10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2006

OR

¨ 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: 0-25060

Supertel Hospitality, Inc.

(Exact name of registrant as specified in its charter)

Virginia	52-1889548
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

309 N. 5th St., Norfolk, NE	68701
(Address of principal executive offices)	(Zip Code)

(402) 371-2520

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class	Name of each exchange on which registered
Common Stock, $.01 par value per share	The NASDAQ Stock Market, LLC
Series A Convertible Preferred Stock, $.01 par value per share	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   ¨    No  x

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

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  x    No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ¨    Accelerated filer   ¨    Non-accelerated filer  x

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

As of June 30, 2006 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $58,558,000 based on the $6.50 closing price as reported on the Nasdaq Global Market.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at March 14, 2007
Common Stock, $.01 par value per share	19,728,121 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document	Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held on May 24, 2007 (Proxy Statement)	Part III

TABLE OF CONTENTS

Item No.		Form 10-K Report Page
	PART I
1.	Business	3
1A.	Risk Factors	9
1B.	Unresolved Staff Comments	22
2.	Properties	22
3.	Legal Proceedings	24
4.	Submission of Matters to a Vote of Security Holders	24
	PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25
6.	Selected Financial Data	27
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
7A.	Quantitative and Qualitative Disclosures about Market Risk	39
8.	Financial Statements and Supplementary Data	40
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	76
9A.	Controls and Procedures	76
9B.	Other Information	76
	PART III
10.	Directors, Executive Officers and Corporate Governance	76
11.	Executive Compensation	76
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	77
13.	Certain Relationships and Related Transactions, and Director Independence	77
14.	Principal Accountant Fees and Services	77
	PART IV
15.	Exhibits and Financial Statement Schedules	77

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PART I

Item 1. Business

Overview

We are a self-administered real estate investment trust, and through our subsidiaries, as of December 31, 2006 we owned 88 limited service hotels in 19 states. Our hotels operate under several national franchise brands.

Our significant events for 2006 include:

• sale of 7,544,936 shares of common stock at an offering price of $6.70 per share in a public offering commenced in December;

• purchase of 12 additional hotels;

• increase in overall property operating income (POI) and occupancy; growth in average daily rate (ADR) and revenue per available room (RevPAR) for limited service hotels;

• addition of extended stay hotels to the Company’s lodging portfolio; and

• payment of quarterly dividends on the common stock, for a total of $.365 per share in 2006, up from $.24 per share in 2005.

Recent Events

The dividend declared by the Board of Directors for the first quarter of 2007 is $.11  ¹/4 , payable April 30, 2007 to shareholders of record on March 30, 2007. The dividend represents a  ¹/4 cent increase from the prior quarter. The Company acquired five additional hotels on January 5, 2007, and as of March 7, 2007, the Company has entered into agreements, subject to customary purchase conditions, to purchase 29 additional limited service hotels.

Available Information

Our executive offices are located at 309 N. 5^th St, Norfolk, Nebraska 68701, our telephone number is (402) 371-2520, and we maintain an Internet website located at www.supertelinc.com. Our annual reports on Form 10-K and quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports are available free of charge on our website as soon as reasonably practicable after they are filed with the SEC. We also make available the charters of our board committees and our Code of Business Conduct and Ethics on our website. Copies of these documents are available in print to any shareholder who requests them. Requests should be sent to Supertel Hospitality, Inc., 309 N. 5^th St, P.O. Box 1448, Norfolk, Nebraska 68701, Attn: Corporate Secretary.

General Development of Business

We are a real estate investment trust (REIT) for federal income tax purposes and we were incorporated in Virginia on August 23, 1994. Our common stock began to trade on The Nasdaq Global Market on October 30, 1996. Our preferred stock began to trade on The Nasdaq Global Market on December 30, 2005.

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Through our wholly owned subsidiaries, Supertel Hospitality REIT Trust and E&P REIT Trust, we own a controlling interest in Supertel Limited Partnership and E&P Financing Limited Partnership. We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnerships, Supertel Limited Partnership and E&P Financing Limited Partnership, limited partnerships, limited liability companies or other subsidiaries of our operating partnerships. We currently own, indirectly, an approximate 97% general partnership interest in Supertel Limited Partnership and a 100% partnership interest in E&P Financing Limited Partnership. In the future, these limited partnerships may issue limited partnership interests to third parties from time to time in connection with our acquisitions of hotel properties.

In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income test required for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels. Therefore, we lease each of our hotel properties to our wholly owned taxable REIT subsidiaries. Under the REIT Modernization Act (“RMA”), which became effective January 1, 2000, REITs are permitted to lease their hotels to wholly owned taxable REIT subsidiaries. We formed TRS Leasing, Inc. and its wholly owned subsidiaries TRS Subsidiary LLC and SPPR TRS Subsidiary, LLC (collectively the “TRS Lessee”) in accordance with the RMA. Pursuant to the RMA, the TRS Lessee is required to enter into management agreements with an “eligible independent contractor” who will manage the hotels leased by the TRS Lessee. Accordingly the hotels are leased to our taxable TRS Lessee and are managed by Royco Hotels Inc. (“Royco Hotels”) formerly known as Royal Host Management Inc.

(b) Financial Information About Industry Segments

We are engaged primarily in the business of owning equity interests in hotel properties. Therefore, presentation of information about industry segments is not applicable. See the Consolidated Financial Statements and notes thereto included in Item 8 of this Annual Report on Form 10-K for certain financial information required in this Item 1.

(c) Narrative Description of Business

General At December 31, 2006, we owned, through our subsidiaries, 88 hotels in 19 states. The hotels are operated by Royco Hotels. We acquired 5 additional hotels on January 5, 2007, and as of March 7, 2007, we have entered into agreements, subject to customary purchase conditions, to purchase 29 additional limited service hotels.

Our primary objective is to increase shareholder value through increasing the operating returns of the hotels, and by acquiring equity interests in hotels that meet our investment criteria.

Internal Growth Strategy We seek to grow internally through improvements to our hotel operating results, principally through increased occupancy and average daily rates, and through reductions in operating expenses. As a REIT, we are required to distribute 90% of our REIT taxable income as dividends to our stockholders each year. Thus, internally generated cash flow will principally be used to pay dividends and any residual cash flow, together with cash flow from external financing sources, may be used to fund ongoing capital improvements, including furniture, fixtures and equipment, to our hotels and to meet general corporate and other working capital needs.

Acquisition Strategy Any acquisition, investment or purchase of property requires approval of the Investment Committee of our board of directors. Our general investment criteria are described below:

• nationally or regionally franchised hotels in locations with relatively high demand for rooms, and a relatively low supply of competing hotels;

• hotels which could benefit from new management, a new marketing strategy and association with a national franchisor;

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• hotels which could benefit significantly from renovations; and

• hotels in attractive locations that could benefit by changing franchises to a grade that is more appropriate for the location and clientele.

Our organizational documents do not limit the types of investments we can make; however, our intent is to focus primarily on midscale without food and beverage and economy, including economy extended-stay hotel properties.

We acquired twelve hotels in 2006 through our subsidiaries. The following table reflects additional information regarding each of these hotels:

Hotel	Location	Date Acquired	Rooms
Super 8	CLARINDA, IOWA	1/13/2006	40
Supertel Inn	CRESTON, IOWA	6/30/2006	41
Supertel Inn	NEOSHO, MISSOURI	12/27/2006	47
Supertel Inn	JANE, MISSOURI	12/27/2006	45
Comfort Inn	ERLANGER, KENTUCKY	05/08/06	145
Savannah Suites	SAVANNAH, GEORGIA	8/18/2006	160
Savannah Suites	AUGUSTA, GEORGIA	8/18/2006	172
Savannah Suites	CHAMBLEE, GEORGIA	8/18/2006	120
Savannah Suites	JONESBORO, GEORGIA	8/18/2006	172
Savannah Suites	STONE MOUNTAIN, GEORGIA	8/18/2006	140
Savannah Suites	GREENVILLE, SOUTH CAROLINA	8/18/2006	170
Savannah Suites	ATLANTA, GEORGIA	11/16/2006	164
			1,416

Development Strategy Subject to market conditions and the availability of financing, we may selectively grow through the development of new limited-service and extended stay hotel properties. We are interested in sites that offer the potential to attract a diverse mix of market segments.

Our site selection criteria include some or all of the following characteristics:

• urban or resort locations with relatively high demand for rooms, and a relatively low supply of competing hotels;

• areas that have strong industrial bases with the potential for future growth;

• communities with state or federal installations, colleges or universities; and

• sites that currently have an aging hotel presence.

These criteria describe the basic characteristics that we look for prior to committing to the development of a new hotel. Sites that are selected may have some or all of the market characteristics described above, as well as characteristics that are not specifically described herein. Sites selected by us will not necessarily possess all of these characteristics.

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Sale of Hotels We may undertake the sale of one or more of the hotels from time to time in response to changes in market conditions, our current or projected return on our investment in the hotels or other factors which the board of directors deems relevant. We undertook a specific disposition program beginning in 2001 that included the sale of 23 hotels through December 31, 2004. The proceeds from the sale of these hotels were used primarily to repay existing debt. We did not sell any hotels in 2005 or 2006 and none of our hotels were classified as being held for sale as of December 31, 2006; however, we may sell additional hotels in the future as market conditions and other factors so warrant.

Hotel Management Royco Hotels, an independent contractor, manages our hotels pursuant to a hotel management agreement with TRS Lessee. The management agreement provides that Royco Hotels has control of all operational aspects of the hotels, including employee-related matters. Royco Hotels must generally maintain each hotel in good repair and condition and make such routine maintenance, repairs and minor alterations as it deems reasonably necessary. Additionally, Royco Hotels must operate the hotels in accordance with the franchise agreements that cover the hotels, which includes using franchisor sales and reservation systems as well as abiding by franchisors’ marketing standards. Royco Hotels may not assign the management agreement without our consent.

The management agreement generally requires TRS Lessee to fund debt service, working capital needs and capital expenditures and fund Royco Hotels’s third-party operating expenses, except those expenses not related to the operation of the hotels. The management agreement generally requires that the hotels meet the franchisors’ standards regarding physical, operational and technological matters. TRS Lessee is responsible for obtaining and maintaining insurance policies with respect to the hotels.

Management Fees Royco Hotels receives a monthly base management fee and an incentive management fee, if certain financial thresholds are met or exceeded. The management agreement, as amended effective January 1, 2007, provides for monthly base management fees and absorbing additional operating expenses as follows:

• 4.25% of gross hotel income for the month for up to the first $75 million of gross hotel income for a fiscal year;

• 4.00% of gross hotel income for the month for gross hotel income exceeding $75 million up to $100 million for a fiscal year;

• 3.00% of gross hotel income for the month for gross hotel income exceeding $100 million for a fiscal year; and

• the base compensation of Royco Hotels district managers to be included in the operating expenses of TRS Lessee.

Prior to the amendment, the base management fee was 4.75% of the gross hotel revenues for all but ten of the hotels. The base management fee for those ten hotels was 4.0%.

If annual net operating income exceeds 10% of our total investment in the hotels, then Royco Hotels receives an incentive management fee of 10% of the excess of net operating income up to the first $1 million, and 20% of excess net operating income above $1 million.

Term and Termination The management agreement expires on December 31, 2011 and, unless Royco Hotels elects not to extend the term, the term of the agreement will be extended to December 31, 2016 if (i) Royco Hotels achieves average annual net operating income of at least 10% of our total investment in the hotels during the four fiscal years ending December 1, 2011 and (ii) Royco Hotels does not default prior to December 31, 2011.

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The management agreement may be terminated as follows:

• either of us may terminate the management agreement if net operating income is not at least 8.5% of our total investment in the hotels or if we undergo a change of control;

• we may terminate the agreement if Royco Hotels undergoes a change of control;

• we may terminate the agreement if tax laws change to allow a hotel REIT to self manage its properties; and

• by the non-defaulting party in the event of a default that has not been cured within the cure period.

If we terminate the management agreement because we undergo a change of control, Royco Hotels undergoes a change of control due to the death of one of its principals, or due to a tax law change, then Royco Hotels will be entitled to a termination fee equal to the greater of (i) $3.6 million less an amount equal to $.1 million multiplied by the number of months after December 31, 2006 preceding the month of termination or (ii) 50% of the base management fee paid to Royco Hotels during the twelve months prior to notice of termination. Under certain circumstances, Royco Hotels will be entitled to a termination fee if we sell a hotel and do not acquire another hotel or replace the sold hotel within twelve months. The fee, if applicable, is equal to 50% of the base management fee paid with respect to the sold hotel during the prior twelve months.

Defaults and Indemnity The following are events of default under the management agreement:

• the failure of Royco Hotels to diligently and efficiently operate the hotels pursuant to the management agreement;

• the failure of either party to pay amounts due to the other party pursuant to the management agreement;

• certain bankruptcy, insolvency or receivership events with respect to either party;

• the failure of either party to perform any of their obligations under the management agreement;

• loss of the franchise license for a hotel because of Royco Hotels;

• failure by Royco Hotels to pay, when due, the accounts payable for the hotels for which we have previously reimbursed Royco Hotels; and

• any of the hotels fail two successive franchisor inspections if the deficiencies are within Royco Hotels’s reasonable control.

With the exception of certain events of default as to which no grace period exists, if an event of default occurs and continues beyond the grace period set forth in the management agreement, the non-defaulting party has the option of terminating the agreement.

The management agreement provides that each party, subject to certain exceptions, indemnifies and holds harmless the other party against any liabilities stemming from certain negligent acts or omissions, breach of contract, willful misconduct or tortuous actions by the indemnifying party or any of its affiliates.

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Franchise Affiliation

Seventy-six of our hotels owned at December 31, 2006 operate under the following national franchise brands:

	Franchise Brand	Number of Hotels
(a)	Super 8 (1)	45
(b)	Comfort Inn/Comfort Suites (2)	21
(c)	Hampton Inn (3)	3
(d)	Holiday Inn Express (4)	3
(e)	Sleep Inn (2)	1
(f)	Days Inn (1)	1
(g)	Ramada Limited (1)	1
(h)	Guest House Inn (5)	1

(1) Super 8 ^® , Ramada Limited ^® , and Days Inn ^® are registered trademarks of Wyndham Worldwide.

(2) Comfort Inn ^® , Comfort Suites ^® and Sleep Inn ^® are registered trademarks of Choice Hotels International, Inc.

(3) Hampton Inn ^® is a registered trademark of Hilton Hotels Corporation.

(4) Holiday Inn Express ^® is a registered trademark of Six Continents Hotels, Inc.

(5) Guesthouse ^® is a registered trademark of Guesthouse International Franchise Systems, Inc.

Twelve of our hotels are not affiliated with a national franchise brand. Seven of these hotels operate under the Savannah Suites name and five of these hotels operate under the Supertel Inn name.

Seasonality of Hotel Business

The hotel industry is seasonal in nature. Generally, revenues for hotels operating in the geographic areas in which we operate are greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters of the year.

Competition

The hotel industry is highly competitive. Each of our hotels is located in a developed area that includes other hotel properties. The number of competitive hotel properties in a particular area could have a material adverse effect on revenues, occupancy and the average daily room rate of the hotels or at hotel properties acquired or developed in the future. A number of our hotels have experienced increased competition in the form of newly constructed competing hotels in the local markets, and we expect the entry of new competition to continue in several additional markets over the next several years.

We may compete for investment opportunities with entities that have substantially greater financial resources than us. These entities generally may be able to accept more risk than we can prudently manage. Competition in general may reduce the number of suitable investment opportunities for us and increase the bargaining power of property owners seeking to sell. Further, we believe that competition from entities organized for purposes substantially similar to our objectives could increase significantly.

Employees

At December 31, 2006, we had 14 employees. Royco Hotels, the manager of our hotels, has a workforce of approximately 1,400 employees dedicated to the operation of the hotels.

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Item 1A. RISK FACTORS

Risks Related to Our Business

We cannot assure you that we will qualify, or remain qualified, as a REIT.

We currently are taxed as a REIT, and we expect to qualify as a REIT for future taxable years, but we cannot assure you that we will remain qualified as a REIT. If we fail to remain qualified as a REIT, all of our earnings will be subject to federal income taxation, which will reduce the amount of cash available for distribution to our stockholders.

Our returns depend on management of our hotels by third parties.

In order to qualify as a REIT, we cannot operate any hotel or participate in the decisions affecting the daily operations of any hotel. Under the REIT Modernization Act of 1999, REITs are permitted to lease their hotels to TRSs. However, a TRS, such as TRS Lessee, may not operate or manage the leased hotels and, therefore, must enter into management agreements with third-party eligible independent contractors to manage the hotels. Thus, an independent operator under a management agreement with TRS Lessee controls the daily operations of each of our hotels.

Under the terms of the management agreement between TRS Lessee and Royco Hotels, our ability to participate in operating decisions regarding the hotels is limited. We depend on Royco Hotels to adequately operate our hotels as provided in the management agreement. We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel (for instance, setting room rates). Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, revenue per available room and average daily rates, we may not be able to force Royco Hotels to change its method of operation of our hotels. We can only seek redress if a management company violates the terms of the management agreement with TRS Lessee, and then only to the extent of the remedies provided for under the terms of the management agreement. Additionally, in the event that we need to replace our management company, we may experience decreased occupancy and other significant disruptions at our hotels and in our operations generally.

Failure of the hotel industry to continue to improve may adversely affect our ability to execute our business strategies, which, in turn, would adversely affect our ability to make distributions to our stockholders.

Our business strategy is focused in the hotel industry, and we cannot assure you that hotel industry fundamentals will continue to improve. Economic slowdown and world events outside our control, such as terrorism, have adversely affected the hotel industry in the recent past and if these events reoccur, may adversely affect the industry in the future. In the event conditions in the hotel industry do not continue to improve as we may expect, our ability to execute our business strategies will be adversely affected, which, in turn, would adversely affect our ability to make distributions to our stockholders.

We face competition for the acquisition of hotels and we may not be successful in identifying or completing hotel acquisitions that meet our criteria, which may impede our growth.

One component of our business strategy is expansion through acquisitions, and we may not be successful in identifying or completing acquisitions that are consistent with our strategy. We compete with institutional pension funds, private equity investors, REITs, hotel companies and others who are engaged in the acquisition of hotels. This competition for hotel investments may increase the price we pay for hotels and these competitors may succeed in acquiring those hotels that we seek to acquire. Furthermore, our potential acquisition targets may find our competitors to be more attractive suitors because they may have greater marketing and financial resources, may be willing to pay more or may have a more compatible operating philosophy. In addition, the number of

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entities competing for suitable hotels may increase in the future, which would increase demand for these hotels and the prices we must pay to acquire them. If we pay higher prices for hotels, our returns on investment and profitability may be reduced. Also, future acquisitions of hotels or hotel companies may not yield the returns we expect and may result in stockholder dilution.

Our TRS lessee structure subjects us to the risk of increased operating expenses.

Our hotel management agreement requires us to bear the operating risks of our hotel properties. Our operating risks include not only changes in hotel revenues and changes in TRS Lessee’s ability to pay the rent due under the leases, but also increased operating expenses, including, among other things:

• wage and benefit costs;

• repair and maintenance expenses;

• energy costs;

• property taxes;

• insurance costs; and

• other operating expenses.

Any decreases in hotel revenues or increases in operating expenses could have a materially adverse effect on our earnings and cash flow.

Our debt service obligations could adversely affect our operating results, may require us to liquidate our properties and limit our ability to make distributions to our stockholders.

We seek to maintain a total stabilized debt level of no more than 40% to 55% of our aggregate property investment. We, however, may change or eliminate this target at any time without the approval of our stockholders. In the future, we and our subsidiaries may incur substantial additional debt, including secured debt. Incurring such debt could subject us to many risks, including the risks that:

• our cash flow from operations will be insufficient to make required payment of principal and interest;

• we may be more vulnerable to adverse economic and industry conditions;

• we may be required to dedicate a substantial portion of our cash flow from operations to the repayment of our debt, thereby reducing the cash available for distribution to our stockholders, funds available for operations and capital expenditures, future investment opportunities or other purposes;

• the terms of any refinancing may not be as favorable as the terms of the debt being refinanced; and

• the use of leverage could adversely affect our stock price and the ability to make distributions to our stockholders.

If we violate covenants in our indebtedness agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on favorable terms, if at all.

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If we do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance this debt through additional debt financing, private or public offerings of debt securities, or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancings, increases in interest expense could adversely affect our cash flow, and, consequently, our cash available for distribution to our stockholders. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our hotel properties on disadvantageous terms, potentially resulting in losses adversely affecting cash flow from operating activities. In addition, we may place mortgages on our hotel properties to secure our line of credit or other debt. To the extent we cannot meet these debt service obligations, we risk losing some or all of those properties to foreclosure. Additionally, our debt covenants could impair our planned strategies and, if violated, result in a default of our debt obligations.

Higher interest rates could increase debt service requirements on our floating rate debt and could reduce the amounts available for distribution to our stockholders, as well as reduce funds available for our operations, future investment opportunities or other purposes. We may obtain in the future one or more forms of interest rate protection—in the form of swap agreements, interest rate cap contracts or similar agreements—to “hedge” against the possible negative effects of interest rate fluctuations. However, we cannot assure you that any hedging will adequately mitigate the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations. In addition, we may be subject to risks of default by hedging counterparties. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable.

Our ability to make distributions to our stockholders is subject to fluctuations in our financial performance, operating results and capital improvement requirements.

As a REIT, we generally will be required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to our stockholders. In the event of future downturns in our operating results and financial performance or unanticipated capital improvements to our hotel properties, we may be unable to declare or pay distributions to our stockholders. The timing and amount of distributions are in the sole discretion of our board of directors, which will consider, among other factors, our actual results of operations, debt service requirements, capital expenditure requirements for our properties and our operating expenses. We may not generate sufficient cash in order to fund distributions to our stockholders.

Among the factors which could adversely affect our results of operations and our distributions to stockholders are reduced net operating profits or operating loses, increased debt service requirements and capital expenditures at our hotel properties. Among the factors which could reduce our net operating profits are decreases in hotel property revenues and increases in hotel property operating expenses. Hotel property revenue can decrease for a number of reasons, including increased competition from a new supply of rooms and decreased demand for rooms. These factors can reduce both occupancy and room rates at our hotel properties.

We have restrictive debt covenants that could adversely affect our ability to run our business.

We file quarterly loan compliance certificates with certain of our lenders. As of September 30, 2004, we requested and received a loan-to-value and a debt service coverage ratio waiver with respect to a term loan with First National Bank of Omaha N.A. On September 30, 2006, the bank agreed to a covenant modification effective through November 1, 2009, providing for a lower loan-to-value ratio and debt service coverage ratio.

Weakness in the economy, and the lodging industry at large, may result in our non-compliance with our loan covenants. Such non-compliance with our loan covenants may result in our lenders restricting the use of our operating funds for capital improvements to our existing hotels, including improvements required by our franchise agreements. We cannot assure you that our loan covenants will permit us to maintain our historic business strategy.

Our restrictive debt covenants may jeopardize our tax status as a REIT.

To maintain our REIT tax status, we generally must distribute at least 90% of our REIT taxable income to our stockholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws. We have previously announced a general dividend

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policy of paying out approximately 100% of annual REIT taxable income. In the event we do not comply with our debt service obligations, our lenders may limit our ability to make distributions to our shareholders, which could adversely affect our REIT tax status.

Our failure to have distributed the former Supertel’s earnings and profits may compromise our tax status.

At the end of any taxable year, a REIT may not have any accumulated earnings and profits (described generally for federal income tax purposes as cumulative undistributed net income) from a non-REIT corporation. In October 1999, our company and the former Supertel Hospitality, Inc. merged. We were the surviving entity in the merger and in May 2005 we changed our name to Supertel Hospitality, Inc. Prior to the effective time of the merger between our company and the former Supertel, the former Supertel paid a dividend to its stockholders of record in the amount of its accumulated earnings and profits for federal income tax purposes. Accordingly, we should not have succeeded to any of the then current and accumulated earnings and profits of the former Supertel. However, the determination of accumulated earnings and profits for federal income tax purposes is extremely complex and the former Supertel’s computations of its accumulated earnings and profits are not binding upon the IRS. Should the IRS successfully assert that the former Supertel’s accumulated earnings and profits were greater than the amount distributed by the former Supertel, we may fail to qualify as a REIT.

