basis over their estimated useful lives as follows:

Fixtures, fittings and equipment 5 — 10 years

Stocks

Stocks are stated at the lower of cost and net realisable value.

Deferred taxation

Deferred taxation is provided in respect of all timing differences that have originated but not reversed at the balance sheet date, where transactions or events have occurred which result in an obligation to pay more or less tax in the future.

Deferred tax is measured at the average tax rates which apply in the period in which the timing differences are expected to reverse. Deferred tax is measured on a non-discounted basis.

Deferred tax assets are regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it is more likely than not that there will be adequate future taxable profits against which to recover carried forward tax losses.

Pension scheme

The company operates a defined contribution pension scheme. Contributions are charged to the profit and loss account in the period in which they are incurred.

Foreign currency transactions

Translations into sterling are made at the average of rates ruling throughout the period for profit and loss items and at the rate ruling at 31 December 2008 for assets and liabilities. Exchange differences arising in the ordinary course of trading are reflected in the profit and loss account.

6

SC London Limited

Dividends

Equity dividends are recognised when they become legally payable. Interim equity dividends are recognised when paid. Final equity dividends are recognised when approved by the shareholders at an annual general meeting.

2 Staff costs and employees

None of the directors received any remuneration in the year.

	2008		2007		2006
	£000		£000		£000
Wages and salaries		3,793		4,184		3,853
Social security costs		209		347		308
Pension costs		42		32		22
		4,044		4,563		4,183

	2008		2007		2006
The average number of employees in the year was:
Operating staff		257		310		303
Management/administration		11		13		10
		268		323		313

Funded defined contribution scheme for employees (group scheme)

Pension costs of £32,000 (2007: £22,000) were charged to the profit and loss account of which £nil (2007: £nil) was outstanding at the balance sheet date.

The pension scheme is held with Standard Life and is administered by Origen.

3 Operating profit

	2008		2007		2006
	£000		£000		£000
This is arrived at after charging:
Depreciation of tangible fixed assets		271		104		226
Loss on Disposal of Fixed Assets		—		114		—
Auditors’ remuneration:
Audit		10		10		8

7

SC London Limited

4 Tax on profit on ordinary activities

(a) Analysis of charge in the year

	2008			2007		2006
	£000			£000		£000
United Kingdom corporation tax at 28.5% (2007:30%)		227			5		264
Adjustments in respect of prior years		18			169		7
Total tax charge (note 5 (b))		245			174		271
Deferred taxation (note 10)		(7	)		48		4
Tax on profit/(loss) on ordinary activities		238			222		275

(b) Factors affecting tax charge for the year

	2008			2007			2006
	£000			£000			£000
Profit/(loss) on ordinary activities before tax		595			(35	)		895
Profit/(loss) on ordinary activities multiplied by standard rate of corporation tax in the UK of 28.5% (2007: 30%)		170			(5	)		268
Effects of:
Expenses not deductible for tax purposes		62			57			—
Capital allowances (in excess of)/less than depreciation		(5	)		(14	)		(4	)
Utilisation of tax losses		—			(33	)		—
Adjustments in respect of prior years		18			169			7
Tax charge for the period (note 5(a))		245			174			271

(c) Factors affecting future tax charges

No significant differences are envisaged for future periods.

5 Dividends

	2008		2007		2006
	£000		£000		£000
Amounts recognised as distributions to equity holders during the year
No dividend payment is recognised in 2008		—		830		—

8

SC London Limited

6 Fixed assets

	Fixtures,
	fittings and
	equipment
	£000
Cost
At 1 January 2008		2,442
Additions		159
Disposals		—
At 31 December 2008		2,601
Depreciation
At 1 January 2008		1,492
Charge for the year		271
Disposals		—
At 31 December 2008		1,763
Net book value
At 31 December 2008		838
At 31 December 2007		950

7 Stocks

	2008		2007
	£000		£000
Consumables		278		232

9

SC London Limited

8 Debtors: amounts falling due within one year

	2008		2007
	£000		£000
Trade debtors		129		234
Amounts due from related party undertaking (note 14)		1,989		1,421
Other debtors		15		9
Prepayments and accrued income		48		31
Deferred taxation (note 10)		60		53
		2,241		1,748

The above amounts are due within one year with the exception of deferred tax.