Because we have elected to be subject to the “built-in gain” rules associated with our REIT election, our sale of assets acquired in our 1999 merger with the former Supertel will be taxable if sold within ten years of the merger.

We are subject to the “built-in gain” rules with respect to the assets acquired in the 1999 merger with the former Supertel. Under those rules, we will be subject to tax at the highest regular corporate rate on the built-in gain in the acquired assets (i.e., the excess of the fair market value of the assets over their adjusted basis at the time of the merger) if we dispose of the assets in a taxable transaction within 10 years of the merger. This ten-year period expires October 2009. We recognized built-in gains taxes of $286,000 due to dispositions of five of those hotels in 2004.

Operating our hotels under franchise agreements could adversely affect distributions to our shareholders.

Seventy-six of our hotels operate under franchise agreements and we are subject to the risks of concentrating our hotel investments in several franchise brands. These risks include reductions in business following negative publicity related to any one of our particular brands. Risks associated with our brands could adversely affect our lease revenues and the amounts available for distribution to our shareholders.

The maintenance of the franchise licenses for our hotels is subject to our franchisors’ operating standards and other terms and conditions. Our franchisors periodically inspect our hotels to ensure that we and TRS Lessee follow their standards. Failure to maintain these standards or other terms and conditions could result in a franchise license being canceled. As a condition of our continued holding of a franchise license, a franchisor could also possibly require us to make capital expenditures, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment. Nonetheless, we may risk losing a franchise license if we do not make franchisor-required capital expenditures.

If a franchisor terminates the franchise license, we may try either to obtain a suitable replacement franchise or to operate the hotel without a franchise license. The loss of a franchise license could materially and adversely affect the operations or the underlying value of the hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. Loss of a franchise license for one or more hotels could materially and adversely affect our revenues. This loss of revenues could, therefore, also adversely affect our cash available for distribution to shareholders.

Our inability to obtain financing could limit our growth.

We are required to distribute at least 90% of our REIT taxable income to our shareholders each year in order to continue to qualify as a REIT. Our debt service obligations and distribution requirements limit our ability to fund capital expenditures,

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acquisitions and hotel development through retained earnings. Our ability to grow through acquisitions or development of hotels will be limited if we cannot obtain debt or equity financing.

Neither our articles of incorporation nor our bylaws limit the amount of debt we can incur. Our board of directors can implement and modify a debt limitation policy without shareholder approval. We cannot assure you that we will be able to obtain additional equity financing or debt financing or that we will be able to obtain any financing on favorable terms.

We may not be able to complete development of new hotels on time or within budget.

We may develop hotel properties as suitable opportunities arise. New project development is subject to a number of risks that could cause increased costs or delays in our ability to generate revenue from any development hotel, reducing our cash available for distribution to shareholders. These risks include:

• construction delays or cost overruns that may increase project costs;

• competition for suitable development sites;

• receipt of zoning, land use, building, construction, occupancy and other required governmental permits and authorizations; and

• substantial development costs in connection with projects that are not completed.

We may not be able to complete the development of any projects we begin and, if completed, our development and construction activities may not be completed in a timely manner or within budget.

We may also rehabilitate hotels that we believe are underperforming. These rehabilitation projects will be subject to the same risks as development projects.

Hotels that we develop have no operating history and may not achieve levels of occupancy that result in levels of operating income that provide us with an attractive return on our investment.

The new hotels that we may develop will have no operating history. These hotels, both during the start-up period and after they have stabilized, may not achieve anticipated levels of occupancy, average daily room rates, or gross operating margins, and could result in operating losses and reduce the amount of distributions to our shareholders.

Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on a co-venturer’s financial condition and disputes between us and our co-venturers.

We may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In such event, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions. Investments in joint ventures may require that we provide the joint venture entity with the right of first offer or right of first refusal to acquire any new property we consider acquiring directly. Partners or co-venturers 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 impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. 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. Consequently, actions by, or disputes with, partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. We may also, in certain circumstances, be liable for the actions of our third-party partners or co-venturers. For example, we may be required to guarantee

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indebtedness incurred by a partnership, joint venture or other entity for the purchase or renovation of a hotel property. Such a guarantee may be on a joint and several basis with our partner or co-venturer in which case we may be liable in the event such party defaults on its guaranty obligation.

Our business could be disrupted if we need to find a new manager upon termination of an existing management agreement.

If Royco Hotels fails to materially comply with the terms of the management agreement, we have the right to terminate the management agreement. Upon termination, we would have to find another manager to manage the property. We cannot operate the hotels directly due to federal income tax restrictions. We cannot assure you that we would be able to find another manager or that, if another manager were found, we would be able to enter into a new management agreement favorable to us. Our franchisors may require us to make substantial capital improvements to the hotels prior to their approval, if required, of a new manager. There would be disruption during any change of hotel management that could adversely affect our operating results and reduce our distributions to our shareholders.

If we decide to sell hotels, we may not be able to sell those hotels on favorable terms.

We sold twenty-two hotels between 2002 and 2004. We did not sell any hotels in either 2005 or 2006. We may decide to sell additional hotels in the future. We may not be able to sell such hotels on favorable terms, and such hotels may be sold at a loss. As with acquisitions, we face competition for buyers of our hotel properties. Other sellers of hotels may have the financial resources to dispose of their hotels on unfavorable terms that we would be unable to accept. If we cannot find buyers for any properties that are designated for sale, we will not be able to implement our disposition strategy. In the event that we cannot fully execute our disposition strategy or realize the benefits therefrom, we will not be able to fully execute our growth strategy.

Geographic concentration of our hotels will make our business vulnerable to economic downturns in the Midwestern and Eastern United States.

Most of our hotels are located in the Midwestern and Eastern United States. Economic conditions in the Midwestern and Eastern United States will significantly affect our revenues and the value of our hotels. Business layoffs or downsizing, industry slowdowns, changing demographics and other similar factors may adversely affect the economic climate in these areas. Any resulting oversupply or reduced demand for hotels in the Midwestern and Eastern United States and our markets in particular would therefore have a disproportionate negative impact on our revenues and limit our ability to make distributions to stockholders.

Unanticipated expenses and insufficient demand for hotels we acquire in new geographic markets could adversely affect our profitability and our ability to make distributions to our stockholders.

As part of our business plan, we may develop or acquire 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 franchise brands. As a result, we may have to incur costs relating to the opening, operation and promotion of those new hotel properties that are substantially greater than those incurred in other areas. 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. Unanticipated expenses and insufficient demand at a new hotel property, therefore, could adversely affect our profitability and our ability to make distributions to our stockholders.

An economic recession and industry downturn could adversely affect our results of operations.

If room supply outpaces demand, our operating margins may deteriorate and we may be unable to execute our business plan. In addition, if this trend continues, we may be unable to continue to meet our debt service obligations or to obtain necessary additional financing.

Our borrowing costs are sensitive to fluctuations in interest rates.

Higher interest rates could increase debt service requirements on our floating rate debt including any borrowings under our credit facilities. Any borrowings under our credit facilities will have floating interest rates, which may increase due to market

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conditions. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or more of our hotel investments at times which may not permit us to receive an attractive return on our investments in order to meet our debt service obligations.

Future acquisitions may not yield the returns expected, may result in disruptions to our business, may strain management resources and may result in stockholder dilution.

Our business strategy may not ultimately be successful and may not provide positive returns on our investments. Acquisitions may cause disruptions in our operations and divert management’s attention away from day-to-day operations. The issuance of equity securities in connection with any acquisition could be substantially dilutive to our stockholders.

We depend on key personnel.

We depend on the efforts and expertise of our chief executive officer and chief financial officer to drive our day-to-day operations and strategic business direction. The loss of any of their services could have an adverse effect on our operations. Our ability to replace key individuals may be difficult because of the limited number of individuals with the breadth of skills and experience needed to excel in the hotel industry. There can be no assurance that we would be able to hire, train, retain or motivate such individuals.

Beginning with our fiscal year ending December 31, 2007, we will be subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We could incur significant costs relating to our compliance with Section 404.

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, our management evaluates the effectiveness of our disclosure controls and procedures, and management’s conclusions regarding the effectiveness are disclosed in our reports filed with the Securities and Exchange Commission. We expect that, beginning with our fiscal year ending December 31, 2007, Section 404 of Sarbanes-Oxley Act of 2002 will require our management to deliver a report that assesses our internal control over financial reporting for the year ending December 31, 2007, and our auditors to deliver an attestation report on management’s assessment of, and the operating effectiveness of, our internal controls over financial reporting in conjunction with our auditor’s opinion on our financial statements for our fiscal year ending December 31, 2007. We may incur significant expenses in order for our auditors to render their attestation report. Further, our auditors may identify material weaknesses in our internal controls over financial reporting and we may incur significant remediation costs.

Risks Related to the Hotel Industry

Our ability to make distributions to our shareholders may be affected by factors in the hotel industry that are beyond our control.

Operating Risks

Our hotels are subject to various operating risks found throughout the hotel industry. Many of these risks are beyond our control. These include, among other things, the following:

• competitors with substantially greater marketing and financial resources than us;

• over-building in our markets, which adversely affects occupancy and revenues at our hotels;

• dependence on business and commercial travelers and tourism;

• terrorist incidents which may deter travel;

• increases in energy costs, airline fares and other expenses, which may affect travel patterns and reduce the number of business and commercial travelers and tourists; and

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• adverse effects of general, regional and local economic conditions.

These factors could adversely affect the amount of rent we receive from leasing our hotels and reduce the net operating profits of TRS Lessee, which in turn could adversely affect our ability to make distributions to our shareholders. Decreases in room revenues of our hotels will result in reduced operating profits for TRS Lessee and decreased lease revenues to our company under our current percentage leases with TRS Lessee.

Competition for Acquisitions

We compete for investment opportunities with entities that have substantially greater financial resources than we do. These entities generally may be able to accept more risk than we can manage wisely. This competition may generally limit the number of suitable investment opportunities offered to us. This competition may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms.

Seasonality of Hotel Business

The hotel industry is seasonal in nature. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters, with the exception of our hotels located in Florida. This seasonality can be expected to cause quarterly fluctuations in our lease revenues. Our quarterly earnings may be adversely affected by factors outside our control, including bad weather conditions and poor economic factors. As a result, we may have to enter into short-term borrowings in our first and fourth quarters in order to offset these fluctuations in revenues.

Investment Concentration in Particular Segments of Single Industry

Our entire business is hotel-related. Our investment strategy is to acquire interests in midscale without food and beverage service and economy hotel properties. Therefore, a downturn in the hotel industry in general and the economy and midscale without food and beverage service segments in particular will have a material adverse effect on our lease revenues and amounts available for distribution to our shareholders.

Capital Expenditures

Our hotels have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. The franchisors of our hotels also require periodic capital improvements as a condition of keeping the franchise licenses. The costs of all of these capital improvements could adversely affect our financial condition and reduce the amounts available for distribution to our shareholders. These renovations may give rise to the following risks:

• possible environmental problems;

• construction cost overruns and delays;

• a possible shortage of available cash to fund renovations and the related possibility that financing for these renovations may not be available to us on affordable terms; and

• uncertainties as to market demand or a loss of market demand after renovations have begun.

For the twelve months ended December 31, 2006, we spent approximately $4.9 million for capital improvements to our hotels.

Recent economic trends, the military action in Afghanistan and Iraq and prospects for future terrorist acts and military action have adversely affected the hotel industry generally, and similar future events could adversely affect the industry in the future.

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Terrorist attacks and the after-effects (including the prospects for more terror attacks in the United States and abroad), combined with economic trends and the U.S.-led military action in Afghanistan and Iraq, substantially reduced business and leisure travel and lodging industry RevPAR generally. We cannot predict the extent to which these factors will directly or indirectly impact your investment in our common stock, the lodging industry or our operating results in the future. Declining RevPAR at our hotels would reduce our net income and restrict our ability to fund capital improvements at our hotels and our ability to make distributions to stockholders necessary to maintain our status as a REIT. Additional terrorist attacks, acts of war or similar events could have further material adverse effects on the markets on which shares of our common stock will trade, the lodging industry in general and our operations in particular.

Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to our stockholders.

We intend to maintain comprehensive insurance on each of our hotel properties, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel owners. There are no assurances that current coverage will continue to be available at reasonable rates. Various types of catastrophic losses, like earthquakes and floods, losses from foreign terrorist activities or domestic, may not be insurable or may not be economically insurable. Initially, we do not expect to obtain terrorism insurance on our hotel properties because it is costly. Lenders may require such insurance and our failure to obtain such insurance could constitute a default under loan agreements. Depending on our access to capital, liquidity and the value of the properties securing the affected loan in relation to the balance of the loan, a default could reduce our net income and limit our ability to obtain future financing.

In the event of a substantial 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 hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. 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.

The hotel business is capital intensive, and our inability to obtain financing could limit our growth.

Our hotel properties will require periodic capital expenditures and renovation to remain competitive. Acquisitions or development of additional hotel properties will require significant capital expenditures. The lenders under some of the mortgage debt that we will assume will require us to set aside varying amounts each year for capital improvements at our hotels. We may not be able to fund capital improvements or acquisitions solely from cash provided from our operating activities because we must distribute at least 90% of our REIT taxable income, excluding net capital gains, each year to maintain our REIT tax status. Consequently, we rely upon the availability of debt or equity capital to fund hotel acquisitions and improvements. As a result, our ability to fund capital expenditures, acquisitions or hotel development through retained earnings is very limited. Our ability to grow through acquisitions or development of hotels will be limited if we cannot obtain satisfactory debt or equity financing which will depend on market conditions. Neither our charter nor our bylaws limits the amount of debt that we can incur. However, we cannot assure you 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.

Noncompliance with governmental regulations could adversely affect our operating results.

Environmental Matters

Our hotel properties are subject to various federal, state and local environmental laws. Under these laws, courts and government agencies have the authority to require the owner of a contaminated property to clean up the property, even if the owner did not know of or was 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 cleanup, contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral.

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Under these environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, like a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment. Furthermore, 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 a hotel may seek to recover damages if he suffers injury from the asbestos. Lastly, some of these environmental laws restrict the use of a property or place conditions on various activities at a property. One example is laws that require a business using chemicals to manage them carefully and to notify local officials that the chemicals are being used.

Our company could be responsible for the costs discussed above if it found itself in one or more of these situations. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could affect the funds available for distribution to our shareholders. To determine whether any costs of this nature might be required, we commissioned Phase I environmental site assessments, or “ESAs” before we acquired our hotels, and in 2002, commissioned new ESAs for 32 of our hotels in conjunction with a refinancing of the debt obligations of those hotels. These studies typically included a review of historical information and a site visit, but not soil or groundwater testing. We obtained the ESAs to help us identify whether we might be responsible for cleanup costs or other costs in connection with our hotels. The ESAs on our hotels did not reveal any environmental conditions that are likely to have a material adverse effect on our business, assets, 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.

Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations

Under the Americans with Disabilities Act of 1990, or 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 U.S. government imposing fines or in private litigants obtaining damages. If we were required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our ability to make distributions to our shareholders and meet our other obligations could be adversely affected.

General Risks Related to the Real Estate Industry

Illiquidity of real estate investments could significantly impede 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 hotel properties or investments in our portfolio in response to changing economic, financial and investment conditions may be limited. In addition, our management agreement with Royco Hotels requires us to pay a termination fee upon the sale of a certain number of hotels, which will limit our ability to sell hotel properties. The real estate market is affected by many factors that are beyond our control, including:

• adverse changes in international, national, regional and local economic and market conditions;

• changes in interest rates and in the availability, cost and terms of debt financing;

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

• the ongoing need for capital improvements, particularly in older structures;

• changes in operating expenses; and

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• civil unrest, acts of God, including earthquakes, floods and other natural disaster and acts of war or terrorism, including the consequences of terrorist acts such as those that occurred on September 11, 2001, which may result in uninsured losses.

We may decide to sell our hotel properties in the future. We cannot predict whether we will be able to sell any hotel property or investment 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 hotel property or loan.

We may be required to expend funds to correct defects or to make improvements before hotel property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a hotel property, we may agree to lock-out provisions that materially restrict us from selling that hotel property for a period of time or impose other restrictions, such as limitation on the amount of debt that can be placed or repaid on that hotel property. These facts and any others that would impede our ability to respond to adverse changes in the performance of our hotel properties could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to stockholders.

Our hotels may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property, which would reduce our cash available for distribution. In addition, the presence of significant mold could expose us to liability from our guests, employees or our management companies and others if property damage or health concerns arise.

Risks Related to our Organization and Structure

Our failure to qualify as a REIT under the federal tax laws would result in adverse tax consequences.

The federal income tax laws governing REITs are complex.

We currently operate as a REIT under the federal income tax laws. The REIT qualification requirements are extremely complex, however, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, we cannot be certain that we would be successful in operating so that we can qualify as a REIT. At any time, new laws, interpretations, or court decisions may change the federal tax laws or the federal income tax consequences of our qualification as a REIT. We have not applied for or obtained ruling from the Internal Revenue Service that we will qualify as a REIT.

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Failure to qualify as a REIT would subject us to federal income tax.

If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income. We might need to borrow money or sell assets in order to pay any such tax. If we cease to be a REIT, we no longer would be required to distribute most of our taxable income to our stockholders. Unless we were entitled to relief under certain federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

Failure to make required distributions would subject us to tax.

In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. As a result, for example, of differences between cash flow and the accrual of income and expenses for tax purposes, or of nondeductible expenditures, our REIT taxable income in any given year could exceed our cash available for distribution. In addition, to the extent we may retain earnings of TRS Lessee in those subsidiaries, such amount of cash would not be available for distribution to our stockholders to satisfy the 90% distribution requirement. Accordingly, we may be required to borrow money or sell assets to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the distribution requirement and to avoid federal corporate income tax and the 4% nondeductible excise tax in a particular year.

The formation of TRS Lessee increases our overall tax liability.

TRS Lessee is subject to federal and state income tax on its taxable income, which in the case of TRS Lessee currently consists and generally will continue to consist of revenues from the hotel properties leased by TRS Lessee, net of the operating expenses for such properties and rent payments to us. Accordingly, although our ownership of TRS Lessee allows us to participate in the operating income from our hotel properties in addition to receiving rent, that operating income is fully subject to income tax. Such taxes could be substantial. The after-tax net income of TRS Lessee is available for distribution to us.

We incur a 100% excise tax on transactions with TRS Lessee that is not conducted on an arm’s-length basis. For example, to the extent that the rent paid by TRS Lessee exceeds an arm’s-length rental amount, such amount potentially is subject to the excise tax. We intend that all transactions between us and TRS Lessee will continue to be conducted on an arm’s-length basis and, therefore, that the rent paid by TRS Lessee to us will not be subject to the excise tax.

Complying with REIT requirements may cause us to forego attractive opportunities that could otherwise generate strong risk-adjusted returns and instead pursue less attractive opportunities, or none at all.

To continue to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of generating strong risk-adjusted returns on invested capital for our stockholders.

Complying with REIT requirements may force us to liquidate otherwise attractive investments, which could result in an overall loss on our investments.

To continue to qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total securities can be represented by securities of

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one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. If we fail to comply with these requirements at the end of any calendar quarter, we may be able to preserve our REIT status by benefiting from certain statutory relief provisions. Except with respect to a de minimis failure of the 5% asset test or the 10% vote or value test, we can maintain our REIT status only if the failure was due to reasonable cause and not to willful neglect. In that case, we will be required to dispose of the assets causing the failure within six months after the last day of the quarter in which we identified the failure, and we will be required to pay an additional tax of the greater of $50,000 or the product of the highest applicable tax rate (currently 35%) multiplied by the net income generated on those assets. As a result, we may be required to liquidate otherwise attractive investments.

Taxation of dividend income could make our common stock less attractive to investors and reduce the market price of our common stock.

At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a stockholder. Legislation enacted in 2003 and 2006 generally reduced the maximum rate of tax applicable to individuals, trusts and estates on dividend income from regular C corporations to 15.0% through 2010. This reduced substantially the so called “double taxation” (that is, taxation at both the corporate and stockholder levels) that has generally applied to corporations that are not taxed as REITs. Generally, dividends from REITs do not qualify for the dividend tax reduction because, as a result of the dividends paid deduction to which REITs are entitled, REITs generally do not pay corporate level tax on income that they distribute to stockholders. As a result of that legislation, individual, trust, and estate investors could view stocks of non-REIT corporations as more attractive relative to shares of REITs than was the case previously because the dividends paid by non-REIT corporations are subject to lower tax rates for such investors.

Provisions of our charter may limit the ability of a third party to acquire control of our company.

In order to maintain our REIT qualification, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal income tax laws to include various kinds of entities) during the last half of any taxable year. Our articles of incorporation contain the ownership limitation, which prohibits both direct and indirect ownership of more than 9.9% of the outstanding shares of our common stock or 9.9% of any series of our preferred stock by any person, subject to several exceptions. Generally, any shares of our capital stock owned by affiliated owners will be added together for purposes of the ownership limitation.

These ownership limitations may prevent an acquisition of control of our company by a third party without our board of directors’ approval, even if our stockholders believe the change of control is in their best interests. Our charter authorizes our board of directors to issue shares of common stock and shares of preferred stock, and to set the preferences, rights and other terms of the preferred stock. Furthermore, our board of directors may, without any action by the stockholders, amend our charter from time to time to increase or decrease the aggregate number of shares of stock of any class or series of preferred stock that we have authority to issue. Issuances of additional shares of stock may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best interests.

Our ownership limitation may prevent you from engaging in certain transfers of our capital stock.

If anyone transfers shares in a way that would violate the ownership limitation described above or prevent us from continuing to qualify as a REIT under the federal income tax laws, we will consider the transfer to be null and void from the outset, and the intended transferee of those shares will be deemed never to have owned the shares. Those shares instead will be transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed by our company or sold to a person whose ownership of the shares will not violate the ownership limitation. Anyone who acquires shares in violation of the ownership limitation or the other restrictions on transfer in our articles of incorporation bears the risk that he will suffer a financial loss when the shares are redeemed or sold if the market price of our stock falls between the date of purchase and the date of redemption or sale.

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We may be subject to the 100% prohibited transaction tax on the gain recognized on the hotels we sold between 2001 and 2004.

A REIT will incur a 100% tax on the net income derived from any sale or other disposition of property that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We undertook a specific disposition program beginning in 2001 that included the sale of 23 hotels through December 31, 2004. We held the disposed hotels for an average period of eight years and did not acquire the hotels for purposes of resale. Accordingly, we do not believe any of those hotels were held primarily for sale in the ordinary course of our trade or business. However, if the Internal Revenue Service would successfully assert that we held such hotels primarily for sale in the ordinary course of our business, the gain from such sales could be subject to a 100% prohibited transaction tax.

The ability of our board of directors to change our major corporate policies may not be in your interest.

Our board of directors determines our major corporate policies, including our acquisition, financing, growth, operations and distribution policies. Our board may amend or revise these and other policies from time to time without the vote or consent of our stockholders.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company’s headquarters is located in Norfolk, Nebraska in an office building owned by the Company. The following table sets forth certain information with respect to the hotels owned by the Company as of December 31, 2006:

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Hotel Brand	Rooms	Hotel Brand	Rooms
Super 8		Comfort Inn /Comfort Suites
Aksarben-Omaha, NE	73	Culpeper, VA	49
Anamosa, IA	35	Chambersburg, PA	63
Antigo, WI	52	Dahlgren, VA	59
Batesville, AR	49	Dublin, VA	99
Burlington, IA	62	Erlanger, KY	145
Charles City, IA	43	Farmville, VA	51
Clarinda, IA	40	Gettysburg, PA	80
Clinton, IA	63	Morgantown, WV	80
Columbus, NE	63	Minocqua, WI	51
Cornhusker–Lincoln, NE	133	New Castle, PA	79
Creston, IA	123	Princeton, WV	51
El Dorado, KS	49	Rocky Mount, VA	61
Fayetteville, AR	83	Sheboygan, WI	59
Ft. Madison, IA	41	Beacon Marina-Solomons, MD	60
Hays, KS	78	Dover, DE	64
Iowa City, IA	86	Fayetteville, NC	120
Jefferson City, MO	77	Warsaw, IN	71
Keokuk, IA	61	Lafayette, IN	62
Kingdom City, MO	62	Marion, IN	62
Kirksville, MO	61	South Bend, IN	135
Lenexa, KS	101	Fort Wayne, IN	128
Manhattan, KS	87	Sleep Inn
Menomonie, WI	81	Omaha, NE	90
Moberly, MO	60	Hampton Inn
Mt. Pleasant, IA	55	Brandon, FL	80
Muscatine, IA	63	Cleveland, TN	59
Neosho, MO	58	Shelby, NC	77
Norfolk, NE	66	Guest House Inn
Omaha, NE	116	Ellenton, FL	63
O’Neill, NE	72	Holiday Inn Express
Parsons, KS	48	Danville, KY	63
Pella, IA	40	Gettysburg, PA	51
Pittsburg, KS	64	Harlan, KY	62
Portage, WI	61	Supertel Inn
Sedalia, MO	87	Key Largo, FL	40
Shawano, WI	55	Jackson, TN	121
Storm Lake, IA	59	Creston, IA	41
Tomah, WI	65	Jane, MO	45
Watertown, SD	57	Neosho, MO	47
Wayne, NE	40	Savannah Suites
West Dodge– Omaha, NE	101	Savannah, GA	160
West “O” – Lincoln, NE	82	Augusta, GA	172
Wichita, KS	119	Chamblee, GA	120
Wichita – (Park City), KS	59	Jonesboro, GA	172
West Plains, MO	49	Stone Mountain, GA	140
Days Inn		Greenville, SC	170
Farmville, VA	59	Pine Street - Atlanata, GA	164
Ramada Limited
Ellenton, FL	73	Total Rooms	6,777

23

Additional property information is found in Item 8 Schedule III of this Annual Report on Form 10-K.

Item 3. Legal Proceedings

We are not a party to, nor are any of our properties subject to, any material legal proceedings. We are, from time to time, engaged in routine litigation incidental to the business.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Executive Officers of the Company as of March 20, 2007

The following are executive officers of the Company as of March 20, 2007:

Paul J. Schulte, Chairman of the Board, Director, President and Chief Executive Officer. Mr. Schulte, age 73, became President and Chief Executive Officer effective August 15, 2004. Mr. Schulte joined the Company’s Board in October 1999, upon acquisition by the Company of the former Supertel Hospitality, Inc. Prior to the acquisition, he was a founder and had been Chairman of the Board, Director, President and Chief Executive Officer of the former Supertel, which was involved in acquiring, developing, owning, managing and operating limited service hotels.

Donavon A. Heimes, Chief Financial Officer, Treasurer and Secretary. Mr. Heimes joined the Company as Chief Financial Officer August 15, 2004. Mr. Heimes, age 62, previously served as a Managing Director of Corporate Finance Associates, a Colorado based merger/acquisition and financial consulting firm since 1997. Mr. Heimes also has had 10 years of accounting and auditing experience with KPMG and over 17 years experience serving as Chief Financial Officer, President and Chief Operating Officer of a privately held company involved in construction, construction materials, heavy equipment manufacturing and real estate development. Mr. Heimes is a CPA, and is a graduate of The University of Nebraska at Omaha and received his MBA from Creighton University.

24

PART II

Item 5. Market for the Registrant’s Common Equity / Related Shareholder Matters and Issuer Purchases of Equity Securities.

(a) Market Information

The common stock trades on the Nasdaq Global Market under the symbol “SPPR.” The closing sales price for the common stock on March 9, 2007 was $7.40 per share. The table below sets forth the dividends declared per share and high and low sales prices per share reported on the Nasdaq Global Market for the periods indicated.

	Common Stock
	High		Low	Dividend
2005
First Quarter	$	3.99	3.66	0.060
Second Quarter	$	4.60	3.67	0.060
Third Quarter	$	5.12	4.12	0.070
Fourth Quarter	$	5.00	4.40	0.070
2006
First Quarter	$	5.55	4.54	0.090
Second Quarter	$	6.58	5.02	0.100
Third Quarter	$	7.98	6.05	0.105
Fourth Quarter	$	7.59	6.39	0.110

(b) Holders

As of March 5, 2007, the approximate number of holders of record of the common stock was 152 and the approximate number of beneficial owners was 4,538.

(c) Dividends

Dividends paid of $.365 during the year ended December 31, 2006 of which $.219 represented ordinary income and $.146 represented a nondividend distribution to shareholders. The 2005 fourth quarter dividend of $.07 was paid in January 2006, and was reported as a component of 2006 dividend payments for income tax purposes. The 2006 fourth quarter dividend of $.11 was paid in January 2007, and will be reported as a component of 2007 dividend payments for income tax purposes. The actual amount of future dividends will be determined by the board of directors based on the actual results of operations, economic conditions, capital expenditure requirements and other factors that the board of directors deems relevant.

25

PERFORMANCE GRAPH

The following graph compares the yearly percentage change in the cumulative total shareholder return on the Company’s common stock for the period December 31, 2001 through December 31, 2006, which the cumulative total return on the SNL securities Hotel REIT Index (“Hotel REITs Index”) and the NASDAQ Composite (“NASDAQ—Total US Index”) for the same period. The Hotel REITs Index is comprised of publicly traded REITs that focus on investments in hotel properties. The NASDAQ Composite is comprised of all United States common shares traded on the NASDAQ Stock Market (previously tiled NASDAQ—Total US). The comparison assumes a starting investment of $100 on December 31, 2001 in the Company’s common stock and in each of the indices shown, and assumes that all dividends are reinvested. The performance graph is not necessarily indicative of future investment performance.

26

Supertel Hospitality, Inc.

	Period Ending
Index	12/31/01	12/31/02	12/31/03	12/31/04	12/31/05	12/31/06
Supertel Hospitality, Inc.	100.00	66.44	164.91	146.02	186.42	294.22
NASDAQ Composite	100.00	68.76	103.67	113.16	115.57	127.58
SNL Hotel REITS Index	100.00	98.65	128.73	170.76	187.50	241.15

Source : SNL Financial LC, Charlottesville, VA

^© 2007

Item 6. Selected Financial Data

The following table sets forth our selected financial information. The selected operating data and balance sheet data have been extracted from our consolidated financial statements for each of the periods presented and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

27

(In thousands, except per share data)	As of and for the Years Ended December 31,
	2006			2005			2004			2003			2002
Operating data (1):
Room rentals and other hotel services (2)	$	77,134		$	60,537		$	57,634		$	57,209		$	58,739
Net earnings (loss) from continuing operations		3,721			2,778			1,299			281			(3,175	)
Discontinued operations		—			—			678			728			178
Net earnings (loss)		3,721			2,778			1,977			1,009			(2,997	)
Preferred stock dividends		(1,215	)		(6	)		—			—			—
Net earnings (loss) available to common shareholders		2,506			2,772			1,977			1,009			(2,997	)
EBITDA (3)		20,883			15,795			13,991			14,841			15,059
FFO (4)		11,189			9,637			7,732			5,418			3,361
Net earnings (loss) per common share from continuing operations - basic		0.20			0.23			0.11			0.02			(0.28	)
Net earnings (loss) per common share from discontinued operations - basic		—			—			0.05			0.06			0.02
Net earnings (loss) per common share basic		0.20			0.23			0.16			0.08			(0.26	)
Net earnings (loss) per common share diluted		0.20			0.23			0.16			0.08			(0.26	)
FFO per share - basic		0.91			0.80			0.64			0.45			0.30
FFO per share - diluted		0.83			0.80			0.64			0.45			0.30
Total assets		202,148			156,956			118,923			124,949			114,260
Total long-term debt		94,878			92,008			71,418			77,611			94,275
Net cash flow:
Provided by operating activities		13,558			10,215			9,123			10,121			2,424
Provided (used) by investing activities		(49,633	)		(32,355	)		(197	)		8,885			17,835
Provided (used) by financing activities		40,348			22,986			(8,912	)		(20,222	)		(23,761	)
Dividends per share (5)		0.405			0.26			0.20			0.17			—
Weighted average number of shares outstanding:
basic		12,261			12,062			12,054			12,045			11,318
diluted for EPS calculation		12,272			12,062			12,054			12,045			11,318
diluted for FFO per share calculation		14,960			12,062			12,054			12,045			11,318
RECONCILIATION OF NET EARNINGS TO EBITDA
Net earnings (loss) available to common shareholders	$	2,506		$	2,772		$	1,977		$	1,009		$	(2,997	)
Interest		8,255			5,959			5,583			6,786			8,748
Income tax benefit		(107	)		(31	)		(275	)		(120	)		840
Depreciation and amortization		8,680			6,863			6,488			6,896			8,210
Minority interest		334			226			218			270			258
Preferred stock dividend		1,215			6			—			—			—
EBITDA (3)	$	20,883		$	15,795		$	13,991		$	14,841		$	15,059
RECONCILIATION OF NET EARNINGS TO FFO
Net earnings (loss) available to common shareholders	$	2,506		$	2,772		$	1,977		$	1,009		$	(2,997	)
Depreciation and Amortization		8,680			6,863			6,488			6,896			8,210
(Gain) loss on disposition of assets		3			2			(733	)		(2,487	)		(1,852	)
FFO (4)	$	11,189		$	9,637		$	7,732		$	5,418		$	3,361

28

(1) Revenues for all periods exclude revenues from hotels sold or classified as held for sale after January 1, 2002, which are classified in discontinued operations in the statements of operations.

(2) Hotel revenues include room and other revenues from the operations of the hotels.

(3) EBITDA is a non-GAAP financial measure. With respect to EBITDA, the Company believes that excluding the effect of non-operating expenses and non-cash charges, all of which are also based on historical cost accounting and may be of limited significance in evaluating current performance, can help eliminate the accounting effects of depreciation and amortization, and financing decisions and facilitate comparisons of core operating profitability between periods and between REITs, even though EBITDA also does not represent an amount that accrues directly to common shareholders.

EBITDA doesn’t represent cash generated from operating activities determined by GAAP and should not be considered as an alternative to net income, cash flow from operations or any other operating performance measure prescribed by GAAP. EBITDA is not a measure of the Company’s liquidity, nor is EBITDA indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions. Neither measurement reflects cash expenditures for long-term assets and other items that have been and will be incurred. EBITDA may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties. To compensate for this, management considers the impact of these excluded items to the extent they are material to operating decisions or the evaluation of the Company’s operating performance.

(4) FFO is a non-GAAP financial measure. We consider FFO to be a market accepted measure of an equity REIT’s operating performance, which is necessary, along with net earnings (loss), for an understanding of our operating results. FFO, as defined under the National Association of Real Estate Investment Trusts (NAREIT) standards, consists of net income computed in accordance with accounting principles generally accepted in the United States of America (“GAAP”), excluding gains (or losses) from sales of real estate assets, plus depreciation and amortization of real estate assets. We believe our method of calculating FFO complies with the NAREIT definition. FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. All REITs do not calculate FFO in the same manner, therefore, our calculation may not be the same as the calculation of FFO for similar REITs. We use FFO as a performance measure to facilitate a periodic evaluation of our operating results relative to those of our peers, who like us, are typically members of NAREIT. We consider FFO a useful additional measure of performance for an equity REIT because it facilitates an understanding of the operating performance of its properties without giving effect to real estate depreciation and amortization, which assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO provides a meaningful indication of our performance.

FFO for 2003 and 2002 includes impairment losses on real estate of $2,069,000, and $2,246,000, respectively. Prior to the third quarter of 2003, we followed a practice of excluding such losses from FFO. However, we revised this practice based on clarification of the SEC staff’s position on the FFO treatment of impairment losses and guidance from NAREIT issued during the third quarter of 2003.

(5) Represents dividends declared by the Company. Dividends paid during the year ended December 31, 2006 ($0.219) represented ordinary income and ($.146) represented nondividend distribution to shareholders. The 2005 fourth quarter dividend ($0.07) was paid in January 2006, and will be reported as a component of 2006 dividend payments for income tax purposes. The 2006 fourth quarter dividend ($0.11) was paid in January 2007, and will be reported as a component of 2007 dividend payments for income tax purposes.

29

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain information both included and incorporated by reference in this management’s discussion and analysis and other sections of this Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on assumptions that management has made in light of experience in the business in which we operate, as well as management’s perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control) and assumptions. Management believes that these forward-looking statements are based on reasonable assumptions.

Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative thereof or other variations thereon or comparable terminology. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and the real estate market specifically, legislative/regulatory changes (including changes to laws governing the taxation of real estate investment trusts), availability of capital, risks associated with debt financing, interest rates, competition, supply and demand for hotel rooms in our current and proposed market areas, policies and guidelines applicable to real estate investment trusts and other risks and uncertainties described herein, and in our filings with the SEC from time to time. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein. We caution readers not to place undue reliance on any forward-looking statements included in this report which speak only as of the date of this report.

Overview

We are a self-administered real estate investment trust (“REIT”), and through our subsidiaries, we own 88 limited service hotels in 19 states. Our hotels operate under several national franchise brands.

Our significant events for 2006 include:

• sale of 7,544,936 shares of common stock at an offering price of $6.70 per share in a public offering commenced in December;

• purchase of 12 additional hotels;

• increase in overall property operating income (POI) and occupancy; growth in average daily rate (ADR) and revenue per available room (RevPAR) for limited service hotels;

• addition of extended stay hotels to the Company’s lodging portfolio; and

• payment of quarterly dividends on the common stock, for a total of $.365 per share in 2006, up from $.24 per share in 2005.

30

Recent Events

The dividend declared by the Board of Directors for the first quarter of 2007 is $.11  ¹/4 , payable April 30, 2007 to shareholders of record on March 30, 2007. The dividend represents a  ¹/4 cent increase from the prior quarter. The Company acquired five additional hotels on January 5, 2007, and as of March 7, 2007, the Company has entered into agreements, subject to customary purchase conditions, to purchase 29 additional limited service hotels.

We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnerships, Supertel Limited Partnership and E&P Financing Limited Partnership, limited partnerships, limited liability companies or other subsidiaries of our operating partnerships. We currently own, indirectly, an approximate 97% general partnership interest in Supertel Limited Partnership and a 100% partnership interest in E&P Financing Limited Partnership.

The discussion that follows is based primarily on our consolidated financial statements as of December 31, 2006 and 2005, and for the years ended December 31, 2006, 2005 and 2004, and should be read along with the consolidated financial statements and related notes.

RevPAR, ADR and Occupancy

The following table presents our revenue per available room (“RevPAR”), average daily rate (“ADR”) and occupancy by state for 2006, 2005 and 2004, respectively. The comparisons from continuing operations include 88, 76 and 69 hotels for 2006, 2005 and 2004, respectively.

	Year ended December 31,
	2006						2005						2004
State	RevPAR		Occ.		ADR		RevPAR		Occ.		ADR		RevPAR		Occ.		ADR
Limited Service:
Arkansas	$	28.23	56.5	%	$	49.98	$	29.24	58.4	%	$	50.05	$	26.32	54.2	%	$	48.56
Delaware		65.47	69.8	%		93.83		61.44	73.5	%		83.58		60.50	79.0	%		76.56
Florida		53.14	61.3	%		86.66		51.96	68.8	%		75.53		51.65	68.2	%		75.68
Indiana [1]		53.40	67.2	%		79.49		37.04	52.7	%		70.25		—	—			—
Iowa		29.90	66.3	%		45.09		27.97	63.4	%		44.10		26.83	63.3	%		42.41
Kansas		31.05	63.0	%		49.29		29.06	61.0	%		47.66		27.86	59.1	%		47.13
Kentucky		36.79	64.0	%		57.46		39.60	64.3	%		61.56		34.54	57.2	%		60.36
Maryland		53.41	59.8	%		89.31		51.74	64.8	%		79.89		47.52	62.7	%		75.79
Missouri		25.95	57.5	%		45.12		24.95	55.4	%		45.07		25.00	55.0	%		45.49
Nebraska		26.52	57.4	%		46.21		23.78	54.5	%		43.63		24.20	57.2	%		42.31
North Carolina		36.71	59.2	%		62.06		35.41	58.6	%		60.41		31.50	55.2	%		57.09
Pennsylvania		46.60	62.5	%		74.59		46.62	65.3	%		71.42		45.59	66.1	%		69.01
South Dakota		28.52	64.3	%		44.34		28.00	61.6	%		45.45		27.83	63.4	%		43.88
Tennessee		36.95	54.3	%		68.06		45.64	73.7	%		61.90		44.41	75.5	%		58.85
Virginia		40.90	68.5	%		59.74		42.81	73.9	%		57.91		37.18	65.0	%		57.19
West Virginia		52.23	79.0	%		66.10		50.51	80.1	%		63.07		48.12	78.9	%		61.03
Wisconsin		35.88	65.9	%		54.48		32.54	59.0	%		55.14		34.64	62.4	%		55.52
Subtotal		36.15	62.9	%		57.46		33.68	62.4	%		54.00		32.64	62.1	%		52.59
Limited Service-Extended Stay:
Georgia [2]		17.03	67.8	%		25.12		—	—			—		—	—			—
South Carolina [2]		14.19	73.9	%		19.20		—	—			—		—	—			—
Subtotal		16.54	68.8	%		24.03		—	—			—		—	—			—
Total Limited Service Portfolio	$	34.92	63.3	%	$	55.18	$	33.68	62.4	%	$	54.00	$	32.64	62.1	%	$	52.59

[1] Acquired in 2005

[2] Extended stay hotels acquired in 2006

31

Our RevPAR, ADR and Occupancy, by franchise affiliation, from continuing operations, for 2006, 2005 and 2004, respectively, were as follows:

	Year ended December 31,
	2006						2005						2004
Flag	RevPAR		Occ.		ADR		RevPAR		Occ.		ADR		RevPAR		Occ.		ADR
Super 8	$	28.27	61.4	%	$	46.03	$	26.82	58.7	%	$	45.72	$	26.68	59.4	%	$	44.95
Comfort Inn/Comfort Suites		46.51	66.2	%		70.23		45.39	69.3	%		65.46		43.55	68.1	%		63.97
Hampton Inn [1]		57.41	70.8	%		81.11		47.04	69.6	%		67.62		45.31	70.6	%		64.15
Holiday Inn Express		48.22	68.2	%		70.68		44.71	64.9	%		68.85		40.17	59.5	%		67.50
Ramada Limited		47.24	65.7	%		71.95		44.87	73.2	%		61.26		40.18	68.3	%		58.80
Guest House Inn		33.91	48.4	%		70.12		35.43	62.0	%		57.16		31.52	58.1	%		54.25
Days Inn		35.99	61.7	%		58.32		35.66	62.9	%		56.67		32.27	58.0	%		55.66
Sleep Inn		50.48	76.7	%		65.85		41.71	77.6	%		53.73		—	—			—
All Others[2]		31.77	42.5	%		74.78		72.62	68.0	%		106.85		85.97	71.0	%		121.11
Subtotal		36.15	62.9	%		57.46		33.68	62.4	%		54.00		32.64	62.1	%		52.59
Savannah Suites [3]		16.54	68.8	%		24.03		—	—			—		—	—			—
Total Portfolio	$	34.92	63.3	%	$	55.18	$	33.68	62.4	%	$	54.00	$	32.64	62.1	%	$	52.59

[1] Hampton Inn numbers for 2005 and 2004 include the Jackson, TN location that was changed to Supertel Inn in 2006

[2} All Others” category for 2006 presents information for five hotels, consisting of the Company’s two Supertel Inn hotels (one Supertel Inn was newly developed and opened for business June 2006), two independent hotels acquired on December 27, 2006, and the Suites of Key Largo Hotel (none of which are affiliated with a national franchise); in 2005 and 2004 the category presents information for one hotel (a hotel which was undergoing extensive renovation in 2006 and renamed Suites of Key Largo).

[3] Extended stay hotels acquired in 2006.

32

Results of Operations

Comparison of the year ended December 31, 2006 to the year ended December 31, 2005

Operating results are summarized as follows for the years ended December 31 (table in thousands):

	2006			2005			Continuing Operations Variance
	Continuing Operations			Continuing Operations
Revenues	$	77,134		$	60,537		$	16,597
Hotel and property operations expenses		(53,591	)		(42,372	)		(11,219	)
Interest expense		(8,255	)		(5,959	)		(2,296	)
Depreciation and amortization expense		(8,680	)		(6,863	)		(1,817	)
General and administrative expenses		(2,842	)		(2,526	)		(316	)
Net losses on dispositions of assets		(3	)		(2	)		(1	)
Other income		185			158			27
Minority interest		(334	)		(226	)		(108	)
Income tax benefit		107			31			76
	$	3,721		$	2,778		$	943

33

Revenues and Operating Expenses

Revenues for 2006 compared to 2005, increased $16.6 million or 27.4%, of which $15.4 million was due to the increase in revenue from acquisitions and $1.2 million was due to the increase in revenue from the same store (stores acquired before January 1, 2005) portfolio. The increase in revenues was also due in part to a 6.4% increase in ADR to $57.46 and a 7.3% increase in RevPAR to $36.15 for the limited service hotels. For the year, the extended stay hotels had ADR of $24.03 and a RevPAR of $16.54. For 2006 compared to 2005, ADR increased 2.2% to $55.18 and RevPAR increased 3.7% to $34.92 for the entire hotel portfolio. The occupancy for all hotels increased 1.4%.

During 2006, hotel and property operations expenses increased $11.2 million, of which $10.3 million was due to the increase in hotel and property operations expenses from new hotel acquisitions and $0.9 million was due to same store, 2006 over 2005.

Interest Expense, Depreciation and Amortization Expense and General and Administration Expense

Interest expense increased by $2.3 million, due primarily to increased debt used for hotel acquisitions. The depreciation and amortization expense increased $1.8 million for 2006 over 2005. This is primarily related to hotel acquisitions as well as asset additions for the same store portfolio outpacing the amount of assets exceeding their useful life. The general and administration expense for 2006 increased $316,000 or 12.5% compared to 2005, this is primarily related to increases in salaries and professional fees.

Income Tax Benefit

The income tax expense (benefit) is related to the taxable earnings (loss) from the Company’s taxable subsidiary, the TRS Lessee. Management believes the federal and state income tax rate for the TRS Lessee will be approximately 40%. The tax benefit is a result of TRS Lessee’s losses for the year ended December 31, 2006 and 2005. The income tax expense (benefit) will vary based on the taxable earnings of the TRS Lessee, a C corporation.

The income tax benefit increased by approximately $76,000 during 2006 compared to the year ago period, due to an increased loss by the TRS Lessee in 2006 compared to the year ago period.

Dispositions

No hotels were sold and no impairment charges were recorded for 2006 and 2005.

Comparison of the year ended December 31, 2005 to the year ended December 31, 2004

Operating results are summarized as follows for the years ended December 31 (table in thousands):

	2005								2004									Continuing Operations Variance
	Continuing Operations			Discontinued Operations		Total			Continuing Operations			Discontinued Operations			Total
Revenues	$	60,537		$	—	$	60,537		$	57,634		$	635		$	58,269		$	2,903
Hotel and property operations expenses		(42,372	)		—		(42,372	)		(41,242	)		(636	)		(41,878	)		(1,130	)
Interest expense		(5,959	)		—		(5,959	)		(5,559	)		(24	)		(5,583	)		(400	)
Depreciation and amortization expense		(6,863	)		—		(6,863	)		(6,418	)		(75	)		(6,493	)		(445	)
General and administrative expenses		(2,526	)		—		(2,526	)		(2,134	)		—			(2,134	)		(392	)
Termination and relocation costs		-			—		—			(1,169	)		—			(1,169	)		1,169
Net gains (losses) on dispositions of assets		(2	)		—		(2	)		(12	)		745			733			10
Other income		158			—		158			175			—			175			(17	)
Minority interest		(226	)		—		(226	)		(218	)		—			(218	)		(8	)
Income tax benefit		31			—		31			242			33			275			(211	)
	$	2,778		$	—	$	2,778		$	1,299		$	678		$	1,977		$	1,479

34

Revenues and Operating Expenses

Revenues increased, from continuing operations, by approximately $2.9 million during 2005, of which $1.6 million was due to acquisition and $1.3 million was due to the increase in revenue from the same store (stores acquired before January 1, 2004) portfolio. The increase in revenue was also due, in part, to an increase in ADR of $1.41 or 2.7% and a 0.5% increase in occupancy, which resulted in a $1.04 or 3.2% increase of RevPAR for the year ended December 31, 2005 compared to the year ago period.