9 Creditors: amounts falling due within one year

	2008		2007
	£000		£000
Trade creditors		327		386
Amounts due to related party undertakings (note 14)		136		—
Taxation and social security		430		618
Accruals and deferred income		792		891
Corporation tax		168		144
		1,853		2,039

10 Deferred taxation

	2008		2007
Depreciation in excess of capital allowances	£000		£000
Balance at 1 January		53		101
Credit/(charge) to the profit and loss account		7		(48	)
Balance at 31 December		60		53

10

SC London Limited

11 Called up share capital

	2008		2007
	£000		£000
Authorised
100,000 ordinary shares of £1 each		100		100
Allotted, called up and fully paid
1 ordinary shares of £1 each		—		—

12 Reserves

	Capital
	redemption		Profit and loss
	reserve		account			Total
	£000		£000			£000
Balance at 1 January 2008		2,521		(255	)		2,266
Profit for the financial year		—		357			357
Balance at 31 December 2008		2,521		102			2,623

13 Reconciliation of movements in shareholders’ funds

	2008		2007
	£000		£000
Profit/(loss)for the financial year		357		(257	)
Dividend Distribution		—		(830	)
Opening shareholders’ funds		2,266		3,353
Closing shareholders’ funds		2,623		2,266

11

SC London Limited

14 Related party transactions

Morgans Hotel Group London Limited

Morgans Hotel Group London Limited is a wholly owned subsidiary of Morgans Hotel Group Europe Limited, which is 50% owned by Morgans Hotel Group Co. SC London pays rent and recharged expenditure to Morgans Hotel Group London Limited, which totalled £3,773,000 (2007: £3,699,000).

Chodorow Ventures LLC

SC London pays a management fee to Euro Management Group Inc., an affiliate of Chodorow Ventures LLC, a company in which one of the directors has an interest. Amounts paid in the period totalled £572,000 (2007: £463,000).

The directors confirm that there were no related party transactions other than those disclosed in these financial statements and that all transactions were undertaken on an arms length basis.

	2008		2007
	£000		£000
Debtors
Clift Holdings LLC		5		1
SC London LLC		1,850		1,105
Morgans Hotel Group London Limited		—		215
Morgans Hotel Group Co		67		50
Chodorow Ventures LLC		67		50
		1,989		1,421

The debtor balance with SC London LLC, the company’s immediate parent undertaking, relates to an unsecured loan with interest charged at a notional rate totalling £1,850,000 (2007: £1,105,000). The amount is repayable on demand.

The debtor balances with Morgans Hotel Group Co and Chodorow Ventures LLC both relate to $100,000 unsecured loans with interest charged at a notional rate. This amounts to £67,163 translated into sterling at the year end exchange rate (2007: £54,000). The loans are repayable on demand.

	2008		2007
	£000		£000
Creditors: amounts falling within one year
Morgans Hotel Group London Limited		136		—
		136		—

12

SC London Limited

15 Ultimate parent company

The company is a subsidiary of SC London LLC. Morgans Hotel Group Co owns 50% of SC London LLC, the remaining 50% being owned by Chodorow Ventures LLC. All the above companies are registered in the U.S.A. The principle place of business of Morgans Hotel Group Co is 475 10^th Avenue, New York, NY 10018, USA. The principle place of business of Chodorow Ventures LLC is 16400 NW Second Avenue, Suite 200, Miami, FL 33169, USA.