Hotel and property operations expenses from continuing operations increased by approximately $1.1 million during 2005, of which acquisitions increased $1.2 million and same store decreased $.1 million.

Interest Expense, Depreciation and Amortization Expense and General and Administration Expense

Interest expense from continuing operations increased by approximately $400,000, due partially to acquisitions and rising rates. Depreciation expense increased $445,000, primarily due to acquisitions and asset additions outpacing the amount of assets exceeding their useful life. General and administrative cost increased by approximately $392,000, due primarily to increases in payroll/taxes/benefits and consulting fees during 2005.

Termination and Relocation Costs

There were no termination and relocation costs during 2005. The 2004 cost of $1.2 million was a result of termination fees directly related to TRS Lessee terminating its hotel management agreement with Humphrey Hospitality Management (HHM) for $500,000 and agreeing to reimburse HHM for certain employment-related severance costs of approximately $189,000. Additional one-time expenses associated with the termination of the hotel management agreement and a related decision to relocate the corporate offices from Columbia, MD to Norfolk, NE approximated $379,000, which is primarily represented by executive separation agreements, legal and consulting services. In addition, capitalized expenditures for replacement software and computer equipment totaled to approximately $225,000.

Income Tax Benefit

The Income tax expense (benefit) is related to the taxable earnings (loss) from the Company’s taxable subsidiary, the TRS Lessee. Management believes the federal and state income tax rate for the TRS Lessee will be approximately 40%. The tax benefit is a result of TRS Lessee’s losses for the year ended December 31, 2005 and 2004. The income tax expense (benefit) will vary based on the taxable earnings of the TRS Lessee, a C corporation.

The income tax benefit decreased by approximately $211,000 during 2005 compared to the year ago period, due to a reduced loss by the TRS Lessee in 2005 compared to the year ago period.

Dispositions

In 2005 no hotels were sold. In 2004, we recognized net gains on the disposition of assets of approximately $733,000, due primarily to net gains on the sale of five hotels ($745,000, net of built-in gain taxes of $286,000). No impairment charges were recorded for 2005 and 2004.

Liquidity and Capital Resources

Our income and ability to meet our debt service obligations, and make distributions to our shareholders, depends upon the operations of the hotels being conducted in a manner that maintains or increases revenue, or reduces expenses, to generate sufficient hotel operating income for TRS Lessee to pay the hotels’ operating expenses, including management fees and rents to us. We depend on rent payments from TRS Lessee to pay our operating expenses and debt service and to make distributions to shareholders.

We expect to meet our short-term liquidity requirements generally through borrowings on our revolving credit facility with Great Western Bank and net cash provided by operations. We believe that our available borrowing capacity and net cash provided by operations will be adequate to fund both operating requirements and the payment of dividends in accordance with REIT requirements.

35

We expect to meet our long-term liquidity requirements, such as scheduled debt maturities, through long-term secured and unsecured borrowings and the issuance of additional securities.

Financing

At December 31, 2006, we had long-term debt of $94.9 million consisting of notes and mortgages payable, with a weighted average term to maturity of 7.0 years and a weighted average interest rate of 7.28%. Aggregate annual principal payments for the next five years and thereafter are as follows (in thousands):

2007	$	2,656
2008		2,896
2009		15,805
2010		2,876
2011		3,090
Thereafter		67,555
	$	94,878

We have no notes or mortgages coming due in 2007. The maturities in 2007, of approximately $2.7 million, consist of principal amortization on mortgage loans which we expect to fund through cash flow from operations.

We file quarterly loan compliance certificates with certain of our lenders. As of December 31, 2006, we were in compliance with all loan covenants.

As of September 30, 2004 we requested and received a loan-to-value and a debt service ratio waiver with respect to a term loan with First National Bank of Omaha N.A. which, on September 30, 2006, was extended through the maturity of the loan, November 1, 2009. The bank agreed that the loan-to-value ratio will be determined using a capitalization rate of 11% for valuing the hotels and the debt service coverage ratio will be 1.35:1. As of December 31, 2006, we were in compliance with the covenants under this term loan, as so modified.

If we fail to pay our indebtedness when due, or fail to comply with covenants, we could incur higher interest rates during the period of such loan defaults, and could ultimately lose the hotels through lender foreclosure.

On February 22, 2007, we entered into a Second Amendment to Loan Agreement with Great Western Bank which amends the Loan Agreement dated January 13, 2005 between the parties by: (a) increasing the loan limit from $20 million to $34 million; (b) increasing the loan to value ratio component of the borrowing base and related covenants from 60% to 65%; (c) decreasing the interest rate 75 basis points to prime minus .75%; and (d) extending the maturity date from January 13, 2008 to February 22, 2009.

We sold 7,544,936 shares of our common stock at an offering price of $6.70 per share in a public offering commenced in December 2006. We sold 1,521,258 shares of our Series A Convertible Preferred Stock at an offering price of $10.00 per share in a public offering in December 2005.

Acquisition of Hotels

The Company acquired a 40-room Super 8 hotel located in Clarinda, Iowa, in January 2006. The purchase price of approximately $1.3 million was funded by borrowings from the Company’s existing credit facilities with Great Western Bank.

36

The Company acquired a 145-room Comfort Inn Conference Center in Erlanger, Kentucky, located near the Cincinnati/Northern Kentucky International Airport, in May 2006. The purchase price of approximately $3.4 million was funded by borrowings from the Company’s existing credit facilities with Great Western Bank.

The Company opened its 41 room Supertel Inn and Conference Center in Creston, Iowa in June 2006. The Conference Center has a capacity of approximately 200 people. This facility was funded by borrowings from the Company’s existing credit facilities with Great Western Bank.

The Company acquired seven Savannah Suites extended-stay hotels with a total of 1,098 rooms in acquisitions completed in August and November 2006. Six of the hotels are located in Georgia and one in South Carolina. The purchase price was approximately $33.3 million, which we financed with borrowings from a new term loan, a new bridge loan and our existing credit facilities.

In December 2006 the Company acquired two independent hotels in Jane and Neosho, Missouri, with a total of 92 rooms. The purchase price of approximately $4.136 million was funded by borrowings from the Company’s existing credit facilities.

In November 2006, we entered into an agreement to acquire four Super 8 hotels and one Comfort Inn hotel, having an aggregate of 468 rooms. The purchase was completed in January 2007 for a purchase price of $24 million, which we financed with borrowings under a new term loan and our existing credit facilities.

As of March 2007, we have entered into agreements to purchase 29 limited service hotels, subject to customary purchase conditions, for an aggregate purchase price of approximately $102 million. We intend to fund the acquisitions from existing credit facilities and new borrowings to be negotiated.

Disposition of Hotels

During 2006 no hotels were sold and as of December 31, 2006 there were no hotels classified as held for sale.

Redemption of Preferred Operating Partnership Units

We own, through our subsidiary, Supertel Hospitality REIT Trust, an approximate 97% general partnership interest in Supertel Limited Partnership, through which we own 32 of our hotels. We are the sole general partner of the limited partnership, and the remaining approximate 3% is held by limited partners who hold, as of December 31, 2006, 372,195 common operating partnership units and 195,610 preferred operating partnership units. Each limited partner of Supertel Limited Partnership may, subject to certain limitations, require that Supertel Limited Partnership redeem all or a portion of his or her common or preferred units, at any time after a specified period following the date he or she acquired the units, by delivering a redemption notice to Supertel Limited Partnership. When a limited partner tenders his or her common units to the partnership for redemption, we can, in our sole discretion, choose to purchase the units for either (1) a number of our shares of common stock equal to the number of units redeemed (subject to certain adjustments) or (2) cash in an amount equal to the market value of the number of our shares of common stock the limited partner would have received if we chose to purchase the units for common stock. We anticipate that we generally will elect to purchase the common units for common stock. The preferred units are convertible by the holders into common units on a one-for-one basis or may be redeemed for cash at $10 per unit until October 2009. The preferred units receive a preferred dividend distribution of $1.10 per preferred unit annually, payable on a monthly basis and do not participate in the allocations of profits and losses of Supertel Limited Partnership. There were no common operating partnership units or preferred operating partnership units converted during the year ended December 31, 2006.

37

Contractual Obligations

Below is a summary of certain obligations that will require capital (in thousands) as of December 31, 2006:

Contractual Obligations	Total		Less Than						More than
			1 Year		1-3 Years		3-5 Years		5 Years
Long-term debt, including interest	$	136,225	$	9,532	$	31,516	$	16,109	$	79,068
Land leases		3,601		60		120		139		3,282
Total contractual obligations	$	139,826	$	9,592	$	31,636	$	16,248	$	82,350

We have various standing or renewable contracts with vendors. These contracts are all cancelable with immaterial or no cancellation penalties. Contract terms are generally one year or less. We also have a management agreement with Royco Hotels for the management of our hotel properties.

Other

To maintain our REIT tax status, we generally must distribute at least 90% of our taxable income to our shareholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws. We have a general dividend policy of paying out approximately 100% of annual REIT taxable income. The actual amount of any future dividends will be determined by the Board of Directors based on our actual results of operations, economic conditions, capital expenditure requirements and other factors that the Board of Directors deems relevant.

Off Balance Sheet Financing Transactions

We have not entered into any off balance sheet financing transactions.

Critical Accounting Policies

Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex or subjective judgments. We have identified the following principal accounting policies that have a material effect on our consolidated financial statements:

Impairment of assets

If events or changes in circumstances indicate that the carrying value of a hotel property to be held and used may be impaired, a recoverability analysis is performed based on estimated undiscounted cash flows to be generated from the property in the future. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property is written down to estimated fair value and an impairment loss is recognized. If a decision is made to sell a hotel property, we evaluate the recoverability of the carrying amount of the asset. If the evaluation indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written down to estimated fair value less costs to sell and an impairment loss is recognized. Estimates of cash flows and fair values of the properties are based on current market conditions and consider matters such as revenues and occupancies for the properties, recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. The estimates are subject to revision as market conditions and management’s assessment of them change. If we misjudge or estimate incorrectly, we may record an impairment charge that is inappropriate or fail to record a charge when we should have done so, and the amount of these charges may be inaccurate.

38

Acquisition of Hotel Properties

Upon acquisition, the Company allocates the purchase price of asset classes based on the fair value of the acquired real estate, furniture, fixtures and equipment, and intangible assets, if any. The Company’s investments in hotel properties are carried at cost and are depreciated using the straight-line method over an estimated useful life of 30 to 40 years for buildings, 15 years for building improvements, and five to twelve years for furniture, fixtures and equipment. Renovations and/or replacements that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives.

The Company is required to make subjective assessments as to the useful lives and classification of its properties for purposes of determining the amount of depreciation expense to reflect each year with respect to those properties. These assessments have a direct impact on the Company’s net income. Should the Company change the expected useful life or classification of particular assets, it would result in a change in depreciation expense and annual net income.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Market Risk Information

The market risk associated with financial instruments and derivative financial or commodity instruments is the risk of loss from adverse changes in market prices or rates. Our market risk arises primarily from interest rate risk relating to variable rate borrowings. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows. In order to achieve this objective, we rely primarily on long-term, fixed rate non-recourse loans from institutional lenders to finance our hotels. We are not currently using derivative financial or commodity instruments to manage interest rate risk.

Management monitors our interest rate risk closely. The table below presents the annual maturities, weighted average interest rates on outstanding debt at the end of each year and fair values required to evaluate the expected cash flows under debt and related agreements, and our sensitivity to interest rate changes at December 31, 2006. Information relating to debt maturities is based on expected maturity dates and is summarized as follows (in thousands):

	2007			2008			2009			2010			2011			Thereafter			Total			Fair Value
Fixed Rate Debt	$	2,516		$	2,698		$	15,368		$	2,122		$	2,278		$	46,084		$	71,066		$	74,956
Average Interest Rate		7.32	%		7.31	%		7.26	%		7.03	%		7.03	%		6.54	%		7.06	%		—
Variable Rate Debt	$	140		$	198		$	437		$	754		$	812		$	21,471		$	23,812		$	25,587
Average Interest Rate		7.50	%		7.50	%		7.50	%		7.50	%		7.50	%		7.10	%		7.38	%		—

As the table incorporates only those exposures that exist as of December 31, 2006, it does not consider exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations would depend on the exposures that arise after December 31, 2006.

39

Item 8. Financial Statements and Supplementary Data

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	41
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2005	42
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004	43
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004	44
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004	45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	46
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION	70
NOTES TO SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION	75

Supplementary information required by this Item is presented in Item 6.

40

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Supertel Hospitality, Inc.:

We have audited the consolidated balance sheets of Supertel Hospitality, Inc. and subsidiaries (the Company) as of December 31, 2006 and 2005 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule III. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Supertel Hospitality, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule III, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

	KPMG LLP
Omaha, Nebraska
March 22, 2007

41

Supertel Hospitality, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	As of
	December 31, 2006			December 31, 2005
ASSETS
Investments in hotel properties	$	254,241		$	205,169
Less accumulated depreciation		63,509			55,399
		190,732			149,770
Cash and cash equivalents		5,436			1,163
Accounts receivable		1,332			1,252
Prepaid expenses and other assets		3,116			2,999
Deferred financing costs, net		1,532			1,772
	$	202,148		$	156,956
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Accounts payable, accrued expenses and other liabilities	$	8,905		$	7,937
Long-term debt		94,878			92,008
		103,783			99,945
Minority interest in consolidated partnerships		3,528			3,560
SHAREHOLDERS’ EQUITY
Preferred stock, $.01 par value, 10,000,000 shares authorized; 1,515,258 shares issued and outstanding, liquidation preference of $15,153		15			15
Preferred stock warrants		53			53
Common stock, $.01 par value, 25,000,000 shares authorized; 19,074,903 and 12,064,283 outstanding		191			121
Additional paid-in capital		109,319			65,621
Distributions in excess of retained earnings		(14,741	)		(12,359	)
		94,837			53,451
COMMITMENTS AND CONTINGENCIES
	$	202,148		$	156,956

See accompanying notes to consolidated financial statements.

42

Supertel Hospitality, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Years ended December 31,
	2006			2005			2004
REVENUES
Room rentals and other hotel services	$	77,134		$	60,537		$	57,634
EXPENSES
Hotel and property operations		53,591			42,372			41,242
Depreciation and amortization		8,680			6,863			6,418
General and administrative		2,842			2,526			2,134
Termination and relocation costs		—			—			1,169
		65,113			51,761			50,963
EARNINGS BEFORE NET LOSSES ON DISPOSITIONS OF ASSETS, OTHER INCOME, INTEREST, MINORITY INTEREST, INCOME TAX BENEFIT AND DISCONTINUED OPERATIONS		12,021			8,776			6,671
Net losses on dispositions of assets		(3	)		(2	)		(12	)
Other income		185			158			175
Interest		(8,255	)		(5,959	)		(5,559	)
Minority interest		(334	)		(226	)		(218	)
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		3,614			2,747			1,057
Income tax benefit		(107	)		(31	)		(242	)
EARNINGS FROM CONTINUING OPERATIONS		3,721			2,778			1,299
DISCONTINUED OPERATIONS
Net loss from discontinued operations net of income tax benefit		—			—			(67	)
Gain on sale of discontinued operations, net of income taxes		—			—			745
Income from discontinued operations		—			—			678
NET EARNINGS		3,721			2,778			1,977
Preferred stock dividend		(1,215	)		(6	)		—
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS	$	2,506		$	2,772		$	1,977
NET EARNINGS PER COMMON SHARE - BASIC AND DILUTED:
Continuing operations	$	0.20		$	0.23		$	0.11
Discontinued operations		—			—			0.05
Net earnings	$	0.20		$	0.23		$	0.16

See accompanying notes to consolidated financial statements.

43

Supertel Hospitality, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except per share data)

	Years ended December 31, 2006, 2005 and 2004
	Preferred Stock		Preferred Stk Warrants		Common Stock		Additional Paid-In Capital		Distributions in Excess of Retained Earnings			Total
Balance at December 31, 2003	$	—	$	—	$	120	$	51,498	$	(11,559	)	$	40,059
Conversion of operating partnership units to common stock		—		—		1		87		—			88
Common dividends - $.20 per share		—		—		—		—		(2,412	)		(2,412	)
Net earnings		—		—		—		—		1,977			1,977
Balance at December 31, 2004	$	—	$	—	$	121	$	51,585	$	(11,994	)	$	39,712
Conversion of operating partnership units to common stock		—		—		—		41		—			41
Common dividends - $.26 per share		—		—		—		—		(3,137	)		(3,137	)
Preferred stock offering		15		53		—		13,995		—			14,063
Preferred dividends		—		—		—		—		(6	)		(6	)
Net earnings		—		—		—		—		2,778			2,778
Balance at December 31, 2005	$	15	$	53	$	121	$	65,621	$	(12,359	)	$	53,451
Deferred compensation		—		—		—		69		—			69
Common dividends - $.405 per share		—		—		—		—		(4,888	)		(4,888	)
Common stock offering		—		—		70		43,629		—			43,699
Preferred dividends		—		—		—		—		(1,215	)		(1,215	)
Net earnings		—		—		—		—		3,721			3,721
Balance at December 31, 2006	$	15	$	53	$	191	$	109,319	$	(14,741	)	$	94,837

See accompanying notes to consolidated financial statements.

44

Supertel Hospitality, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	December 31,
	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	3,721		$	2,778		$	1,977
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		8,668			6,851			6,488
Amortization of intangible assets and deferred financing costs		341			379			228
Net (gains) losses on dispositions of assets		3			2			(733	)
Amortization of stock option expense		69			—			—
Write-off of assets related to relocation costs		—			—			91
Imputed interest on notes payable		155			(155	)		—
Minority interest		334			226			218
Changes in operating assets and liabilities:
(Increase) decrease in assets		(209	)		(1,761	)		251
Increase (decrease) in liabilities		476			1,895			603
Net cash provided by operating activities		13,558			10,215			9,123
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to hotel properties		(5,623	)		(6,363	)		(3,923	)
Acquisition and development of hotel properties		(44,015	)		(25,998	)		—
Proceeds from sale of hotel assets		5			6			3,726
Net cash used by investing activities		(49,633	)		(32,355	)		(197	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs		(89	)		(580	)		(88	)
Principal payments on long-term debt		(11,910	)		(9,137	)		(17,233	)
Proceeds from long-term debt		14,625			22,952			11,040
Redemption of operating partnership units		—			(1,174	)		—
Distributions to minority partners		(351	)		(215	)		(219	)
Preferred stock offering		—			14,063			—
Common stock offering		43,699			—			—
Dividends paid		(5,626	)		(2,923	)		(2,412	)
Net cash provided (used) by financing activities		40,348			22,986			(8,912	)
Increase in cash and cash equivalents		4,273			846			14
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		1,163			317			303
CASH AND CASH EQUIVALENTS, END OF YEAR	$	5,436		$	1,163		$	317
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized	$	7,664		$	5,203		$	5,906
Income taxes paid		—			—			—
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends declared	$	6,103		$	3,143		$	2,412
Conversion of operating partnership units	$	—		$	41		$	88
Issuance of operating partnership units	$	—		$	2,793		$	—
Assumed debt from Wells Fargo on Sleep Inn	$	—		$	807		$	—
Assumed debt from GE on South Bend	$	—		$	6,123		$	—

See accompanying notes to consolidated financial statements.

45

Supertel Hospitality, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Note 1. Organization and Summary of Significant Accounting Policies

Description of Business

Supertel Hospitality, Inc. (SHI) was incorporated in Virginia on August 23, 1994. SHI is a self-administered real estate investment trust (REIT) for Federal income tax purposes.

SHI, through its wholly owned subsidiaries, Supertel Hospitality REIT Trust and E&P REIT Trust (collectively, the “Company”) owns a controlling interest in Supertel Limited Partnership (“SLP”) and E&P Financing Limited Partnership (“E&P LP”). All of the Company’s interests in 82 properties with the exception of furniture, fixtures and equipment held by TRS Leasing, Inc. are held directly or indirectly by E&P LP, SLP or Solomons Beacon Inn Limited Partnership (SBILP) (collectively, the “Partnerships”). The Company’s interest in six properties are held directly by either SPPR-Hotels, LLC (SHLLC) or SPPR-South Bend, LLC (SSBLLC). SHI is the sole general partner in SLP and at December 31, 2006, owned approximately 97% of the Units in SLP. SLP is the general partner in SBILP. At December 31, 2006, SLP and SHI owned 99% and 1% interests in SBILP, respectively, and SHI owned 100% of Supertel Hospitality Management, Inc and SPPR Holdings, Inc. (SPPRHI). SLP and SPPRHI owned 99% and 1% of SHLLC, respectively, and SLP owned 100% of SSBLLC.

As of December 31, 2006, the Company, through the Partnerships, owned 81 limited service hotels and 7 extended stay hotels (the “hotels”) and one office building. The hotels are leased to the Company’s wholly owned taxable REIT subsidiary, TRS Leasing, Inc, and its wholly owned subsidiaries TRS Subsidiary, LLC and SPPR TRS Subsidiary, LLC (collectively “TRS Lessee”), and were managed by Humphrey Hospitality Management, Inc. and its wholly owned subsidiary, Supertel Hospitality Management, Inc. (“SHMI”) (collectively “HHM”), through July 31, 2004 at which time the contract with HHM was terminated. Effective August 1, 2004, the TRS Lessee entered into a new hotel management agreement with Royco Hotels Inc (Royco Hotels) formerly known as Royal Host Management Inc. The agreement with Royco Hotels provided for a base management fee representing 4.75% and 4.00% of hotel revenue, on 78 and 10 hotels, respectively.

The hotel management agreement with Royco Hotels was amended effective January 1, 2007. The amendment, among other things, provides for: (a) the amendment of the base management fee calculation so that the base management fee is reduced as a percentage of gross hotel revenue (ranging from 4.25% to 3.0%) as revenues increase above certain thresholds; (b) the automatic extension of the term of the management agreement for five years (unless Royco Hotels elects otherwise) in the event of a specified return on Supertel’s hotel investment for the four years ended December 31, 2010; (c) an increase in the termination fee payable to Royco Hotels under certain circumstances equal to the greater of (i) $3.6 million less an amount equal to $.1 million multiplied by the number of months after December 31, 2006 preceding the month of termination or (ii) 50% of the base management fee paid to Royco Hotels during the twelve months prior to notice of termination; and (d) the base compensation of Royco Hotels district managers to be included in the operating expenses paid by TRS Lessee.

For the year ended 2003 and through July 31, 2004, James I. Humphrey, Jr., the sole shareholder of HHM, was a director of the Company. Paul Schulte, the Company’s Chairman of the Board, served as President of SHMI for an annual compensation package of one dollar ($1.00) through the year ended December 31, 2003 and for the period ended July 31, 2004. No other member of the Company’s board had a financial interest in HHM.

Effective August 2004, SHMI was acquired by SHI.

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Note 1. Organization and Summary of Significant Accounting Policies (continued)

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Partnerships and the TRS Lessee. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 consolidated financial statements and revenues and expenses recognized during the reporting period. The significant estimates pertain to impairment analysis and allocation of purchase price (SFAS No. 141). Actual results could differ from those estimates.

Capitalization Policy

Acquisition, development and construction costs of properties in development are capitalized including, where applicable, direct and indirect costs, including real estate taxes and interest costs. Development and construction costs and costs of significant improvements, replacements, renovations to furniture and equipment expenditures for hotel properties are capitalized while costs of maintenance and repairs are expensed as incurred.

Deferred Financing Cost

Direct costs incurred in financing transactions are capitalized as deferred costs and amortized to interest cost over the term of the related loan using the effective interest method.