16 Reconciliation of operating profit to net cash inflow/(outflow) from operating activities

	2008			2007			2006
	£000			£000			£000
Operating profit/(loss)		566			(82	)		833
Depreciation and loss on disposal		271			218			226
(Increase) / decrease in stock		(46	)		44			(77	)
(Increase) / decrease in debtors		(486	)		272			(125	)
(Decrease) / increase in creditors		(210	)		(517	)		453
Net cash inflow/(outflow) from operating activities		95			(65	)		1,310

17 Analysis of cash flows

	2008			2007			2006
	£000			£000			£000
Return on investment and servicing of finance
Interest received		29			47			62
Capital expenditure
Purchase of tangible fixed assets		(159	)		(783	)		(219	)

18 Analysis of changes in net debt

	At 1 January					At 31
	2008		Cash flows			December 2008
	£000		£000			£000
Cash at bank and in hand		1,375		(256	)		1,119
Net funds		1,375		(256	)		1,119

13

SC London Limited

19 Summary of differences between United Kingdom Generally Accepted Accounting Practice (“UK GAAP”) and United States Generally Accepted Accounting Principles (“US GAAP”)

There are no material differences between profit for the financial year as reported under UK GAAP and that reported under US GAAP. In addition there are no material differences between shareholders’ funds at either 31 December 2008 or 31 December 2007 as reported under UK GAAP and that reported under US GAAP.

Financial statement presentation

The balance sheet prepared in accordance with UK GAAP differs in certain respects from US GAAP. Under UK GAAP, current assets are netted against current liabilities in the balance sheet whereas US GAAP requires the separate presentation of total assets and total liabilities. UK GAAP requires assets to be presented in ascending order of their liquidity, whereas under US GAAP assets are presented in descending order of liquidity.

Cash flow statement

The cash flow statement presented under UK GAAP has been prepared in accordance with FRS 1 (revised), “Cash Flow Statements”. There are certain differences from UK GAAP to US GAAP with regard to the classification of items within the cash flow statement and with regard to the definition of cash and cash equivalents. In accordance with FRS 1, cash flows are prepared separately for operating activities, returns on investment and servicing of finance, taxation, capital expenditure and financial investment, acquisitions and disposals, equity dividends paid, management of liquid resources and financing.

US GAAP, however, requires only three categories of cash flow activity to be reported. Under SFAS No. 95, “Statement of Cash Flows”, cash flows are classified under operating activities (including cash flows from taxation and returns on investment and servicing of finance), investing activities and financing activities.

A summary of the Company’s operating, investing and financing activities classified in accordance with US GAAP is presented below:

	2008			2007			2006
	£000			£000			£000
Net cash provided by operating activities		(97	)		(312	)		1,166
Net cash used in investing activities		(159	)		(1,613	)		(219	)
Net increase/(decrease) in cash		(256	)		(1,925	)		947
Cash and cash equivalents at beginning of period		1,375			3,300			2,353
Cash and cash equivalents at end of period		1,119			1,375			3,300

14

EX-99.3

Exhibit 99.3

1100 West Properties LLC and Subsidiary

Consolidated Financial Statements

For the years ended December 31, 2008 and 2007 and the period from August 8, 2006
(commencement of operations) to December 31, 2006
and Report of Independent Registered Public Accounting Firm

1100 West Properties LLC and Subsidiary

Contents

Report of Independent Registered Public Accounting Firm	1
Consolidated financial statements:
Balance sheets	2
Statements of operations	3
Statements of changes in members’ equity	4
Statements of cash flows	5
Notes to consolidated financial statements	6

Report of Independent Registered Public Accounting Firm

To the Members of 1100 West Properties LLC:

We have audited the accompanying consolidated balance sheets of 1100 West Properties LLC and Subsidiary (the “Company”) as of December 31, 2008 and 2007 and the related consolidated statements of operations, changes in members’ equity and cash flows for the years ended December 31, 2008 and 2007 and the period from August 8, 2006 (commencement of operations) to December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 1100 West Properties LLC and Subsidiary at December 31, 2008 and 2007, and the results of their operations and their cash flows for years ended December 31, 2008 and 2007 and the period from August 8, 2006 (commencement of operations) to December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

March 13, 2009

1

1100 West Properties LLC and Subsidiary
Consolidated Balance Sheets
(in thousands)

	As of December 31,
	2008		2007
Assets
Real estate held for sale and development	$	148,068	$	153,679
Property and equipment, net of accumulated depreciation of $53		19,346		—
Cash and cash equivalents		716		184
Restricted cash		7,048		6,380
Customer escrows and tenant deposits		7,769		11,035
Accounts receivable		807		—
Related party receivables		96		—
Deferred financing costs, net of accumulated amortization of $2,720 and $1,378		1,238		1,539
Prepaid expenses and other assets		1,963		1,868
Total assets	$	187,051	$	174,685
Liabilities and Members’ Equity
Liabilities:
Mortgage loans	$	107,062	$	100,986
Loans from members		22,500		—
Customer and tenant deposits		8,845		9,755
Accounts payable and accrued liabilities		17,626		5,633
Related party payables		3,078		251
Deferred income		—		30,868
Total liabilities		159,111		147,493
Commitments and contingencies
Members’ equity		27,940		27,192
Total liabilities and members’ equity	$	187,051	$	174,685

See accompanying notes to consolidated financial statements.

2

1100 West Properties LLC and Subsidiary
Consolidated Statements of Operations
(In Thousands)

							Period from August 8, 2006
	Year ended December 31,						(commencement of operations)
	2008			2007			to December 31, 2006
Revenues:
Sale of condominium units	$	67,018		$	—		$	—
Rooms		1,020			—			—
Food and beverage		885			—			—
Other		182			350			1,113
Total revenues		69,105			350			1,113
Operating costs and expenses:
Cost of sales of condominium units		59,830			—			—
Selling and marketing relating to condominium units		8,167			—			—
Rooms		377			—			—
Food and beverage		792			—			—
Other departmental		105			—			—
Management fees		162			—			—
General and administrative		743			695			506
Advertising expenses		4,658			4,162			777
Repairs and maintenance		91			44			86
Energy		336			286			270
Property taxes, insurance and other		208			104			454
Depreciation		53			189			952
Total operating costs and expenses		75,522			5,480			3,045
Operating loss		(6,417	)		(5,130	)		(1,932	)
Interest expense, net		835			338			3,328
Net loss	$	(7,252	)	$	(5,468	)	$	(5,260	)

See accompanying notes to consolidated financial statements.

3

1100 West Properties LLC and Subsidiary

Consolidated Statements of Changes in Members’ Equity

Years ended December 31, 2008 and 2007 and for the
period from August 8, 2006 (commencement of
operations) to December 31, 2006	(In Thousands)
Contributions from members	$	31,000
Net loss		(5,260	)
Balance, December 31, 2006		25,740
Contributions from members		6,920
Net loss		(5,468	)
Balance, December 31, 2007		27,192
Contributions from members		8,000
Net loss		(7,252	)
Balance, December 31, 2008	$	27,940

See accompanying notes to consolidated financial statements.

4

1100 West Properties LLC and Subsidiary

Consolidated Statements of Cash Flows
(In Thousands)

							Period from August 8, 2006
	Year ended December 31,						(commencement of operations)
	2008			2007			to December 31, 2006
Cash flows from operating activities:
Net loss	$	(7,252	)	$	(5,468	)	$	(5,260	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation		53			189			952
Amortization of deferred financing costs		164			81			405
Changes in assets and liabilities:
Real estate held for sale and development		(12,474	)		(40,604	)		(749	)
Restricted cash		(668	)		27,088			(6,088	)
Related party receivables		(96	)		—			—
Accounts receivable		(807	)		44			(44	)
Prepaid expenses and other assets		(95	)		(1,545	)		(323	)
Accounts payable and accrued liabilities		11,993			4,985			648
Related party payables		2,827			251			—
Customer escrows and tenant deposits		2,356			(1,278	)		—
Deferred income		(30,868	)		30,868			—
Net cash (used in) provided by operating activities		(34,867	)		14,611			(10,459	)
Cash flows from investing activities:
Payment for assets acquired		—			—			(110,212	)
Additions to property and equipment		(136	)		—			—
Restricted cash		—			—			(29,745	)
Net cash used in investing activities		(136	)		—			(139,957	)
Cash flows from financing activities:
Proceeds from mortgage loans		28,000			—			124,000
Loans from members		22,500			—			—
Repayment of mortgage loans		(21,924	)		(23,014	)		—
Payments for deferred financing costs		(1,041	)		—			(2,917	)
Contributions from members		8,000			6,920			31,000
Net cash provided by (used in) financing activities		35,535			(16,094	)		152,083
Net increase (decrease) in cash and cash equivalents		532			(1,483	)		1,667
Cash and cash equivalents, beginning of year		184			1,667			—
Cash and cash equivalents, end of year	$	716		$	184		$	1,667
Supplemental disclosure of cash flow information:
Cash paid for interest, of which $6,405 and $8,082 relates to capitalized interest, respectively	$	6,717		$	8,723		$	2,951
Capitalized amortization of deferred financing costs	$	1,178		$	892		$	—
Reclassification of real estate held for sale and development to property and equipment	$	19,263		$	—		$	—