Investment in Hotel Properties

Upon acquisition, the Company allocates the purchase price of assets to asset classes based on the fair value of the acquired real estate, furniture, fixtures and equipment, and intangible assets, if any. The Company’s investments in hotel properties are carried at cost and are depreciated using the straight-line method over an estimated useful life of 20 to 40 years for buildings and five to twelve years for furniture, fixtures and equipment.

The Company periodically reviews the carrying value of each hotel to determine if circumstances exist indicating impairment to the carrying value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel to reflect the hotel at fair value. The Company does not believe that there are any facts or circumstances indicating impairment in the carrying value of any of its hotels.

In accordance with the provisions of Financial Accounting Standards Board Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” a hotel is considered held for sale when a contract for sale is entered into, a substantial, non refundable deposit has been committed by the purchaser, and sale is expected to occur within one year. Depreciation of these properties is discontinued at that time, but operating revenues, other operating expenses and interest continue to be recognized until

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Note 1. Organization and Summary of Significant Accounting Policies (continued)

the date of sale. Revenues and expenses of properties that are classified as held for sale or sold are presented as discontinued operations for all periods presented in the statements of operations if the properties will be or have been sold on terms where the Company has limited or no continuing involvement with them after the sale. If active marketing ceases or the properties no longer meet the criteria to be classified as held for sale, the properties are reclassified as operating and measured at the lower of their (a) carrying amount before the properties were classified as held for sale, adjusted for any depreciation expense that would have been recognized had the properties been continuously classified as operating or (b) their fair value at the date of the subsequent decision not to sell.

Gains from sales of hotel properties are recognized using the full accrual method provided that various criteria relating to the terms of the transactions and any subsequent involvement by the Company with the properties sold are met. Gains relating to the transactions that do not meet the established criteria are deferred and recognized when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances.

Cash and Cash Equivalents

Cash and cash equivalents include cash and various highly liquid investments with original maturities of three months or less when acquired, and are carried at cost which approximates fair value.

Revenue Recognition

Revenues from the operations of the hotel properties are recognized when earned.

Reclassification

Certain 2005 and 2004 financial statement accounts have been reclassified to conform with 2006 presentations.

Recently Issued Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. (“FIN 48”), Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109 . FIN 48 clarifies the accounting for uncertainty in income taxes by creating a framework for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions that they have taken or expect to take in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006 and was required to be adopted by the Company beginning January 1, 2007. The Company does not believe adoption will have a material impact on the Company’s results of operations or financial position.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Market Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures required for fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. SFAS 157 is effective for the Company on a prospective basis for the reporting period beginning January 1, 2008. The Company does not believe adoption will have a material impact on the Company’s results of operations or financial position.

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Note 1. Organization and Summary of Significant Accounting Policies (continued)

In September 2006, the Securities and Exchange Commission staff published Staff Accounting Bulletin (“SAB”) 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how prior year misstatements should be considered when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. The adoption of SAB 108 did not have a material impact on the Company’s results of operations or financial position.

Income Taxes

The Company qualifies and intends to continue to qualify as a REIT under applicable provisions of the Internal Revenue Code, as amended. In general, under such Code provisions, a trust which has made the required election and, in the taxable year, meets certain requirements and distributes to its shareholders at least 90% of its REIT taxable income will not be subject to Federal income tax to the extent of the income which it distributes. Earnings and profits, which determine the taxability of dividends to shareholders, differ from net income reported for financial reporting purposes due primarily to differences in depreciation of hotel properties for Federal tax purposes. Except with respect to the TRS Lessee, the Company does not believe that it will be liable for significant Federal or state income taxes in future years.

Deferred income taxes relate primarily to the TRS Lessee and are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of the TRS Lessee and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors.

Under the REIT Modernization Act (“RMA”), which became effective January 1, 2001, the Company is permitted to lease its hotels to one or more wholly owned taxable REIT subsidiaries (“TRS”) and may continue to qualify as a REIT provided that the TRS enters into management agreements with an “eligible independent contractor” that will manage the hotels leased by the TRS. The Company formed the TRS Lessee and, effective January 1, 2002, the TRS Lessee leased all of the hotel properties. The TRS Lessee is subject to taxation as a C-Corporation. The TRS Lessee has incurred operating losses for financial reporting and Federal income tax purposes for 2006, 2005 and 2004.

In October 1999, the Company and the old Supertel Hospitality, Inc., merged and the Company was the surviving entity. In 2005, the Company changed its name to Supertel Hospitality, Inc. In connection with its election to be taxed as a REIT, the Company has elected to be subject to the “built-in gain” rules. Under these rules, taxes may be payable at the time and to the extent that the net unrealized gains on assets acquired in a 1999 merger with the old Supertel are recognized in taxable dispositions of such assets in the subsequent ten-year period. This ten-year period expires October 2009. The Company had no built-in gains taxes in 2006 and 2005. The Company recognized built-in gains taxes of $286 due to dispositions of properties in 2004.

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Supertel Hospitality, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Note 1. Organization and Summary of Significant Accounting Policies (continued)

Financial Instruments

Fair values of financial instruments approximate their carrying values in the financial statements, except for long-term debt for which fair value information is presented in Note 5.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of any dilutive potential common shares outstanding during the period, if any. The weighted average number of shares used in the basic EPS computation for 2006, 2005 and 2004 were 12,260,836, 12,062,351, and 12,054,466, respectively, and for diluted EPS were 12,271,782, 12,062,351 and 12,054,466, respectively.

At December 31, 2006, 2005, and 2004 there were 372,195, 372,195 and 9,713, respectively of SLP common operating units outstanding. These units have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts allocated to the common unit holders (whose units are convertible on a one-to-one basis to common shares) since their share of income would be added back to income. In addition, the 195,610 shares of SLP preferred operating units are antidilutive.

At December 31, 2006 and 2005, there were 1,515,258 and 1,521,258 shares, respectively, of Series A Convertible Preferred Stock. The preferred stock warrants outstanding as of December 31, 2006 and 2005, were 126,311 for each year. Effective July 21, 2006, 6,000 shares of Series A convertible Preferred Stock was converted to 10,620 shares of Common Stock. The shares of Series A convertible Preferred Stock, after adjusting the numerator and denominator for the basic EPS computation, are antidilutive for the year ended December 31, 2006 and 2005, for the earnings per share computation. The exercise price of the preferred stock warrants exceeded the market price of the common stock, and therefore these shares were excluded from the computation of diluted earnings per share. See additional information regarding preferred stock and warrants in Note 8.

The potential common shares represented by outstanding stock options for the year ended December 31, 2006 totaled 100,000 of which 89,054 shares are assumed to be purchased with proceeds from the exercise of stock options resulting in 10,946 shares that are dilutive.

Stock-Based Compensation

Upon initial issuance of stock options on May 25, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), “Share-Based Payments,” which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values.

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Supertel Hospitality, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Note 1. Organization and Summary of Significant Accounting Policies (continued)

Minority Interest

Minority interest in the operating partnership represents the limited partners’ proportionate share of the equity in the operating partnership. During 2006, 2005, and 2004, respectively, 0, 4,434 and 10,479 units of limited partnership interest were redeemed by unit holders. At December 31, 2006, the aggregate partnership interest held by the limited partners in the operating partnership was approximately 3.00%. Income is allocated to minority interest based on the weighted average percentage ownership throughout the year. The limited partner’s common operating units were increased by 0 and 366,916 in 2006 and 2005, respectively. See additional information regarding operating partnership units in Note 8.

Concentration of Credit Risk

The Company maintained a major portion of its deposits with Great Western Bank, a Nebraska Corporation at December 31, 2006 and 2005. The balance on deposit at Great Western Bank exceeded the federal deposit insurance limit; however, management believes that no significant credit risk exists with respect to the uninsured portion of this cash balance.

Note 2. Acquisitions and Development

The Company acquired a 40-room Super 8 hotel located in Clarinda, Iowa, in January 2006. The purchase price of approximately $1.3 million was funded by borrowings from the Company’s existing credit facilities with Great Western Bank.

The Company acquired a 145-room Comfort Inn Conference Center in Erlanger, Kentucky, located near the Cincinnati/Northern Kentucky International Airport, in May 2006. The purchase price of approximately $3.4 million was funded by borrowings from the Company’s existing credit facilities with Great Western Bank.

The Company opened its 41 room Supertel Inn and Conference Center in Creston, Iowa in June 2006. The Conference Center has a capacity of approximately 200 people. This facility was funded by borrowings from the Company’s existing credit facilities with Great Western Bank.

The Company acquired seven Savannah Suites extended-stay hotels with a total of 1,098 rooms in acquisitions completed in August and November 2006. Six of the hotels are located in Georgia and one in South Carolina. The purchase price was approximately $33.3 million, which the Company financed with borrowings from a new term loan, a new bridge loan and existing credit facilities.

In December 2006 the Company acquired two independent hotels in Jane and Neosho, Missouri, with a total of 92 rooms. The purchase price of approximately $4.136 million was funded by borrowings from the Company’s existing credit facilities.

All of the hotels acquired in 2006 were considered to be compatible with the Company’s overall hotel business strategy.

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

The results of the acquired properties’ operations have been included in the consolidated financial statements since their dates of acquisition.

The following summarizes the estimated fair value of the assets acquired for the seven Savannah Suites hotels as of the dates of their acquisition.

Land	$	5,800
Building		24,274
Furniture, fixtures & equipment		1,384
Leasehold interest		1,865
Total assets acquired	$	33,323

The investment in properties represents the estimated fair value of the hotel properties based on the purchase price.

The following unaudited pro forma financial data gives effect to our acquisition of six hotels from Independent Property Operators of America, LLC (IPOA) which occurred in November, 2005, and to the acquisition of seven Savannah Suites hotels, which were the only significant 2006 acquisitions presentation of financial data, occurred in August and November of 2006.

The unaudited pro forma financial data for the year ended December 31, 2006 is presented as if the acquisition of the seven hotels from Savannah Suites had occurred on January 1, 2006. The unaudited pro forma financial data for the year ended December 31, 2005 is presented as if the acquisitions of the six IPOA hotels and the seven Savannah Suites hotels had occurred on January 1, 2005.

The unaudited pro forma financial data does not purport to represent what the Company’s results of operations would actually have been if the transactions had in fact occurred on the dates discussed above. They also do not project or forecast the Company’s results of operations or any future date or period.

	Year Ended December 31,
	2006 Pro Forma Consolidated		2005 Pro Forma Consolidated
Revenues	$	82,536	$	78,193
Earnings from continuing operations	$	3,317	$	2,853
Net earnings	$	3,424	$	2,884
Net earnings per share-basic and diluted	$	0.18	$	0.24

The information presented represents the activity for these acquired properties from and including January 1, for the periods presented to, but not including, the date of our acquisition.

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

The year ended December 31, 2006 pro forma financial data reflects the following adjustments for the seven Savannah Suites hotels. The year ended December 31, 2005 pro forma financial data reflects the following adjustments for the IPOA and Savannah Suites acquisitions:

• hotel operating expenses reflect the cost reductions resulting from reduced management fees and insurance expense;

• deprecation expense is adjusted for acquired depreciable basis; and

• interest expense includes the additional interest and amortization of deferred financing costs.

Note 3. Investments in Hotel Properties

Investments in hotel properties consisted of the following at December 31:

	2006		2005
Land	$	31,099	$	21,514
Buildings and improvements		181,731		147,082
Furniture and equipment		40,951		35,534
Construction-in-progress		460		1,039
		254,241		205,169
Less accumulated depreciation		63,509		55,399
	$	190,732	$	149,770

Note 4. Discontinued Operations

In accordance with SFAS 144, gains, losses and impairment losses on hotel properties sold or classified as held for sale on or after January 1, 2004 are presented in discontinued operations.

In 2006 and 2005, the Company did not sell any hotels. In 2004, the Company recognized net gains on the sale of five hotels of approximately $745, net of built-in gain taxes of $286.

In 2006, 2005 and 2004, no impairment charges were recorded.

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

The operating results of hotel properties included in discontinued operations are summarized as follows:

	2004
Revenues	$	635
Hotel and property operations expenses		(636	)
Interest expense		(24	)
Depreciation and amortization expense		(75	)
Net gain on dispositions of assets		745
Income tax benefit		33
	$	678

Note 5. Long-Term Debt

Long-term debt consisted of the following notes and mortgages payable at December 31:

	2006		2005
Mortgage loan payable to Regions Bank, N.A., evidenced by a promissory note dated August 5, 1998, in the amount of $3 million. The note bears interest during a five-year period beginning August 2003 at 4.875% per annum and thereafter during the remaining term at a rate equal to 250 basis points over the index rate as defined in the promissory note. The interest rate will be adjusted every fifth anniversary. Monthly principal and interest payments are payable through maturity on August 5, 2018, at which point the remaining principal and accrued interest are due.	$	2,197	$	2,334
Mortgage loan payable to Susquehanna Bank, evidenced by a promissory note dated February 8, 1999, in the amount of approximately $5 million. The note bears interest at 7.75% per annum. Monthly principal and interest payments are payable through maturity on February 8, 2009, at which point the remaining principal and accrued interest are due.	$	4,398	$	4,506
Mortgage loan payable to Greenwich Capital Financial Products, Inc. (“Greenwich”), evidenced by a promissory note dated November 26, 2002, in the amount of $40 million. The note bears interest at 7.50% per annum. Monthly principal and interest payments are payable through maturity on December 1, 2012, at which point the remaining principal and accrued interest are due.	$	36,166	$	37,238
Mortgage loan payable to First National Bank of Omaha evidenced by a promissory note in the amount of $15 million dated October 20, 1999. The note bears interest at 8.4% per annum. Monthly principal and interest payments are payable through maturity on November 1, 2009, at which point the remaining principal and accrued interest are due.	$	10,657	$	11,283

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Mortgage loans payable to First Citizens National Bank evidenced by promissory notes totaling approximately $1 million. The loan obligations were assumed on October 19, 2000 in conjunction with the acquisition of hotel assets. The sole remaining note bears interest at 7.14% per annum. Principal and interest payments are due in monthly installments, with the note maturing on July 20, 2012.	$	411	$	457
Mortgage loans payable to Small Business Administration evidenced by promissory notes in the aggregate amounts of approximately $0.9 million. The loan obligations were assumed on October 23, 2000, October 19, 2000 and October 20, 2000, respectively, in conjunction with the acquisition of hotel assets. The notes bear interest at 8.12%, 8.95%, and 6.71% per annum, respectively. Principal and interest payments are due in monthly installments to January 1, 2017, December 11, 2011 and May 1, 2013, respectively. Two notes were paid off with the remaining maturity of May 1, 2013.	$	150	$	169
Loan payable to Village Bank formerly known as Southern Community Bank & Trust evidenced by a promissory note in the amount of $2.7 million dated November 1, 2004. A letter of credit dated November 1, 2004 in the amount of $0.2 million with Great Western Bank is furnished as additional collateral. The note bears interest at an initial interest rate of 6.50%, which will remain in effect for the first 36 months, then adjusted to the three year Treasury Rate plus 3.75% every 36 months over the remaining life of the loan. The loan will have a floor of 6.50% and a ceiling of 11.00%. Principal and interest payments are due in monthly installments to November 1, 2024.	$	2,533	$	2,611
Revolving credit facility from Great Western Bank evidenced by a promissory note dated January 13, 2005 for up to $22 million (with a step-down to $20 million as of February 1, 2006) bearing interest at the daily prime rate. Principal is due on January 13, 2007 and interest is payable monthly. On February 17, 2006, the Company entered into a First Amendment to Loan Agreement with Great Western Bank which extends (a) the maturity date of the Loan Agreement dated January 13, 2005 between the parties from January 13, 2007 to January 13, 2008 and (b) the date on which the loan limit of the Loan Agreement is reduced from $22 million to $20 million from February 1, 2006 to February 13, 2007. On February 22, 2007, Supertel Hospitality, Inc., entered into a Second Amendment to Loan Agreement with Great Western Bank which amends the Loan Agreement dated January 13, 2005 between the parties by: (a) increasing the loan limit from $20 million to $34 million; (b) increasing the loan to value ratio component of the borrowing base and related covenants from 60% to 65%; (c) decreasing the interest rate 75 basis points to prime minus .75%; and (d) extending the maturity date from January 13, 2008 to February 22, 2009.		—	$	7,664

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Supertel Hospitality, Inc. and Subsidiaries

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Revolving credit facility from Wells Fargo evidenced by a promissory note dated December 1, 2005 with a maturity of December 1, 2007, bearing a variable interest rate 0.125 below the lenders Prime Rate. As of December 31, 2006 the rate charged was 8.125% per annum, payable monthly.		—	$	1,978
Mortgage loan payable to Citigroup Global Markets Realty Corp., evidenced by a promissory note dated November 7, 2005, in the amount of $14.8 million. The note bears interest at 5.97% per annum. Principal and interest payments are due in monthly installments with the outstanding principal and interest payable in full on November 11, 2015.	$	14,554	$	14,809
Mortgage loan payable to GE Capital Franchise Finance Corporation (“GE”), evidenced by a promissory note dated May 30, 2002 with an original principal amount of $6.8 million, assumed as of November 30, 2005 with a remaining principal amount of $6.1 million. The note bears interest at a variable rate of one-month LIBOR plus 3.32%, reset monthly, the rate as of December 31, 2006 was 8.67%. Principal and interest payments are due in monthly installments with the outstanding principal and interest payable in full on June 1, 2012.	$	5,962	$	6,114
Loan payable to Independent Property Operators of America, LLC (“IPOA”), evidenced by a promissory note dated November 30, 2005 in the amount of $3 million due in full at the maturity date of November 30, 2006. The note did not bear interest. Therefore, an imputed interest rate was assessed of 5.97%, providing an original discount amount of $169. The note was paid off in 2006.		—	$	2,845
Revolving credit facility from BankFirst evidenced by a promissory note dated May 1, 2006 in the amount of $3 million with a maturity of May 1, 2007, bearing a variable interest rate 0.125 below the New York Prime Rate.		—		—
Mortgage loan payable to GE Capital Franchise Finance Corporation (“GECC”), evidenced by a promissory note dated August 18, 2006, in the amount of $17.9 million. The note bears interest at three-month LIBOR plus 1.70% (reset monthly) and can be converted to a fixed rate equal to the seven-year weekly U.S. dollar interest rate swap plus 1.98% between the seventh and thirty-sixth months of the loan. The rate as of December 31, 2006 was 7.07%. Interest payments in the first two years of the loan, monthly interest and principal (equal to one-twelfth of one percent of the loan amount) payments in the third year of the loan and monthly interest and principal (amortized over twenty years) payments in the fourth through tenth years of the loan. The principal balance of the loan is due and payable on September 1, 2016.	$	17,850		—
	$	94,878	$	92,008

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

The long-term debt is secured by 81 and 75 of the Company’s hotel properties, for the years ended 2006 and 2005, respectively. In addition, the Company’s chairman and another director guaranteed, jointly and severally with the Company, the payment of interest and principal on $5 million of certain of the Company’s outstanding long-term debt with US Bank. As of December 31, 2003, the Company had indemnified these individuals should the respective lenders call on these guarantees. Effective January 13, 2005, in conjunction with the repayment in full of the US Bank debt, the personal guarantees were terminated. The Company’s debt agreements contain requirements as to the maintenance of minimum levels of debt service coverage and loan-to-value ratios and net worth, and place certain restrictions on distributions.

The Company files quarterly loan compliance certificates with certain of its lenders. The Company requested and received under its term loan and revolving credit facility with US Bank, a waiver, which was effective from December 31, 2002 until the Company terminated the facility in January 2005, which permitted it to maintain a higher income to debt ratio than permitted under the loan covenants.

As of September 30, 2004 the Company had requested and received a loan to value and a debt service ratio waiver with respect to a term loan with First National Bank of Omaha N.A. Ten of its hotels secure the $10.7 million term loan. The Company had a loan to value ratio of 63% and a debt service ratio of 1.46:1 as compared to the covenant requirements of the term loan of 60% and 1.5:1. The bank has agreed that through and including June 30, 2006, the loan to value ratio will be determined using a capitalization rate of 11% for valuing the hotels (versus an original rate of 12%) and the debt service coverage ratio will be 1.35:1. Effective September 30, 2006, those revised loan covenants were extended through the maturity of the loan, November 1, 2009.

Aggregate annual principal payments for the next five years and thereafter are as follows:

2007	$	2,656
2008		2,896
2009		15,805
2010		2,876
2011		3,090
Thereafter		67,555
	$	94,878

On January 13, 2005, the Company completed a $22,000 revolving credit facility with Great Western Bank. The borrowings from the new credit facility were used to pay the maturing US Bank term note and the US Bank revolving credit facility with balances of $6,225 and $4,520 respectively, as of December 31, 2004. This revolving credit facility was amended on February 22, 2007. See note 11.

At December 31, 2006 and 2005, the estimated fair values of long-term debt were approximately $100,500 and $95,800, respectively. The fair values were estimated by discounting future cash payments to be made at rates that approximate rates currently offered for loans with similar maturities.

Interest expense on debt that is to be assumed by the buyer and interest expense on debt that is required to be repaid as a result of a disposal transaction is allocated to discontinued operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Note 6. Income Taxes

The RMA was included in the Tax Relief Extension Act of 1999, which was enacted into law on December 17, 1999. The RMA includes numerous amendments to the provisions governing the qualification and taxation of REITs, and these amendments were effective January 1, 2001. One of the principal provisions included in the Act provides for the creation of TRS. TRS are corporations that are permitted to engage in nonqualifying REIT activities. A REIT is permitted to own up to 100% of the voting stock in a TRS. Previously, a REIT could not own more than 10% of the voting stock of a corporation conducting nonqualifying activities. Relying on this legislation, in November 2001, the Company formed the TRS Lessee.

As a REIT, the Company generally will not be subject to corporate level Federal income tax on taxable income it distributes currently to stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to Federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property and to Federal income and excise taxes on its undistributed taxable income. In addition, taxable income of a TRS is subject to Federal, state and local income taxes.

In connection with the Company’s election to be taxed as a REIT, it has also elected to be subject to the “built-in gain” rules on the assets formerly held by the old Supertel. Under these rules, taxes will be payable at the time and to the extent that the net unrealized gains on assets at the date of conversion to REIT status are recognized in taxable dispositions of such assets in the ten-year period following conversion.

At December 31, 2006, the income tax bases of the Company’s assets and liabilities excluding those of TRS were approximately $176,597 and $86,966, respectively; December 31, 2005 were approximately $120,254 and $79,273, respectively.

The TRS net operating loss carryforward from December 31, 2006 as determined for Federal income tax purposes was approximately $1,484. The availability of such loss carryforward will begin to expire in 2023.

Income tax expense (benefit) for the years ended December 31, 2006, 2005 and 2004 consists of the following:

	2006									2005									2004
	Federal			State			Total			Federal			State			Total			Federal			State			Total
Current	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Deferred		(88	)		(19	)		(107	)		(26	)		(5	)		(31	)		(227	)		(48	)		(275	)
Total	$	(88	)	$	(19	)	$	(107	)	$	(26	)	$	(5	)	$	(31	)	$	(227	)	$	(48	)	$	(275	)

The actual income tax expense of the TRS for the years ended December 31, 2006, 2005 and 2004 differs from the “expected” income tax expense (computed by applying the appropriate U.S. Federal income tax rate of 34% to earnings before income taxes) as a result of the following:

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Supertel Hospitality, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

	2006			2005			2004
Computed “expected” income tax benefit	$	(72	)	$	(49	)	$	(237	)
State income taxes, net Federal income tax benefit		(13	)		(3	)		(32	)
Other		(22	)		21			(6	)
	$	(107	)	$	(31	)	$	(275	)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and the deferred tax liability at December 31, 2006, 2005 and 2004 follows:

	2006		2005		2004
Deferred Tax Assets:
Expenses accrued for consolidated financial statement purposes, nondeductible for tax return purposes	$	144	$	92	$	137
Net operating losses carried forward for federal income tax purposes		593		347		251
Total deferred tax assets		737		439		388
Deferred Liabilities:
Tax depreciation in excess of book depreciation		1,044		853		833
Total deferred tax liabilities		1,044		853		833
Net deferred tax liabilities	$	307	$	414	$	445

In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. There is no valuation allowance at December 31, 2006, 2005 or 2004.