See accompanying notes to consolidated financial statements.

5

1100 West Properties LLC and Subsidiary

Notes to Consolidated Financial Statements

1. Organization and Business

1100 West Properties LLC (“West Properties”), a Delaware limited liability company, was formed in August 2006 and is owned 50% by Sanctuary West Holdings LLC (“SWH”) and 50% by Morgans Group LLC (“MHG”).

The consolidated financial statements include the results of operations of West Properties and MC South Beach (collectively, the “Company”).

The Company was formed to purchase, renovate and convert an existing apartment building on Biscayne Bay in South Beach Miami into a condo hotel operated under MHG’s Mondrian brand. The hotel opened in December 2008 and has 328 hotel residences consisting of studios, one-and two-bedroom apartments, and four tower suites. The Company leases the hotel food and beverage operations to MC South Beach LLC (“MC South Beach”). The Company is a 50% member in MC South Beach and has a 50% share of all the profits and losses.

The Company is in the process of selling units as condominiums, subject to market conditions, and unit buyers will have the opportunity to place their units into the hotel’s rental program. As of December 31, 2008 and 2007, the Company has sold 93 units and 49 units, respectively. The Company substantially completed development and commenced the hotel operations in December 2008.

The Company acquired the existing land and building for a gross purchase price of approximately $110 million and plans to spend approximately $120 million on renovations. The initial equity investment of $30 million was funded equally from both SWH and MHG.

Under the limited liability agreement of the Company, income and loss is allocated in proportion to the members’ percentage interest in the Company. Net cash from Operations, as defined, and Capital Transaction Proceeds, as defined, are distributed monthly to the Members in accordance with their percentage interests.

6

1100 West Properties LLC and Subsidiary

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated in consolidation.

As further discussed in Note 5, the Company’s mortgage note payable of approximately $107 million requires repayment of $17.5 million by August 1, 2009 in order for the loan to be extended for the first annual extension. Management believes this obligation will be obtained from condominium sales, although there can be no assurances that such proceeds will be sufficient to cover the obligation. Should the proceeds not be sufficient from expected sales of the condominium units, the members will provide additional funds to meet this obligation prior to August 1, 2009.

Financial Accounting Standards Board (“FASB”) Interpretation No.46, “Consolidation of Variable Interest Entities, and Interpretation of Accounting Research Bulletin No. 51”, as amended (“FIN 46R”), requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Pursuant to FIN 46R, the Company consolidates MC South Beach that provides food and beverage services at the hotel as the Company absorbs a majority of the restaurant’s expected losses and residual returns. No assets of the Company are collateral for MC South Beach’s obligations and creditors of MC South Beach have no recourse to the Company.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include operating cash accounts and highly liquid investments, with original maturities of three months or less from the date of purchase.

Bank overdrafts of approximately $2 million representing outstanding checks in excess of funds on deposits are included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.

Concentration of Credit Risk

The Company places its temporary cash investments in high credit financial institutions. However, a portion of temporary cash investments may exceed FDIC insured levels from time to time.

7

1100 West Properties LLC and Subsidiary

Notes to Consolidated Financial Statements

Restricted Cash

Restricted cash consists of reserves for real estate taxes, insurance, interest reserve, project reserve and a development reserve as provided for in the mortgage note.

Fair Value of Financial Instruments

The financial instruments include cash and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued expenses, and mortgage loan. The Company’s mortgage loan accrues interest at a floating rate, which re-prices frequently. Management believes the carrying amounts of the aforementioned financial instruments are a reasonable estimate of fair value at December 31 2008 and 2007, due to the short-term maturity of these items or variable interest rate.

Revenue Recognition

Real Estate Held for Sale: Sales of real estate are generally accounted for under the full accrual method when sales closes and title passes. Under this method, the gain is not recognized until the collectability of the sales price is reasonably assured and the earnings process is virtually complete. When a sale does not meet the requirements for income recognition, gain is deferred until those requirements are met.

In 2007, due to uncertainties with respect to allocation and estimation of costs attributable to units sold and the inability of the Company to deliver the unit to the buyer resulting from on-going construction, the Company accounted for the sales under the deposit method and accordingly did not recognize any revenue from the units sold. As of December 31, 2007, the proceeds received from the sale of 49 condomimum units were reflected as deferred income in the accompanying consolidated balance sheets.

Hotel Operations: The Company’s hotel revenues are derived from lodging, food and beverage and related services provided to hotel customers such as telephone and minibar as well as hotel management services. Revenue is recognized when the amounts are earned and can reasonably be estimated. These revenues are recorded net of taxes collected from customers and remitted to government authorities and are recognized as the related services are delivered.

Rental income is recognized on a straight-line basis over the term of the respective leases.

Accounts Receivable

Accounts receivable are carried at their estimated recoverable amount, net of allowances. Management provides for the allowance based on a percentage of aged receivables and assesses accounts receivable on a periodic basis to determine if any additional amounts will potentially be uncollectible. After all attempts to collect accounts receivable are exhausted, the uncollectible balances are written off against the allowance. Based on the information available, the Company believes that accounts receivable are fully realizable as of December 31, 2008.

8

1100 West Properties LLC and Subsidiary

Notes to Consolidated Financial Statements

Real Estate Held for Sale and Development

Beginning February 1, 2007 to November 2008, the real estate was accounted for as a development project in accordance with SFAS No. 67.

Real estate held for sale and development is carried at cost, net of adjustment for impairment, if any. Development costs, including land and building, direct costs of construction, indirect costs and interest, real estate taxes and other costs incurred during the development and construction period were capitalized and amortized to cost of sales as closing occurred. Capitalization of interest, real estate taxes and other cost incurred begins when development activities commence and ends when the assets are substantially completed and ready for occupancy.

Certain construction-in-progress costs are currently paid out of the development reserve, which was set up at the closing of the loan.

Statement of Financial Accounting Standards (“SFAS”) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, requires that real estate assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by the asset. These evaluations for impairment are significantly impacted by estimates of revenues, costs and expenses, and other factors. If real estate assets are considered to be impaired, the impairment to be recognized is measured by the amount in which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined based on estimated future cash flows discounted for inherent risks associated with the real estate assets, or other valuation techniques. The Company reviewed its real estate held for sale and development for impairment. There were no impairment write-downs during the years ended December 31, 2008 and 2007.

Property and Equipment

Property and equipment consists of amenities such as restaurant, spa, bar and parking that the Company retained and reclassified to property and equipment upon commencement of the hotel operations. Property and equipment are carried at cost, net of accumulated depreciation. Cost of completed renovations and significant improvements are capitalized and depreciated over their estimated lives, while costs relating to normal recurring repairs and maintenance are charged to expense as incurred.

9

1100 West Properties LLC and Subsidiary

Notes to Consolidated Financial Statements

Property and equipment are depreciated using the straight-line method. The estimated useful lives are summarized as follows:

	Lives
Buildings and improvement	40
Furniture, fixtures and equipment	5-20

In accordance with SFAS No. 144, long-lived assets currently in use are reviewed whenever events or changes in circumstances indicate the carrying value of a long-lived asset may not be recoverable and will be written down to fair value if considered impaired. Long-lived assets to be disposed of are written down to the lower of cost or fair value less the estimated cost to sell. The Company has reviewed its long-lived assets for impairment. There was no impairment write-downs during the year ended December 31, 2008.