Dividends paid were $.365 per share during the year ended December 31, 2006, of which $0.219 represented ordinary income and $.146 represented nondividend distribution to shareholders. Dividends paid were $.24 per share of ordinary income during the year ended December 31, 2005. Dividends paid were $.20 per share during the year ended December 31, 2004, of which $.1391 represented ordinary income and $.0609 represented capital gain distribution to shareholders.

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Supertel Hospitality, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Note 7. Commitments and Contingencies and Other Related Party Transactions

Effective July 31, 2004, the TRS Lessee terminated its hotel management agreement with HHM, paying HHM a $500 early termination fee in addition to agreeing to reimburse HHM for certain employment-related severance costs of approximately $189.

On August 1, 2004, the TRS Lessee entered into a hotel management agreement with Royco Hotels, Inc. Royco Hotels, Inc., formally known as Royal Host Management Inc., is a US based subsidiary of Royco Hotels, Ltd., a Canada based company.

Royco Hotels, an independent contractor, manages our hotels pursuant to a hotel management agreement with TRS Lessee. The management agreement provides that Royco Hotels has control of all operational aspects of the hotels, including employee-related matters. Royco Hotels must generally maintain each hotel in good repair and condition and make such routine maintenance, repairs and minor alterations as it deems reasonably necessary. Additionally, Royco Hotels must operate the hotels in accordance with the franchise agreements that cover the hotels, which includes using franchisor sales and reservation systems as well as abiding by franchisors’ marketing standards. Royco Hotels may not assign the management agreement without our consent.

The management agreement generally requires TRS Lessee to fund debt service, working capital needs and capital expenditures and fund Royco Hotels third-party operating expenses, except those expenses not related to the operation of the hotels. The management agreement generally requires that the hotels meet the franchisors’ standards regarding physical, operational and technological matters. TRS Lessee is responsible for obtaining and maintaining insurance policies with respect to the hotels.

Management Fees

Royco Hotels receives a monthly base management fee and an incentive management fee, if certain financial thresholds are met or exceeded. The management agreement, as amended effective January 1, 2007, provides for monthly base management fees as follows:

· 4.25% of gross hotel income for the month for up to the first $75 million of gross hotel income for a fiscal year;

· 4.00% of gross hotel income for the month for gross hotel income exceeding $75 million up to $100 million for a fiscal year; and

· 3.00% of gross hotel income for the month for gross hotel income exceeding $100 million for a fiscal year.

Prior to the amendment, the base management fee was 4.75% of the gross hotel revenues for all but six of the hotels. The base management fee for those six hotels was 4.0%.

If annual net operating income exceeds 10% of our total investment in the hotels, then Royco Hotels receives an incentive management fee of 10% of the excess of net operating income up to the first $1 million, and 20% of excess net operating income above $1 million.

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Supertel Hospitality, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Term and Termination

The management agreement expires on December 31, 2011 and, unless Royco Hotels elects not to extend the term, the term of the agreement will be extended to December 31, 2016 if (i) Royco Hotels achieves average annual net operating income of at least 10% of our total investment in the hotels during the four fiscal years ending December 1, 2011 and (ii) Royco Hotels does not default prior to December 31, 2011.

The management agreement may be terminated as follows:

· either party may terminate the management agreement if net operating income is not at least 8.5% of the Company’s total investment in the hotels or if the Company undergo a change of control;

· the Company may terminate the agreement if Royco Hotels undergoes a change of control;

· the Company may terminate the agreement if tax laws change to allow a hotel REIT to self manage its properties; and

· by the non-defaulting party in the event of a default that has not been cured within the cure period.

If the Company terminates the management agreement because the Company undergoes a change of control, Royco Hotels undergoes a change of control due to the death of one of its principals, or due to a tax law change, then Royco Hotels will be entitled to a termination fee equal to equal to the greater of (i) $3.6 million less an amount equal to $100 multiplied by the number of months after December 31, 2006 preceding the month of termination or (ii) 50% of the base management fee paid to Royco Hotels during the twelve months prior to notice of termination. Under certain circumstances, Royco Hotels will be entitled to a termination fee if the Company sells a hotel and does not acquire another hotel or replace the sold hotel within twelve months. The fee, if applicable, is equal to 50% of the base management fee paid with respect to the sold hotel during the prior twelve months.

Defaults and Indemnity

The following are events of default under the management agreement:

· the failure of Royco Hotels to diligently and efficiently operate the hotels pursuant to the management agreement;

· the failure of either party to pay amounts due to the other party pursuant to the management agreement;

· certain bankruptcy, insolvency or receivership events with respect to either party;

· the failure of either party to perform any of their obligations under the management agreement;

· loss of the franchise license for a hotel because of Royco Hotels;

· failure by Royco Hotels to pay, when due, the accounts payable for the hotels for which we have previously reimbursed Royco Hotels; and

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Supertel Hospitality, Inc. and Subsidiaries

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

· any of the hotels fail two successive franchisor inspections if the deficiencies are within Royco Hotels’s reasonable control.

With the exception of certain events of default as to which no grace period exists, if an event of default occurs and continues beyond the grace period set forth in the management agreement, the non-defaulting party has the option of terminating the agreement.

The management agreement provides that each party, subject to certain exceptions, indemnifies and holds harmless the other party against any liabilities stemming from certain negligent acts or omissions, breach of contract, willful misconduct or tortuous actions by the indemnifying party or any of its affiliates.

In November 2004, the Company obtained a $2.7 million loan from Village Bank, formerly known as Southern Community Bank & Trust. George R. Whittemore, Director of the Company, is a member of the Board of Directors of Village Bank. Further information about the loan from Village Bank is presented in Note 5.

From January 2003 until August 2004, the Company paid rents and other charges to HHM for the office space it occupied in Columbia, MD. The Company paid base rents of $62 to HHM for 2004.

The Company assumed land lease agreements in conjunction with purchases of three hotels. One lease requires monthly payments of the greater of $2 or 5% of room revenue through November 2091. The second lease requires an annual payment of $35 through May 2025. The third lease requires monthly payments of $1 thru 2017 with approximately $1 annual increase beginning January 1, 2018, with additional increases in 2033, 2043, 2053 and 2063. Land lease expense totaled approximately $90, $ 89 and $86 in 2006, 2005 and 2004, respectively, and is included in property operating expense.

The Company purchased a cell tower lease in November 2006, with annual rent received in the amount of $12 through June 2010.

As of December 31, 2006, the future minimum lease payments applicable to non-cancelable operating leases are as follows:

	Lease rents		Sublease receipts			Net payment
2007		72		(12	)	$	60
2008		72		(12	)		60
2009		72		(12	)		60
2010		73		(6	)		67
2011		72		—			72
Thereafter		3,282		—			3,282
	$	3,643	$	(42	)	$	3,601

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Supertel Hospitality, Inc. and Subsidiaries

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Note 8. Common and Preferred Stock and Operating Partnership Units

The Company’s common stock is duly authorized, full paid and non-assessable. At December 31, 2006, members of the Board of Directors and executive officers owned approximately 16% of the Company’s outstanding common stock.

At December 31, 2006, 372,195 of SLP’s common operating partnership units (“Common OP Units”) and 195,610 of SLP’s preferred operating partnership units (“Preferred OP Units”) were outstanding. Each limited partner of SLP may, subject to certain limitations, require that SLP redeem all or a portion of his or her Common OP Units or Preferred OP Units, at any time after a specified period following the date he or she acquired the units, by delivering a redemption notice to SLP. When a limited partner tenders his or her Common OP Units to SLP for redemption, the Company can, in its sole discretion, choose to purchase the units for either (1) a number of shares of Company common stock equal to the number of units redeemed (subject to certain adjustments) or (2) cash in an amount equal to the market value of the number of shares of Company common stock the limited partner would have received if the Company chose to purchase the units for common stock. The Preferred OP Units are convertible by the holders into Common OP Units on a one-for-one basis or may be redeemed for cash at $10 per unit until October 2009. The Preferred OP Units receive a preferred dividend distribution of $1.10 per preferred unit annually, payable on a monthly basis and do not participate in the allocations of profits and losses of SLP. During 2006 and 2005, 0 and 4,434 respectively, Common OP Units were redeemed for common shares of SHI and no preferred units were redeemed for cash or converted to common stock. In addition, the Company agreed to allow the redemption of 127,439 Preferred OP Units at any time, subject to a 60-day notification period.

On December 30, 2005 the Company offered and sold 1,521,258 shares of 8% Series A Convertible Preferred Stock. The shares were sold for $10.00 per share and bear a liquidation preference of $10.00 per share. Underwriting and other costs of the offering totaled $1.2 million. The proceeds were used to reduce borrowings under the Company’s revolving credit facility with Great Western Bank.

Dividends on the Series A Convertible Preferred stock are cumulative and are payable monthly in arrears on the last day of each month, at the annual rate of 8% of the $10.00 liquidation preference per share, equivalent to a fixed annual amount of $.80 per share. Dividends on the Series A Convertible Preferred Stock accrue regardless of whether or not the Company has earnings, whether there are funds legally available for the payment of such dividends and whether or not such dividends are declared. Unpaid dividends will accumulate and bear additional dividends at 8%, compounded monthly.

The Series A convertible preferred stock with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up, ranks senior to all classes or series of the Company’s common stock, senior or on parity with all other classes or series of preferred stock and junior to all of the Company’s existing and future indebtedness. Upon liquidation all preferred stock will be entitled to $10.00 per share plus accrued but unpaid dividends. The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares unless it has also paid (or set aside for payment) the full cumulative distributions on the preferred shares for the current and all past dividend periods. The outstanding preferred shares do not have any maturity date, and are not subject to mandatory redemption.

Each share of Series A convertible preferred stock is convertible in whole or in part, at any time at the option of the holders thereof, into common stock at a conversion price of $5.66 per share of common stock (equivalent to a conversion rate of 1.77 shares of common stock for each share of Series A convertible preferred stock) subject to certain adjustments. The Company may not optionally redeem the Series A preferred shares prior to January 1, 2009, except in limited circumstances to preserve its status as a REIT.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

The conversion rights of the holders of the Series A convertible preferred stock are subject to cancellation on or after December 31, 2008 if the closing price of the Company common stock on the Nasdaq Global Market exceeds $7.36 for at least 20 trading days within any period of 30 consecutive trading days. The Company will issue a conversion cancellation notice to holder of the Series A convertible preferred stock specifying the date the conversion rights will be deemed cancelled if the holder chooses to exercise this option. In the event the Company issues a conversion cancellation notice, the Series A convertible preferred stock will be redeemable on or after January 1, 2009 for cash, at the Company’s option, in whole or from time to time in part, at $10.00 per share, plus accrued and unpaid dividends to the redemption date. Otherwise the Series A convertible preferred stock will be redeemable for cash, at the Company’s option in whole or from time to time in part, at:

$10.80 per share on or after January 1, 2009

$10.40 per share on or after January 1, 2010; and

$10.00 per share on or after January 1, 2011,

plus accrued and unpaid dividends to the redemption date.

On December 30, 2005, the Company issued warrants to Anderson & Strudwick Incorporated, the selling agent for the Company in its public offering of the Series A Preferred Stock, to purchase 126,311 shares of Series A convertible preferred stock. The warrants will be exercisable until December 31, 2010 at $12.00 per share of Series A convertible preferred stock. The warrants may not be sold, transferred, pledged, assigned or hypothecated for a period of one year after their issuance, except to officers of the selling agent.

Note 9. Stock-Based Compensation

Upon initial issuance of stock options on May 25, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), “Share-Based Payments,” which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values.

Options

The Company has a 2006 Stock Plan (the “Plan”) which has been approved by the Company’s shareholders. The Plan authorized the grant of stock options, stock appreciation rights, restricted stock and stock bonuses for up to 200,000 shares of common stock.

As of December 31, 2006, 100,000 stock options have been awarded under the Plan. The options have an exercise price of $5.89, which is equal to the average of the high and low sales price of the stock as reported on the National Association of Securities Dealers Automated Quotation system (NASDAQ) on May 25, 2006, the date of grant. The options vested on December 31, 2006 and have an expiration date of May 25, 2010. A total of 100,000 shares of common stock have been reserved for issuance pursuant to the Plan with respect to the granted options.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

The Company records compensation expense for stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The Company uses historical data among other factors to estimate the expected price volatility, the expected option life, the dividend rate and expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for the estimated life of the option. The following table summarizes the estimates used in the Black-Scholes option-pricing model:

Volatility	22.00	%
Expected dividend yield	6.20	%
Expected term (in years)	3.92
Risk free interest rate	4.82	%

The following table summarizes the Company’s activities with respect to its stock options for 2006 as follows:

	Shares	Weighted- Average Exercise Price		Aggregate Fair Value
Outstanding at December 31, 2005	—	$	—	$	—
Granted	100,000		5.89		69
Exercised	—		—		—
Forfeited or expired	—		—		—
Outstanding at December 31, 2006	100,000	$	5.89	$	69
Exercisable at December 31, 2006	100,000	$	5.89	$	69

Share-Based Compensation Expense

The amount recognized in the consolidated financial statements for the twelve months ended December 31, 2006 for share-based compensation expense related to employees and directors is $69.

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Supertel Hospitality, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Note 10. Supplementary Data

The following table presents our unaudited quarterly results of operations:

	Quarters Ended
	March 31, 2006			June 30, 2006			September 30, 2006			December 31, 2006			YTD 2006
2006
Revenues	$	15,690		$	20,118		$	22,441		$	18,885		$	77,134
Expenses		16,187			18,122			19,858			19,201			73,368
Earnings (loss) before net gains (losses) on dispositions of assets, other income, minority interest and income tax expense (benefit)		(497	)		1,996			2,583			(316	)		3,766
Net gains (losses) on dispositions of assets		(4	)		(1	)		(1	)		3			(3	)
Other income		30			31			47			77			185
Minority interest		(48	)		(103	)		(122	)		(61	)		(334	)
Earnings (loss) from continuing operations before income taxes		(519	)		1,923			2,507			(297	)		3,614
Income tax expense (benefit)		(324	)		317			268			(368	)		(107	)
Net earnings (loss)		(195	)		1,606			2,239			71			3,721
Preferred stock dividend		(304	)		(305	)		(304	)		(302	)		(1,215	)
Net earnings (loss) available to common shareholders	$	(499	)	$	1,301		$	1,935		$	(231	)		2,506
Net earnings (loss) per common share - basic *	$	(0.04	)	$	0.11		$	0.16		$	(0.02	)	$	0.20
Net earnings (loss) per common share - diluted	$	(0.04	)	$	0.11		$	0.15		$	(0.02	)	$	0.20

* Quarterly EPS data does not add to YTD, due to rounding

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

	Quarters Ended
	March 31, 2005			June 30, 2005			September 30, 2005			December 31, 2005			YTD 2005
2005
Revenues	$	12,262		$	16,084		$	17,332		$	14,859			60,537
Expenses		13,020			14,399			14,969			15,332			57,720
Earnings (loss) before net gains (losses) on dispositions of assets, other income minority interest and income tax expense (benefit)		(758	)		1,685			2,363			(473	)		2,817
Net gains (losses) on dispositions of assets		(1	)		1			1			(3	)		(2	)
Other income		45			42			40			31			158
Minority interest		(53	)		(55	)		(73	)		(45	)		(226	)
Earnings (loss) from continuing operations before income taxes		(767	)		1,673			2,331			(490	)		2,747
Income tax expense (benefit)		(376	)		239			372			(266	)		(31	)
Net earnings (loss)		(391	)		1,434			1,959			(224	)		2,778
Preferred stock dividend		—			—			—			(6	)		(6	)
Net earnings (loss) available to common shareholders	$	(391	)	$	1,434		$	1,959		$	(230	)		2,772
Net earnings (loss) per common share - basic	$	(0.03	)	$	0.12		$	0.16		$	(0.02	)	$	0.23
Net earnings (loss) per common share - diluted	$	(0.03	)	$	0.12		$	0.16		$	(0.02	)	$	0.23

There were no impairment losses and no sale of properties for 2006 and 2005.

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

Note 11. Subsequent Events

On January 5, 2007, Supertel Limited Partnership, acquired five hotels from Motels of America LLC. The $24 million purchase price for the five hotels was funded by $8.4 million of cash and borrowings from Supertel Hospitality’s existing credit facilities with Great Western Bank and a $15.6 million term loan from General Electric Capital Corporation (“GECC”) entered into on January 5, 2007 by Supertel Limited Partnership. The hotels are located in: Columbus, Georgia; Boise, Idaho; Terra Haute, Indiana; Ellsworth, Maine; and Billings, Montana.

On January 17, 2007, SLP, entered into a purchase agreement to purchase seven hotels from Musselman Hotels II, LLC. The purchase price for the hotels is $14.4 million, subject to downward adjustment for the hotels’ positive cash flows occurring from January 1, 2007 through the closing of the transaction. Supertel intends to fund the purchase price from new borrowings to be negotiated. The hotels are located in: Ashland, Kentucky (Days Inn); Brooks, Kentucky (Comfort Inn); Cave City, Kentucky (Quality Inn); Glasgow, Kentucky (Comfort Inn); Glasgow, Kentucky (Days Inn); Louisville, Kentucky (Comfort Suites); and Louisville, Kentucky (Sleep Inn). The closing of the transaction is expected to occur on July 2, 2007, and is subject to customary closing conditions including inspections (i.e., property and title surveys, environmental surveys and appraisals), accuracy of representations and warranties and compliance with covenants and obligations under the purchase agreement and obtaining satisfactory financing.

On February 9, 2007, SLP, entered into hotel purchase agreements to purchase six hotels from Budget Motels, Inc. and Waterloo Hospitality, Inc. The purchase price for the hotels is $38.6 million. Supertel intends to fund the purchase price from existing credit facilities, new borrowings to be negotiated and by assuming debt. The hotels are located in: Alexandria, Virginia (Comfort Inn); Alexandria, Virginia (Days Inn); Bossier City, Louisiana (Days Inn); Fredericksburg (North), Virginia (Days Inn); Fredericksburg (South), Virginia (Days Inn); and Shreveport, Louisiana (Days Inn). The closing of the transactions is subject to customary closing conditions including inspections (i.e., property and title surveys, environmental surveys and appraisals), accuracy of representations and warranties and compliance with covenants and obligations under the purchase agreements.

The hotel purchase agreement for the hotels located in Alexandria, Virginia (Comfort Inn), Alexandria, Virginia (Days Inn), Fredericksburg (South), Virginia (Days Inn), and Shreveport, Louisiana (Days Inn) provides for the hotels to be purchased by Supertel Limited Partnership on March 30, 2007 for a $30.9 million purchase price, consisting of approximately $19.6 million cash and $11.3 million of assumed loans.

The hotel purchase agreement for the hotels located in Bossier City, Louisiana (Days Inn) and Fredericksburg (North), Virginia (Days Inn) provides for the hotels to be purchased by Supertel Limited Partnership on July 31, 2007 for a $7.7 million cash purchase price. The purchase agreement also provides for SLP to lease the two hotels from March 30, 2007 to July 31, 2007 pursuant to the terms of a lease agreement. The lease agreement requires SLP to pay monthly rent of $44 for the two hotels during the lease term.

In February 2007, SLP, entered into a purchase agreement to purchase Tara Inn and Suites, located in Jonesboro, GA. The purchase price is approximately $6 million, which will be funded from existing credit facitities.

On February 22, 2007, SHI, entered into a Second Amendment to Loan Agreement with Great Western Bank which amends the Loan Agreement dated January 13, 2005 between the parties by: (a) increasing the loan

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December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

limit from $20 million to $34 million; (b) increasing the loan to value ratio component of the borrowing base and related covenants from 60% to 65%; (c) decreasing the interest rate 75 basis points to prime minus .75%; and (d) extending the maturity date from January 13, 2008 to February 22, 2009.

On March 7, 2007, SLP, entered into a purchase agreement to purchase fifteen hotels, which are operated under the Masters Inn name, from entities in which two individuals own all or a majority of the capital stock. The purchase price for the hotels is $42.7 million, which SHI intends to fund from existing credit facilities and new borrowings to be negotiated. The hotels are located in: Tuscaloosa, Alabama; Orlando, Florida; Kissimmee, Florida (2); Seffner, Florida; East Tampa, Florida; Doraville, Georgia; Marietta, Georgia; Tucker, Georgia; Augusta, Georgia; Garden City, Georgia; Mt. Pleasant, South Carolina; Charleston, South Carolina; and Cayce, South Carolina (2). The closing of the transaction is expected to occur on or about April 30, 2007, and is subject to customary closing conditions including inspections (i.e., property and title surveys, environmental surveys and appraisals), accuracy of representations and warranties and compliance with covenants and obligations under the purchase agreement and obtaining satisfactory financing.