Deferred Financing Costs

Costs incurred in connection with the mortgage loan are amortized over the term of the loan using the straight-line method which approximates the effective yield method. Amortization of deferred loan costs is capitalized during development and included in real estate held for sale and development on the accompanying consolidated balance sheets.

Derivative Instruments and Hedging Activities

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, the Company records all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses cash flow instruments as part of its hedging strategy. Interest rate swaps involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.

The interest rate cap that the Company held was not speculative and was used to manage the Company’s exposure to interest rate movements and other identified risks. To accomplish the objective, the Company primarily uses interest rate swaps and caps as part of its cash flow hedging strategy. The Company did not designate the cap instrument as a cash flow hedge in accordance with SFAS No. 133, accordingly, change in fair value of this derivative was included in interest expense and $18,000 was capitalized to the real estate held for sale and development on the accompanying consolidated balance sheets. The interest rate cap expires on August 8, 2009. The value of the interest rate cap as of December 31, 2008 was zero.

10

1100 West Properties LLC and Subsidiary

Notes to Consolidated Financial Statements

Advertising Costs

Advertising costs are charged to expense when incurred.

Income Taxes

The Company is a limited liability company, which is treated similarly to partnerships for tax purposes. Accordingly, Federal, state and local income taxes have not been provided for in the accompanying financial statements, as the members are responsible for reporting their allocable share of the Company’s income, gains, deductions, losses and credits on their respective income tax returns.

Reclassification

Certain prior year financial statement amounts have been reclassified to conform to the current year presentation.

3. Real Estate Held for Sale and Development

Real estate held for sale consists of the following (000’s omitted):

December 31,	2008		2007
Land	$	14,291	$	21,188
Building		108,193		87,887
Construction-in-progress		16,682		44,604
Furniture, fixtures and equipment		8,902		—
Real estate held for sale and development	$	148,068	$	153,679

Upon substantial completion of the development and commencement of hotel operations in December 2008, $19.3 million of real estate held for sale and development, representing assets to be retained and operated by the Company, was reclassified to property and equipment.

11

1100 West Properties LLC and Subsidiary

Notes to Consolidated Financial Statements

Interest incurred and capitalized to real estate held for sale and development as of December 31, 2008 and 2007 is as follows (000’s omitted):

December 31,	2008			2007
Interest capitalized, January 1	$	7,399		$	—
Interest incurred and capitalized		5,864			7,399
Interest amortized to cost of sales		(3,778	)		—
Interest capitalized, December 31	$	9,485		$	7,399

4. Property and Equipment

Property and equipment consists of the following as of December 31, 2008 (000’s omitted):

Land	$	1,203
Building		16,916
Construction-in-progress		137
Furniture, fixtures and equipment		1,143
Total		19,399
Less- accumulated depreciation		(53	)
Property and equipment, net	$	19,346

5. Mortgage Loan

The Company financed the purchase of the property with a mortgage loan in the original principal amount of $124 million. The loan consisted of two tranches, an A Note ($82 million) and a B Note ($42 million). Both the A and B Notes required interest payments only and bore interest at LIBOR plus 300 basis points and were to mature in August 2009. At the closing of the loan, $9 million and $29.7 million were placed in escrow to fund an interest reserve and a development reserve as required by the loan agreement.

Under the mortgage loan agreement, the Company deposited the first $6.9 million of net sales cash flow, as defined, into a project escrow account and once the project escrow account was funded, the loan required partial principal payments based upon the net sales proceeds of the condominium units. As of December 31, 2008 and 2007, approximately $45 million and $23 million, respectively, were paid down on the loan balance out of the net sales proceeds from the condominium units.

12

1100 West Properties LLC and Subsidiary

Notes to Consolidated Financial Statements

In April 2008, the Company obtained a mezzanine loan of $28 million bearing interest at LIBOR plus 600 basis points (approximately 7.9% as of December 31, 2008) with a maturity of August 2009.