69

Supertel Hospitality, Inc. and Subsidiaries

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

As of December 31, 2006

		Initial Cost				Costs Subsequent to Acquisition			Gross Amount at December 31, 2006
	Encum-			Buildings &				Buildings &			Buildings &		Accumulated			Net
Hotel and Location	brance	Land		Improvements		Land		Improvements	Land		Improvements		Depreciation			Book Value
Comfort Inn
Minocqua, Wisconsin	GWB	$	214,505	$	1,458,389	$	—	291,057	$	214,505	$	1,749,446	$	(694,536	)	$	1,269,415
Sheboygan, Wisconsin	GWB		286,970		1,716,782		—	312,041		286,970		2,028,823		(811,604	)		1,504,189
Chambersburg, Pennsylvania	GRW		89,000		2,346,362		—	197,662		89,000		2,544,024		(664,706	)		1,968,318
Culpeper, Virginia	GRW		182,264		2,142,652		—	488,931		182,264		2,631,583		(711,939	)		2,101,908
Dahlgren, Virginia	VB		327,514		2,489,390		—	285,708		327,514		2,775,098		(966,370	)		2,136,242
Dublin, Virginia	VB		152,239		3,700,710		—	813,779		152,239		4,514,489		(1,622,917	)		3,043,811
Farmville, Virginia	GRW		253,618		2,162,087		—	445,157		253,618		2,607,244		(899,724	)		1,961,138
Gettysburg, Pennsylvania	SUS		—		4,158,453		—	234,465		—		4,392,918		(1,175,604	)		3,217,314
Morgantown, West Virginia	GRW		398,322		3,853,651		—	695,350		398,322		4,549,001		(1,515,500	)		3,431,823
New Castle, Pennsylvania	GRW		56,648		4,101,254		—	522,422		56,648		4,623,676		(1,289,545	)		3,390,779
Princeton, West Virginia	GRW		387,567		1,774,501		—	571,559		387,567		2,346,060		(855,009	)		1,878,618
Rocky Mount, Virginia	GRW		193,841		2,162,429		—	73,847		193,841		2,236,276		(672,014	)		1,758,103
Solomons, Maryland	GRW		2,303,990		2,988,255		—	1,730,592		2,303,990		4,718,847		(1,902,128	)		5,120,709
Erlanger, Kentucky	NON		750,000		2,822,201		—	173,186		750,000		2,995,387		(111,021	)		3,634,366
Fayetteville, North Carolina	CITI		725,000		3,910,514		—	205,492		725,000		4,116,006		(231,365	)		4,609,641
Fayetteville Car Wash, North Carolina	CITI		—		164,128		—	1,387		—		165,515		(14,188	)		151,327
Super 8
Creston, Iowa	GRW		56,000		840,580		89,607	2,140,226		145,607		2,980,806		(1,435,793	)		1,690,620
Columbus, Nebraska	GWB		51,716		571,178		51,666	681,785		103,382		1,252,963		(754,537	)		601,808
O’Neill, Nebraska	GRW		75,000		667,074		46,075	1,044,656		121,075		1,711,730		(860,613	)		972,192
Omaha, Nebraska	FNB		164,034		1,053,620		—	1,161,324		164,034		2,214,944		(1,436,068	)		942,910
Lincoln, Nebraska (West “O”)	GWB		139,603		1,234,988		63,153	859,570		202,756		2,094,558		(1,210,570	)		1,086,744
Lincoln, Nebraska (Cornhusker)	GWB		226,174		1,068,520		271,817	1,738,748		497,991		2,807,268		(1,472,841	)		1,832,418
Keokuk, Iowa	GRW		55,000		642,783		71,175	574,017		126,175		1,216,800		(725,813	)		617,162
Iowa City, Iowa	GRW		227,290		1,280,365		—	486,838		227,290		1,767,203		(1,090,006	)		904,487
Omaha, Nebraska (Ak-sar-ben)	GWB		203,453		1,054,497		—	229,777		203,453		1,284,274		(787,433	)		700,294

70

Supertel Hospitality, Inc. and Subsidiaries

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED

As of December 31, 2006

		Initial Cost		Costs Subsequent to Acquisition			Gross Amount at December 31, 2006
	Encum-		Buildings &			Buildings &		Buildings &	Accumulated		Net
Hotel and Location	brance	Land	Improvements	Land		Improvements	Land	Improvements	Depreciation		Book Value
Kirksville, Missouri	GWB	151,225	830,457	—		231,602	151,225	1,062,059	(655,099	)	558,185
Burlington, Iowa	GRW	145,000	867,116	—		291,519	145,000	1,158,635	(693,482	)	610,153
Sedalia, Missouri	GWB	185,025	917,809	—		588,228	185,025	1,506,037	(831,830	)	859,232
Hays, Kansas	FNB	317,762	1,133,765	19,519		271,565	337,281	1,405,330	(888,274	)	854,337
Moberly, Missouri	GWB	60,000	1,075,235	—		292,649	60,000	1,367,884	(820,842	)	607,042
Pittsburg, Kansas	GRW	130,000	852,131	—		240,856	130,000	1,092,987	(644,619	)	578,368
Manhattan, Kansas	FNB	261,646	1,254,175	(10,000	)	391,018	251,646	1,645,193	(935,152	)	961,687
Clinton, Iowa	GRW	135,153	805,067	(46,089	)	236,975	89,064	1,042,042	(633,134	)	497,972
Mt. Pleasant, Iowa	GRW	85,745	536,064	21,507		468,191	107,252	1,004,255	(580,942	)	530,565
Wichita, Kansas	FNB	435,087	1,806,979	—		621,910	435,087	2,428,889	(1,380,212	)	1,483,764
Kingdom City, Missouri	FNB	176,970	877,287	—		191,272	176,970	1,068,559	(614,935	)	630,594
Lenexa, Kansas	GWB	454,113	1,722,866	—		383,950	454,113	2,106,816	(1,223,047	)	1,337,882
Pella, Iowa	GRW	61,853	664,610	—		137,998	61,853	802,608	(453,151	)	411,310
Storm Lake, Iowa	GRW	90,033	819,202	33,394		498,492	123,427	1,317,694	(632,177	)	808,944
West Plains, Missouri	GWB	112,279	861,178	—		151,492	112,279	1,012,670	(532,576	)	592,373
Jefferson City, Missouri	GWB	264,707	1,206,886	—		279,347	264,707	1,486,233	(817,427	)	933,513
El Dorado, Kansas	FNB	96,764	418,333	467		548,572	97,231	966,905	(479,283	)	584,853
Wayne, Nebraska	FNB	79,127	685,135	—		136,579	79,127	821,714	(402,032	)	498,809
Batesville, Arkansas	GWB	81,483	811,371	—		155,013	81,483	966,384	(441,556	)	606,311
Fayetteville, Arkansas	GWB	255,731	1,549,271	—		192,853	255,731	1,742,124	(820,050	)	1,177,805
Omaha, Nebraska (West Dodge)	GWB	593,518	1,758,275	—		212,035	593,518	1,970,310	(898,100	)	1,665,728
Watertown, South Dakota	FNB	51,237	1,296,312	—		498,698	51,237	1,795,010	(736,585	)	1,109,662
Norfolk, Nebraska	GRW	226,971	1,587,581	—		438,206	226,971	2,025,787	(781,802	)	1,470,956
Park City, Kansas	FNB	275,962	891,933	—		452,986	275,962	1,344,919	(616,015	)	1,004,866

71

Supertel Hospitality, Inc. and Subsidiaries

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED

As of December 31, 2006

		Initial Cost		Costs Subsequent to Acquisition			Gross Amount at December 31, 2006
	Encum-		Buildings &			Buildings &		Buildings &	Accumulated		Net
Hotel and Location	brance	Land	Improvements	Land		Improvements	Land	Improvements	Depreciation		Book Value
Muscatine, Iowa	GWB	204,890	1,616,090	—		251,463	204,890	1,867,553	(740,772	)	1,331,671
Fort Madison, Iowa	GWB	104,855	871,075	—		175,985	104,855	1,047,060	(423,518	)	728,397
Parsons, Kansas	FNB	167,849	1,195,484	—		182,211	167,849	1,377,695	(497,151	)	1,048,393
Portage, Wisconsin	GRW	203,032	1,839,321	—		231,595	203,032	2,070,916	(725,709	)	1,548,239
Antigo, Wisconsin	GWB	234,605	1,485,579	—		228,146	234,605	1,713,725	(659,194	)	1,289,136
Shawano, Wisconsin	GRW	244,935	1,672,123	—		209,908	244,935	1,882,031	(704,605	)	1,422,361
Tomah, Wisconsin	GWB	211,975	2,079,714	(59,834	)	322,055	152,141	2,401,769	(838,455	)	1,715,455
Menomonie, Wisconsin	GRW	451,520	2,398,446	—		223,747	451,520	2,622,193	(813,395	)	2,260,318
Neosho, Missouri	NON	232,000	1,416,216	—		146,634	232,000	1,562,850	(516,094	)	1,278,756
Anamosa, Iowa	SBA	49,981	1,150,688	—		119,686	49,981	1,270,374	(334,283	)	986,072
Charles City, Iowa	FCNB	95,363	1,543,872	—		109,740	95,363	1,653,612	(469,865	)	1,279,110
Clarinda, Iowa	NON	75,000	1,276,923	—		19,553	75,000	1,296,476	(49,227	)	1,322,249
Sleep Inn
Omaha, Nebraska	WF	400,000	3,275,773	—		222,389	400,000	3,498,162	(200,553	)	3,697,609
Holiday Inn Express
Gettysburg, Pennsylvania	SUS	59,634	1,832,171	—		274,688	59,634	2,106,859	(636,401	)	1,530,092
Harlan, Kentucky	GRW	—	2,949,276	—		603,594	—	3,552,870	(1,075,916	)	2,476,954
Danville, Kentucky	GRW	155,717	2,971,403	—		442,064	155,717	3,413,467	(1,038,983	)	2,530,201
Hampton Inn
Cleveland, Tennessee	GRW	212,914	2,370,499	—		847,838	212,914	3,218,337	(846,037	)	2,585,214
Shelby, North Carolina	GRW	253,921	2,782,042	—		896,111	253,921	3,678,153	(1,102,482	)	2,829,592
Brandon, Florida	REG	322,203	3,150,779	—		532,232	322,203	3,683,011	(989,902	)	3,015,312
Comfort Suites
Dover, Delaware	GRW	337,113	5,179,187	—		5,582	337,113	5,184,769	(1,497,639	)	4,024,243
Ft. Wayne, Indiana	CITI	1,200,000	4,803,605	—		404,805	1,200,000	5,208,410	(349,399	)	6,059,011
Lafayette, Indiana	CITI	850,000	3,473,808	—		48,961	850,000	3,522,769	(195,152	)	4,177,617
Marion, Indiana	CITI	430,000	1,945,383	—		128,539	430,000	2,073,922	(160,332	)	2,343,590
South Bend, Indiana	GE SB	500,000	11,512,314	—		124,258	500,000	11,636,572	(500,924	)	11,635,648
Warsaw, Indiana	CITI	650,000	2,500,570	—		111,084	650,000	2,611,654	(163,792	)	3,097,862

72

Supertel Hospitality, Inc. and Subsidiaries

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED

As of December 31, 2006

			Initial Cost				Costs Subsequent to Acquisition				Gross Amount at December 31, 2006
	Encum-				Buildings &				Buildings &				Buildings &		Accumulated			Net
Hotel and Location	brance		Land		Improvements		Land		Improvements		Land		Improvements		Depreciation			Book Value
Ramada
Ellenton, Florida	GRW			546,945		2,293,464		—		777,229		546,945		3,070,693		(1,139,380	)		2,478,258
Guest House Inn
Ellenton, Florida	GRW			290,373		2,102,371		—		181,064		290,373		2,283,435		(564,963	)		2,008,845
Days Inn
Farmville, Virginia	GRW			384,591		1,967,727		—		218,045		384,591		2,185,772		(657,656	)		1,912,707
Extended Stay
Atlanta, Georgia	NON	*		1,865,000		3,997,960		—		—		1,865,000		3,997,960		(15,835	)		5,847,125
Augusta, Georgia	GE SS			750,000		3,816,246		—		9,884		750,000		3,826,130		(44,341	)		4,531,789
Chamblee, Georgia	GE SS			1,650,000		3,563,648		—		—		1,650,000		3,563,648		(49,955	)		5,163,693
Greenville, South Carolina	GE SS			550,000		3,408,375		—		1,414		550,000		3,409,789		(40,771	)		3,919,018
Jonesboro, Georgia	GE SS			875,000		2,978,463		—		5,203		875,000		2,983,666		(31,892	)		3,826,774
Savannah, Georgia	GE SS			1,250,000		4,052,678		—		12,593		1,250,000		4,065,271		(43,991	)		5,271,280
Stone Mountain, Georgia	GE SS			725,000		3,840,600		—		5,936		725,000		3,846,536		(48,561	)		4,522,975
Supertel Inn
Jane, Missouri	NON			680,000		1,571,500		—				680,000		1,571,500		—			2,251,500
Neosho, Missouri	NON			180,000		1,835,800		—				180,000		1,835,800		—			2,015,800
Jackson, Tennessee	GRW			261,506		3,430,541		—		526,747		261,506		3,957,288		(1,648,985	)		2,569,809
Key Largo, Florida	GRW			339,425		3,238,530		—		633,898		339,425		3,872,428		(1,078,077	)		3,133,776
Creston, Iowa	NON			234,866		2,708,224		—				234,866		2,708,224		(66,089	)		2,877,001
Subtotal Hotel Properties				30,477,352		187,692,869		552,457		33,106,463		31,029,809		220,799,332		(62,384,442	)		189,444,699
Construction in Progress				—		—		—		460,882		—		460,882		—			460,882
Office building	BF			68,765		1,516,627		—		365,585		68,765		1,882,212		(1,124,275	)		826,702
Total			$	30,546,117	$	189,209,496	$	552,457	$	33,932,930	$	31,098,574	$	223,142,426	$	(63,508,717	)	$	190,732,283

* Atlanta Land includes value of land lease

73

Supertel Hospitality, Inc. and Subsidiaries

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED

As of December 31, 2006

Encumbrance codes refer to the following lenders:

GRW	Greenwich Capital Loan	FNB	First National Bank of Omaha
REG	Regions Bank (FL)	SUS	Susquehanna Bank
GWB	Great Western Bank	FCNB	First Citizens National Bank
VB	Village Bank	SBA	Small Business Administration
NON	Unencumbered	CITI	Citigroup Global Markets Realty
GE SB	GE Capital Franchise Finance	WF	Wells Fargo Bank
GE SS	GE Capital Corporation	BF	Bank First

74

Supertel Hospitality, Inc. and Subsidiaries

NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

AS OF DECEMBER 31, 2006

	ASSET BASIS	Total
(a)	Balance at December 31, 2003	$	168,789,518
	Additions to buildings and improvements		3,917,677
	Disposition of buildings and improvements		(8,816,590	)
	Impairment loss
	Balance at December 31, 2004	$	163,890,605
	Additions to buildings and improvements		42,083,569
	Disposition of buildings and improvements		(804,724	)
	Impairment loss		—
	Balance at December 31, 2005	$	205,169,450
	Additions to buildings and improvements		49,638,065
	Disposition of buildings and improvements		(566,515	)
	Impairment loss		—
	Balance at December 31, 2006	$	254,241,000
	ACCUMULATED DEPRECIATION	Total
(b)	Balance at December 31, 2003	$	48,594,946
	Depreciation for the period ended December 31, 2004		6,487,831
	Depreciation on assets sold or disposed		(5,737,195	)
	Balance at December 31, 2004	$	49,345,582
	Depreciation for the period ended December 31, 2005		6,850,711
	Depreciation on assets sold or disposed		(796,909	)
	Balance at December 31, 2005	$	55,399,384
	Depreciation for the period ended December 31, 2006		8,667,617
	Depreciation on assets sold or disposed		(558,284	)
	Balance at December 31, 2006	$	63,508,717

(c) The aggregate cost of land, buildings, furniture and equipment for Federal income tax purposes is approximately $248 million.

(d) Depreciation is computed based upon the following useful lives:

Buildings and improvements    20 - 40 years

Furniture and equipment             5 - 12 years

(e) The Company has mortgages payable on the properties as noted. Additional mortgage information can be found in note 5 to the consolidated financial statements.

75

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation was performed under the supervision of management, with the participation of our Chief Executive Officer and 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 that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934 is (1) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. No changes in the Company’s internal controls over financial reporting occurred during the last fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

The unaudited pro forma financial statement of operations for the year ended December 31, 2006 which gives effect to our acquisition of seven hotels from Savannah Suites, of which six hotels were acquired in August 2006 and one hotel in November 2006, as if it had occurred as of January 1, 2006 is attached hereto as Exhibit 99.1.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information concerning the directors and executive officers of the Company is incorporated by reference from information relating to executive officers of the Company set forth in Part I of this Form 10-K and to the Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders (the “2007 Proxy Statement”) under the captions “Corporate Governance” and “Election of Directors.”

The Company has adopted a Code of Business Conduct and Ethics that applies to the Company’s Chief Executive Officer and Chief Financial Officer and has posted the Code of Business Conduct and Ethics on its Web site. The Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K relating to amendments to or waivers from any provision of the Code of Business Conduct and Ethics applicable to the Company’s Chief Executive Officer and Chief Financial Officer by posting that information on the Company’s Web site at www.supertelinc.com.

Item 11. Executive Compensation

Information regarding executive and director compensation is incorporated by reference to the 2007 Proxy Statement under the captions “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year-end,” and “Director Compensation.”

76

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information regarding the stock ownership of each person known to the Company to be the beneficial owner of more than 5% of the Common Stock, of each director and executive officer of Supertel Hospitality, Inc., and all directors and executive officers as a group, is incorporated by reference to the 2007 Proxy Statement under the caption “Ownership of the Company’s Common Stock By Management and Certain Beneficial Owners.”

Equity Compensation Plan Information

The following table provides information about the Company’s common stock that may be issued upon exercise of options, warrants and rights under existing equity compensation plans as of December 31, 2006.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)			Number of securities remaining available for future issuance under equity compensation (including securities plans reflected in column(a)) (c)
Equity compensation plans approved by security holders		100,000		$	5.89		100,000
Equity compensation plans not approved by security holders		—			—		—
Total		100,000					100,000

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information regarding certain relationships and related transactions is incorporated by reference to the 2007 Proxy Statement under the caption “Certain Relationships and Related Transactions.”

Item 14. Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the material in the 2007 Proxy Statement under the caption “Principal Accountant Fees and Services” and “Pre-approval Policies.”

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Financial Statements and Schedules.

	Page
Report of Independent Registered Public Accounting Firm	41
Consolidated Balance Sheets as of December 31, 2006 and 2005	42
Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004	43
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004	44
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004	45
Notes to Consolidated Financial Statements	46
Schedule III – Real Estate and Accumulated Depreciation	70
Notes to Schedule III-Real Estate and Accumulated Depreciation	75

77

Exhibits.

3.1 (b) Second Amended and Restated Articles of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005).

3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).

10.1 Third Amended and Restated Agreement of Limited Partnership of Supertel Limited Partnership, as amended. (incorporated herein by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005).

10.2 * Form of Master Lease Agreement made as of January 1, 2002 by and between Supertel Limited Partnership, E&P Financing Limited Partnership, Solomons Beacon Inn Limited Partnership and TRS Leasing, Inc.

10.3 Loan Agreement dated as of November 26, 2002 by and among Solomons Beacon Inn Limited Partnership, TRS Subsidiary, LLC and Greenwich Capital Financial Products, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 26, 2002).

10.4 Promissory Note between Solomons Beacon Inn Limited Partnership, TRS Subsidiary, LLC and Greenwich Capital Financial Products, Inc. dated as of November 26, 2002 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated November 26, 2002).

10.5 Guaranty of Recourse Obligations made by the Company in favor of Greenwich Capital Financial Products, Inc., dated as of November 26, 2002 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated November 26, 2002).

10.6 Pledge and Security Agreement by the Company, Supertel Limited Partnership, TRS Leasing, Inc. and Solomons GP, LLC, for the benefit of Greenwich Capital Financial Products, Inc. dated as of November 26, 2002 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated November 26, 2002).

10.7 Master Lease Agreement dated as of November 26, 2002, between Solomons Beacon Inn Limited Partnership and TRS Subsidiary, LLC (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated November 26, 2002).

10.8 First Amended and Restated Master Lease Agreement dated as of November 26, 2002 between Supertel Limited Partnership, E&P Financing Limited Partnership, TRS Leasing, Inc. and Solomons Beacon Inn Limited Partnership (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K dated November 26, 2002).

10.9 Form of Preferred Stock Warrant (incorporated by reference to Exhibit 4.6 to the Company’s Amendment to Registration Statement on Form S-1/A (333-129376) filed on December 23, 2005).

10.10 Hotel Management Agreement, dated as of August 1, 2004 between TRS Leasing, Inc., TRS Subsidiary, LLC and Royco Hotels, Inc. (incorporated by reference to Exhibit 10.35 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).

78

10.11 Amendment dated January 1, 2007 to Hotel Management Agreement dated August 1, 2004 by and between Royco Hotels, Inc., TRS Leasing, Inc., TRS Subsidiary, LLC and SPPR TRS Subsidiary, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 1, 2007).

10.12 Loan Agreement dated January 13, 2005 by and between the Company and Great Western Bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 13, 2005).

10.13 Second Amendment to Loan Agreement dated February 22, 2007 between the Company and Great Western Bank (incorporated by reference to the Company’s Current Report on Form 8-K dated February 22, 2007).

10.14 Promissory Notes, Loan Agreement and form of Deed to Secure Debt, Assignment of Rents and Leases, Security Agreement and Fixture Filing, dated August 18, 2006, by Supertel Limited Partnership to and for the benefit of General Electric Capital Corporation (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 17, 2006).

10.15 Unconditional Guaranty of Payment and Performance, dated August 18, 2006, by the Company to and for the benefit of General Electric Capital Corporation (incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K dated August 17, 2006).

10.16 Promissory Note, Loan Agreement and form of Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Filing, dated January 5, 2007, by Supertel Limited Partnership to and for the benefit of General Electric Capital Corporation (incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K dated January 5, 2007).

10.17 Employment Agreement dated as of September 1, 2005 by and between the Company and Paul Schulte (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 25, 2005).

10.18 Employment Agreement dated as of September 1, 2005 by and between the Company and Don Heimes (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated August 25, 2005).

10.19 Director and Named Executive Officers Compensation, is incorporated by reference to the sections entitled “Compensation Discussion and Analysis”, “Compensation Committee Report”, “Summary Compensation Table”, “Grants of Plan-Based Awards for Fiscal Year 2006,”, “Outstanding Equity Awards at Fiscal Year-End”, and “Director Compensation” in the Company’s Proxy Statement for the Annual Meeting of Stockholders on May 24, 2007.

21.0 * Subsidiaries.

23.1 * Consent of KPMG LLP.

31.1 * Section 302 Certification of Chief Executive Officer.

31.2 * Section 302 Certification of Chief Financial Officer.

32.1 * Section 906 Certifications.

99.1 * Unaudited Pro Forma Consolidated Financial Data

Pursuant to Item 601 (b)(4) of Regulation S-K, certain instruments with respect to the Company’s long-term debt are not filed with this Form 10-K. The Company will furnish a copy of any such long-term debt agreement to the Securities and Exchange Commission upon request.

* Filed herewith

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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.

	SUPERTEL HOSPITALITY, INC.
	By:	/s/ Paul J. Schulte
March 20, 2007		Paul J. Schulte
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated above.

By:	/s/ Paul J. Schulte	By:	/s/ Joseph Caggiano
	Paul J. Schulte		Joseph Caggiano
	President and Chief Executive Officer (principal executive officer)		Director
By:	/s/ Donavon A. Heimes	By:	/s/ Jeffrey M. Zwerdling
	Donavon A. Heimes		Jeffrey M. Zwerdling
	Chief Financial Officer, Treasurer and Corporate Secretary (principal financial and accounting officer)		Director
By:	/s/ Paul J. Schulte	By:	/s/ Allen L. Dayton
	Paul J. Schulte		Allen L. Dayton
	Chairman of the Board		Director
By:	/s/ Steve H. Borgmann	By:	/s/ George R. Whittemore
	Steve H. Borgmann		George R. Whittemore
	Director		Director
By:	/s/ Loren Steele	By:	/s/ Patrick J. Jung
	Loren Steele		Patrick J. Jung
	Director		Director

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EX-10.2

Exhibit 10.2

MASTER LEASE AGREEMENT

DATED AS OF JANUARY 1, 2002

BETWEEN

HUMPHREY HOSPITALITY LIMITED PARTNERSHIP,

E&P FINANCING LIMITED PARTNERSHIP, AND

SOLOMONS BEACON INN LIMITED PARTNERSHIP

AS LESSOR

AND

TRS LEASING, INC.

AS LESSEE

TABLE OF CONTENTS

SECTION		PAGE
ARTICLE I		1
1.1	Leased Property	1
1.2	Term.	2
ARTICLE II		2
2.1	Definitions	2
ARTICLE III		9
3.1	Rent	9
3.2	Additional Charges	10
3.3	Lease Provision	10
3.4	Conversion of Property	10
3.5	Books and Records	10
ARTICLE IV		11
4.1	Payment of Impositions	11
4.2	Notice of Impositions	12
4.3	Adjustment of Impositions	12
4.4	Maintenance	12
4.5	Insurance Premiums	12
ARTICLE V		12
5.1	No Termination	12
ARTICLE VI		12
6.1	Ownership of the Leased Property	12
6.2	Lessee’s Personal Property	13
6.3	Lessor’s Lien	13
ARTICLE VII		13
7.1	Condition of the Leased Property	13
7.2	Use of the Leased Property	14
7.3	Lessor to Grant Easements, etc	14
ARTICLE VIII		15
8.1	Compliance with Legal and Insurance Requirements, etc	15
8.2	Legal Requirement Covenants	15
8.3	Environmental Covenants	15
ARTICLE IX		17
9.1	Capital Improvements, Maintenance and Repair	17
9.2	Encroachments, Restrictions, Etc.	18
ARTICLE X		19
10.1	Alterations	19
10.2	Salvage	19
10.3	Joint Use Agreements	19
ARTICLE XI		19
ARTICLE XII		19
ARTICLE XIII		20
13.1	General Insurance Requirements	20
13.2	Replacement Cost	21

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13.3	Worker’s Compensation	21
13.4	Waiver of Subrogation	22
13.5	Form Satisfactory, etc	22
13.6	Change in Limits	22
13.7	Blanket Policy	22
13.8	Separate Insurance	22
13.9	Reports On Insurance Claims	23
ARTICLE XIV		23
14.1	Insurance Proceeds	23
14.2	Reconstruction in the Event of Damage or Destruction Covered by Insurance	23
14.3	Reconstruction in the Event of Damage or Destruction Not Covered by Insurance	24
14.4	Lessee’s Property	24
14.5	Damage Near End of Term	24
14.6	Waiver	24
ARTICLE XV		25
15.1	Definitions	25
15.2	Parties’ Rights and Obligations	25
15.3	Total Taking	25
15.4	Allocation of Award	25
15.5	Partial Taking	25
15.6	Temporary Taking	26
15.7	Lessee’s Offer	26
ARTICLE XVI		26
16.1	Events of Default	26
16.2	Surrender	27
16.3	Damages	27
16.4	Waiver	28
16.5	Application of Funds	28
ARTICLE XVII		28
ARTICLE XVIII		29
ARTICLE XIX		29
19.1	Personal Property Limitation	29
19.2	Sublease Rent Limitation	29
19.3	Sublease Tenant Limitation	30
19.4	TRS Election and Limitations	30
19.5	Manager Officer and Employee Limitation	30
ARTICLE XX		31
ARTICLE XXI		31
ARTICLE XXII		31
ARTICLE XXIII		32
23.1	Subletting and Assignment	32
23.2	Attornment	32
ARTICLE XXIV		33
ARTICLE XXV		33
ARTICLE XXVI		33
ARTICLE XXVII		33

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ARTICLE XXVIII		34
ARTICLE XXIX		34
ARTICLE XXX		34
ARTICLE XXXI		34
ARTICLE XXXII		35
ARTICLE XXXIII		35
ARTICLE XXXIV		36
34.1	Lessor May Grant Liens	36
34.2	Lessee’s Right to Cure	36
34.3	Breach by Lessor	36
ARTICLE XXXV		36
35.1	Miscellaneous	36
35.2	Transition Procedures	37
35.3	Waiver of Presentment, etc	37
ARTICLE XXXVI		37
ARTICLE XXXVII		38
ARTICLE XXXVIII		38
ARTICLE XXXIX		38
ARTICLE XL		39
40.1	Room Set-Aside	39
40.2	Capital Expenditures	39
40.3	Prohibited Expenditures	39

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MASTER LEASE AGREEMENT

THIS MASTER LEASE AGREEMENT (hereinafter called “Lease”), made as of the 1ST day of January, 2002 by and between Humphrey Hospitality Limited Partnership, a Virginia limited partnership, E&P Financing Partnership, a Maryland limited partnership, and Solomons Beacon Inn Limited Partnership, a Maryland limited partnership (hereinafter called “Lessor”), and TRS Leasing, Inc., a Virginia corporation (hereinafter called “Lessee”), provides as follows.