On November 25, 2008, the Company amended and restated the mortgage and mezzanine loan agreements to provide the Company with four one year extension options and revise the interest rate for both A Note and B Note. A Note bears interest at LIBOR plus 325 basis points (approximately 5.15% as of December 31, 2008) and B Note bears interest of LIBOR plus 446 basis points (approximately 6.36% as of December 31, 2008).

Under the amended agreements, the initial maturity date of August 1, 2009 can be extended to July 29, 2013, subject to certain conditions including an amortization payment of approximately $17.5 million on August 1, 2009 for the first such annual extension, repayment of the remainder of the A Note, as defined, by August 1, 2010 for the exercise of the second annual extension, achievement of defined debt service coverage ratios for the exercise of the third and fourth annual extensions, and achievement of a loan to value test for the fourth annual extension. A portion of the proceeds obtained from condominium sales may be used to pay down all or part of this $17.5 million extension obligation, although there can be no assurances that such sale proceeds will be sufficient to cover the obligation. The members will provide additional funds if proceeds from expected sales of condominium units are not sufficient to meet this obligation prior to August 1, 2009.

6. Related Party Transactions

In 2008, an entity controlled by the Company’s members has provided additional mezzanine financing of approximately $22.5 million to fund the completion of the construction and renovations of the property. The loan bears interest at 18% per annum and matures in August 2009.

The Company has entered into a project management agreement with Sanctuary West Management, LLC (“SWM”), an affiliate of SWH. The agreements specify that SWM is to receive a developer fee of 1% of the actual construction costs. Developer fees were approximately $232,000 and $232,000 for the years ended December 31, 2008 and 2007, respectively, and $84,000 for the period ended December 31, 2006 and have been capitalized as costs of the project.

An affiliate of SWH provides asset management services to the Company for a monthly fee of $30,000. For the years ended December 31, 2008 and 2007, and the period ended December 31, 2006, these fees amounted to $360,000, $360,000 and $150,000, respectively, and have been capitalized as costs of the project.

For the periods ended December 31, 2007 and 2006, members were paid for fees for overhead costs of $1,500,000 and $500,000, respectively, which were capitalized as costs of the project. No such fees were paid in 2008.

13

1100 West Properties LLC and Subsidiary

Notes to Consolidated Financial Statements

Morgans Hotel Group Management LLC (“MHGM”), an affiliate of MHG, charges a management fee equal to 4% of gross revenues, as defined. Management fees incurred for the year ended December 31, 2008 amounted to approximately $96,000 and are included in management fees in the accompanying consolidated statements of operations. MHGM is also entitled to an annual incentive fee based on the Net Operating Profits, as defined, from the hotel operations. No incentive fees were incurred for the year ended December 31, 2008.

MHGM, under the management contract, is also entitled to reimbursements of allocable chain services, which are currently equal to 3% of gross revenues, as defined. The chain reimbursements in 2008 amounted to approximately $52,000 and are included in management fees in the accompanying consolidated statements of operations.

At December 31, 2008 and 2007, the Company had approximately $3.0 million and $251,000, respectively, of payables to certain affiliates included in related party payables in the accompanying consolidated balance sheets.

The Company is a part of a Master Condominium Association to which it pays annual dues. Members of both SWH and MHG serve on the Board of the Master Association. For the years ended December 31, 2008 and 2007 and the period ended December 31, 2006, the Company incurred dues of approximately $463,000, $763,000 and $320,000, respectively, substantially all of which were capitalized as costs of the project.

7. Commitments and Contingencies

The Company has entered into 226 condomimum purchase and sale contracts and has closed on 93 condomimum units as of December 31, 2008. Total deposits held in escrow by the Company relating to unclosed contracts amounted to approximately $7.4 million (excluding interest) as of December 31, 2008.

The Company is involved in various lawsuits and administrative actions in the normal course of business. In management’s opinion, disposition of these lawsuits is not expected to have a material adverse effect on the Company’s financial position or results of operations.

14