W I T N E S S E T H:

Lessor owns fee title to the “Leased Property” (as hereinafter defined). Lessor and Lessee wish to enter into this Lease which shall constitute a separate lease for each Leased Property.

NOW, THEREFORE, Lessor, in consideration of the payment of rent by Lessee to Lessor, the covenants and agreements to be performed by Lessee, and upon the terms and conditions hereinafter stated, does hereby rent and lease unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased Property.

ARTICLE I

1.1 Leased Property. The leased property (the “Leased Property”) is comprised of Lessor’s real property interest in each of the hotel properties described in Exhibit “A” attached hereto, as it may be amended from time to time (each a “Leased Property”), as follows:

(a) the land or ground leasehold interests described in Exhibit “A” attached hereto and by reference incorporated herein (the “Land”);

(b) all buildings, structures and other improvements of every kind including, but not limited to, alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines (on-site and offsite), parking areas and roadways appurtenant to such buildings and structures presently situated upon the Land (collectively, the “Leased Improvements”);

(c) all easements, rights and appurtenances relating to the Land or the Leased Improvements;

(d) all equipment, machinery, fixtures, and other items of property required for or incidental to the use of the Leased Improvements as a hotel, including all components thereof, now and hereafter permanently affixed to or incorporated into the Leased Improvements, including, without limitation, all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, all of which to the greatest extent permitted by law are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto (collectively, the “Fixtures”);

(e) all furniture and furnishings and all other items of personal property (excluding Inventory and personal property owned by Lessee) located on, and used in connection with, the operation of the Leased Improvements as a hotel, together with all replacements, modifications, alterations and additions thereto; and

(f) all existing leases of space within the Leased Property (including any security deposits or collateral held by Lessor pursuant thereto).

THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS OF RECORD INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS, MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE SURVEY THEREOF.

1.2 Term. The term of the Lease (the “Term”) shall commence on the date hereof (the “Commencement Date”) and shall end on the fifth anniversary of the last day of the month in which the Commencement Date occurs or unless sooner terminated in accordance with the provisions hereof.

ARTICLE II

2.1 Definitions. For all purposes of this Lease, except as otherwise expressly provided or unless the context otherwise requires, (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles as are at the time applicable, (c) all references in this Lease to designated “Articles,” “Sections” and other subdivisions are to the designated Articles, Sections and other subdivisions of this Lease and (d) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Lease as a whole and not to any particular Article, Section or other subdivision:

Additional Charges: As defined in Section 3.2.

Affiliate: As used in this Lease the term “Affiliate” of a person shall mean (a) any person that, directly or indirectly, controls or is controlled by or is under common control with such person, (b) any other person that owns, beneficially, directly or indirectly, five percent or more of the outstanding capital stock, shares or equity interests of such person, or (c) any officer, director, employee, partner or trustee of such person or any person controlling, controlled by or under common control with such person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of such person). The term “person” means and includes individuals, corporations, general and limited partnerships, limited liability companies, stock companies or associations, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, or other entities and governments and agencies and political subdivisions thereof. For the purposes of this definition, “control” (including the correlative meanings of the terms “controlled by” and “under common control with”), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, through the ownership of voting securities, partnership interests or other equity interests.

Award: As defined in Section 15.1(c).

Base Rate: The rate of interest announced publicly by Citibank, N.A., in New York, New York, or any successor bank from time to time, as such bank’s base rate. If no such rate is announced or becomes discontinued, then such other rate as Lessor may reasonably designate.

Percentage Rent: As defined in Section 3.1(a).

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Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which national banks in the City of Washington, D.C., or in the municipality wherein the Leased Property is located, are closed.

CERCLA: The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended.

Code: The Internal Revenue Code of 1986, as amended.

Commencement Date: As defined in Section 1.2.

Condemnation, Condemnor: As defined in Section XV.

Date of Taking: As defined in Section 15.1(b).

Encumbrance: As defined in Section XXXIV.

Environmental Authority: Any department, agency or other body or component of any Government that exercises any form of jurisdiction or authority under any Environmental Law.

Environmental Authorization: Any license, permit, order, approval, consent, notice, registration, filing or other form of permission or authorization required under any Environmental Law.

Environmental Laws: All applicable federal, state, local and foreign laws and regulations relating to pollution of the environment (including without limitation, ambient air, surface water, ground water, land surface or subsurface strata), including without limitation laws and regulations relating to emissions, discharges, Releases or threatened Releases of Hazardous Materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. Environmental Laws include but are not limited to CERCLA, FIFRA, RCRA, SARA and TSCA.

Environmental Liabilities: Any and all obligations to pay the amount of any judgment or settlement, the cost of complying with any settlement, judgment or order for injunctive or other equitable relief, the cost of compliance or corrective action in response to any notice, demand or request from an Environmental Authority, the amount of any civil penalty or criminal fine, and any court costs and reasonable amounts for attorney’s fees, fees for witnesses and experts, and costs of investigation and preparation for defense of any claim or any Proceeding, regardless of whether such Proceeding is threatened, pending or completed, that may be or have been asserted against or imposed upon Lessor, Lessee, the Leased Property or any property used therein and arising out of:

(a) Failure of Lessee, or Lessor to comply at any time with all Environmental Laws;

(b) Presence of any Hazardous Materials on, in, under, at or in any way affecting the Leased Property;

(c) A Release at any time of any Hazardous Materials on, in, at, under or in any way affecting the Lease Property;

(d) Identification of Lessee or Lessor as a potentially responsible party under CERLA or under any Environmental Law similar to CERCLA;

3

(e) Presence at any time of any above-ground and/or underground storage tanks, as defined in RCRA or in any applicable Environmental Law on, in, at or under the Leased Property; or

(f) Any and all claims for injury or damage to persons or property arising out of exposure to Hazardous Materials originating or located at the Leased Property, or resulting from operation thereof.

Event of Default: As defined in Section XVI.

Facility: The hotel and/or other facility offering lodging and other services or amenities being operated or proposed to be operated on the Leased Property.

Fair Market Rental: The fair market rental of the Leased Property means the rental which a willing tenant not compelled to rent would pay a willing landlord not compelled to lease for the use and occupancy of such Leased Property pursuant to the Lease for the term in question, (a) assuming that Lessee is not in default thereunder and (b) determined in accordance with the appraisal procedures set forth in Article XXXIII or in such other manner as shall be mutually acceptable to Lessor and Lessee.

Fair Market Value: The fair market value of the Leased Property means an amount equal to the price that a willing buyer not compelled to buy would pay a willing seller not compelled to sell for such Leased Property, (a) assuming the same is unencumbered by this Lease, (b) determined in accordance with the appraisal procedures set forth in Article XXXIII or in such other manner as shall be mutually acceptable to Lessor and Lessee, (c) assuming that such seller must pay customary closing costs and title premiums, and (d) taking into account the positive or negative effect on the value of the Leased Property attributable to the interest rate, amortization schedule, maturity date, prepayment penalty and other terms and conditions of any encumbrance that is assumed by the transferee. In addition, in determining the Fair Market Value with respect to damaged or destroyed Leased Property such value shall be determined as if such Leased Property had not been so damaged or destroyed.

FIFRA: The Federal Insecticide, Fungicide, and Rodenticide Act, as amended.

Fiscal Year: The 12-month period from January 1 to December 31.

Fixtures: As defined in Section I.

Franchise Agreement: Any franchise agreement or license agreement with a franchisor under which the Facility is operated.

Furniture and Equipment: For purposes of this Lease, the terms “furniture and equipment” shall mean collectively all carpet, furniture, furnishings, wall coverings, fixtures and hotel equipment and systems located at, or used in connection with, the Facility, together with all replacements therefor and additions thereto, including, without limitation, (i) all equipment and systems required for the operation of kitchens, bars, if any, restaurants, if any, and laundry and dry cleaning facilities, (ii) dining room wagons, materials handling equipment, cleaning and engineering equipment, (iii) telephone and computerized accounting systems, and (iv) vehicles.

Government: The United States of America, any state, district or territory thereof, any foreign nation, any state, district, department, territory or other political division thereof, or any political subdivision of any of the foregoing.

Gross Operating Expenses: For purposes of this Lease, the term “Gross Operating Expenses”

4

shall mean all of the following with respect to the Facility: reasonable and customary salaries and employee expense and payroll taxes (including salaries, wages, bonuses and other compensation of all employees at the Facility, and benefits including life, medical and disability insurance and retirement benefits), expenditures described in Section IX, operational supplies, utilities, insurance to be provided by Lessee under the terms of this Agreement, governmental fees and assessments, food, beverages, laundry service expense, the cost of Inventories and fixed asset supplies, license fees, advertising, marketing, reservation systems and any and all other operating expenses as are reasonably necessary for the proper and efficient operation of the Facility incurred by Lessee in accordance with the provisions hereof (excluding, however, (i) federal, state and municipal excise, sales and use taxes collected directly from patrons and guests or as a part of the sales price of any goods, services or displays, such as gross receipts, admissions, cabaret or similar or equivalent taxes paid over to federal, state or municipal governments, (ii) the cost of insurance to be provided under Article XIII, (iii) expenditures by Lessor pursuant to Article XIII and (iv) payments on any Mortgage or other mortgage or security instrument on the Facility); all determined in accordance with generally accepted accounting principles and the Uniform System. No part of Lessee’s central office overhead or general or administrative expense (as opposed to that of the Facility) shall be deemed to be a part of Gross Operating Expenses, as herein provided. Reasonable out-of-pocket expenses of Lessee incurred for the account of or in connection with the Facility operations, including but not limited to postage, telephone charges and reasonable travel expenses of employees, officers and other representatives and consultants of Lessee and its Affiliates, shall be deemed to be a part of Gross Operating Expenses and such persons shall be afforded reasonable accommodations, food, beverages, laundry, valet and other such services by and at the Facility without charge to such persons or Lessee.

Gross Operating Profit shall mean, for any Fiscal Year, the excess of Gross Revenues for such Fiscal Year over Gross Operating Expenses for such Fiscal Year.

Gross Revenues: All revenues, receipts, and income of any kind derived directly or indirectly by Lessee from or in connection with the Facility (including rentals or other payments from tenants, lessees, licensees or concessionaires but not including their gross receipts unless such party is an Affiliate of the Lessee in which case the gross receipts shall be included) whether on a cash basis or credit, paid or collected, determined in accordance with generally accepted accounting principles and the Uniform System, excluding, however: (i) funds furnished by Lessor, (ii) federal, state and municipal excise, sales, and use taxes collected directly from patrons and guests or as a part of the sales price of any goods, services or displays, such as gross receipts, admissions, cabaret or similar or equivalent taxes and paid over to federal, state or municipal governments, (iii) gratuities, (iv) proceeds of insurance and condemnation, (v) proceeds from sales other than sales in the ordinary course of business, (vi) all loan proceeds from financing or refinancings of the Facility or interests therein or components thereof, (vii) judgments and awards, except any portion thereof arising from normal business operations of the hotel, and (viii) items constituting “allowances” under the Uniform System.

Hazardous Materials: All chemicals, pollutants, contaminants, wastes and toxic substances, including without limitation:

(a) Solid or hazardous waste, as defined in RCRA or in any Environmental Law;

(b) Hazardous substances, as defined in CERCLA or in any Environmental Law;

(c) Toxic substances, as defined in TSCA or in any Environmental Law;

(d) Insecticides, fungicides, or rodenticides, as defined in FIFRA or in any Environmental Law; and

5

(e) Gasoline or any other petroleum product or byproduct, polychlorinated biphenols, asbestos and urea formaldehyde.

Impositions: Collectively, all taxes (including, without limitation, all ad valorem, sales and use, single business, gross receipts, transaction privilege, rent or similar taxes as the same relate to or are imposed upon Lessee or its business conducted upon the Leased Property) including Real Estate Taxes and Personal Property Taxes, assessments (including, without limitation, all assessments for public improvements or benefit, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term), ground rents, water, sewer or other rents and charges, excises, tax inspection, authorization and similar fees and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Leased Property or the business conducted thereon by Lessee (including all interest and penalties thereon caused by any failure in payment by Lessee), which at any time prior to, during or with respect to the Term hereof may be assessed or imposed on or with respect to or be a lien upon (a) Lessor’s interest in the Leased Property, (b) the Leased Property, or any part thereof or any rent therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, or sales from, or activity conducted on or in connection with the Leased Property, or the leasing or use of the Leased Property or any part thereof by Lessee.

Indemnified Party: Either of a Lessee Indemnified Party or a Lessor Indemnified Party.

Indemnifying Party: Any party obligated to indemnify an Indemnified Party pursuant to Section 8.3 or Article XXII.

Insurance Requirements: All terms of any insurance policy required by this Lease and all requirements of the issuer of any such policy.

Inventory: All “Inventories of Merchandise” and “Inventories of Supplies” as defined in the Uniform System, including, but not limited to, linens and other non-depreciable personal property.

Land: As defined in Article I.

Lease: This Lease.

Leased Improvements; Leased Property: Each as defined in Article I.

Legal Requirements: All federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting either the Leased Property or the maintenance, construction, use or alteration thereof (whether by Lessee or otherwise), whether or not hereafter enacted and in force, including (a) all laws, rules or regulations pertaining to the environment, occupational health and safety and public health, safety or welfare, and (b) any laws, rules or regulations that may (1) require repairs, modifications or alterations in or to the Leased Property or (2) in any way adversely affect the use and enjoyment thereof; and all permits, licenses and authorizations and regulations relating thereto and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Lessee (other than encumbrances created by Lessor without the consent of Lessee), at any time in force affecting the Leased Property.

Lending Institution: Any insurance company, credit company, federally insured commercial or savings bank, national banking association, savings and loan association, employees welfare, pension or retirement fund or system, corporate profit sharing or pension trust, college or university, or real estate investment trust, including any corporation qualified to be treated for federal tax purposes as a real estate investment trust, such trust having a net worth of at least $10,000,000.

6

Lessee: The Lessee designated on this Lease and its respective permitted successors and assigns.

Lessee Indemnified Party: Lessee, any Affiliate of Lessee, any other Person against whom any claim for indemnification may be asserted hereunder as a result of a direct or indirect ownership interest (including a stockholder’s interest) in Lessee, the officers, directors, stockholders, employees, agents and representatives of Lessee and any corporate stockholder, agent, or representative of Lessee, and the respective heirs, personal representatives, successors and assigns of any such officer, director, stockholder, employee, agent or representative.

Lessee’s Personal Property: As defined in Section 6.2.

Lessor: The Lessor designated on this Lease and its respective successors and assigns.

Lessor Indemnified Party: Lessor, any Affiliate of Lessor, any other Person against whom any claim for indemnification may be asserted hereunder as a result of a direct or indirect ownership interest (including a stockholder’s or partnership interest) in Lessor, the officers, directors, stockholders, employees, agents and representatives of the general partner of Lessor and any partner, agent, or representative of Lessor, and the respective heirs, personal representatives, successors and assigns of any such officer, director, partner, stockholder, employee, agent or representative.

Minimum Price: The sum of (a) the equity in the Leased Property at the time of acquisition of the Leased Property by Lessor (i.e., that portion of the purchase price of the Leased Property paid by Lessor in cash or exchange for partnership interests in the Lessor) plus (b) other capital expenditures on the Leased Property made by Lessor after the date hereof plus (c) the unpaid principal balance of all encumbrances against the Leased Property at the time of purchase of the Leased Property by Lessee, less (x) all proceeds received by Lessor from any financing or refinancing of the Leased Property after the date hereof (after payment of any debt refinanced and net of any costs and expenses incurred in connection with such financing or refinancing, including, without limitation, loan points, commitment fees and commissions and legal fees) and (y) the net amount (after deduction of all reasonable legal fees and other costs and expenses, including without limitation expert witness fees, incurred by Lessor in connection with obtaining any such proceeds or award) of all insurance proceeds received by Lessor and awards received by Lessor from any partial Taking of the Leased Property that are not applied to restoration.

Notice: A notice given pursuant to Article XXXII.

Officer’s Certificate: A certificate of Lessee reasonably acceptable to Lessor, signed by the chief financial officer or another officer authorized so to sign by the board of directors or by-laws of Lessee, or any other person whose power and authority to act has been authorized by delegation in writing by any such officer.

Overdue Rate: On any date, a rate equal to the Base Rate plus 5% per annum, but in no event greater than the maximum rate then permitted under applicable law.

Other Revenues: Gross revenue from the operation of the Facility excluding:

(a) Room Revenues;

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(b) the amount of all credit, rebates or refunds to customers, guests or patrons;

(c) all sales taxes or any other taxes imposed on such revenues.

Payment Date: Any due date for the payment of any installment of Percentage Rent.

Percentage Rent: As defined in Section 3.1(b).

Person: Any Government, natural person, corporation, partnership or other legal entity.

Personal Property Taxes: All personal property taxes imposed on the furniture, furnishings or other items of personal property located on, and used in connection with, the operation of the Leased Improvements as a hotel (other than Inventory and other personal property owned by the Lessee), together with all replacement, modifications, alterations and additions thereto.

Primary Intended Use: As defined in Section 7.2(b).

Proceeding: Any judicial action, suit or proceeding (whether civil or criminal), any administrative proceeding (whether formal or informal), any investigation by a governmental authority or entity (including a grand jury), and any arbitration, mediation or other non-judicial process for dispute resolution.

RCRA: The Resource Conservation and Recovery Act, as amended.

Real Estate Taxes: All real estate taxes, including general and special assessments, if any, which are imposed upon the Land and any improvements thereon.

Rejectable Offer Price: An amount equal to the greater of (a) the Fair Market Value, determined as of the applicable purchase date, or (b) the Minimum Price.

Release: A “Release” as defined in CERCLA or in any Environmental Law, unless such Release has been properly authorized and permitted in writing by all applicable Environmental Authorities or is allowed by such Environmental Law without authorizations or permits.

Rent: Collectively, the Percentage Rent and Additional Charges.

Room Revenues: Gross revenue from the rental of guest rooms, whether to individuals, groups or transients, at the Facility, excluding the following:

(a) the amount of all credits, rebates or refunds to customers, guests or patrons;

(b) all sales taxes or any other taxes imposed on the rental of such guest rooms; and

(c) any fees collected for amenities including, but not limited to: telephone, laundry, movies or concessions.

SARA: The Superfund Amendments and Reauthorization Act of 1986, as amended.

State: The State or Commonwealth of the United States in which the Leased Property is located.

Subsidiaries: Corporations in which Lessee owns, directly or indirectly, more than 50% of the voting stock or control, as applicable (individually, a “Subsidiary”).

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Taking: A taking or voluntary conveyance during the Term hereof of all or part of the Leased Property, or any interest therein or right accruing thereto or use thereof, as the result of, or in settlement of, any Condemnation or other eminent domain proceeding affecting the Leased Property whether or not the same shall have actually been commenced.

Term: As defined in Section 1.2.

TSCA: The Toxic Substances Control Act, as amended.

Unavoidable Delays: Delays due to strikes, lock-outs, labor unrest, inability to procure materials, power failure, acts of God, governmental restrictions, enemy action, civil commotion, fire, unavoidable casualty or other causes beyond the control of the party responsible for performing an obligation hereunder, provided that lack of funds shall not be deemed a cause beyond the control of either party hereto unless such lack of funds is caused by the failure of the other party hereto to perform any obligations of such party under this Lease or any guaranty of this Lease.

Uneconomic for its Primary Intended Use: A state or condition of the Facility (after the application of any insurance proceeds if any) such that, in the good faith judgment of Lessee, reasonably exercised and evidenced by the resolution of the board of directors or other governing body of Lessee, the Facility cannot be operated on a commercially practicable basis for its Primary Intended Use, taking into account, among other relevant factors, the number of usable rooms and projected revenues, such that Lessee intends to, and shall, complete the cessation of operations from the Facility.

Uniform System: Shall mean the Uniform System of Accounts for Hotels (8th Revised Edition, 1986) as published by the Hotel Association of New York City, Inc., as same may hereafter be revised.

Unsuitable for its Primary Intended Use: A state or condition of the Facility (after the application of insurance proceeds if any) such that, in the good faith judgment of Lessee, reasonably exercised and evidenced by the resolution of the board of directors or other governing body of Lessee, due to casualty damage or loss through Condemnation, the Facility cannot function as an integrated hotel facility consistent with standards applicable to a well maintained and operated hotel.

ARTICLE III

3.1 Rent. Lessee covenants and agrees to pay to Lessor in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, in immediately available funds without deduction or offset, at Lessor’s address set forth in Article XXXII hereof or at such other place or to such other Person as Lessor from time to time may designate in a Notice, all Percentage Rent and Additional Charges, during the Term, for each Leased Property as set forth on Exhibit “A” hereto.

(a) Percentage Rent: Commencing on the closing date and extending for a period of 24 months, Lessee shall pay percentage rent (“Percentage Rent”) quarterly in arrears from the closing date an amount equal to 26% of all quarterly Room Revenue, and commencing on the third anniversary of the closing date, Percentage Rent shall be increased to an amount representing 30% of all quarterly Room Revenue.

(b) Officer’s Certificates. An Officer’s Certificate shall be delivered to Lessor quarterly setting forth the calculation of the related quarterly Percentage Rent payments 30 days after the end of each such period of each Fiscal Year (or part thereof) in the Term. The Percentage Rent payments for the periods to which the Officer’s Certificates relate shall accompany such Officer’s Certificate. Such quarterly payments shall be based on the formula set forth in Section 3.1(b).

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The obligation to pay Percentage Rent shall survive the expiration or earlier termination of the Term, and a final reconciliation, taking into account, among other relevant adjustments, any adjustments which are accrued after such expiration or termination date but which related to Percentage Rent accrued prior to such termination date, and Lessee’s good faith allowances, shall be made not later than two years after such expiration or termination date, but Lessee shall advise Lessor within 60 days after such expiration or termination date of Lessee’s best estimate at that time of the approximate amount of such adjustments, which estimate shall not be binding on Lessee or have any legal effect whatsoever. The accrual of Percentage Rent shall cease with the termination of the Lease.

3.2 Additional Charges. In addition to the Percentage Rent, (a) Lessee also will pay and discharge as and when due and payable all other amounts, liabilities, obligations and Impositions that Lessee assumes or agrees to pay under this Lease, and (b) in the event of any failure on the part of Lessee to pay any of those items referred to in clause (a) of this Section 3.2, Lessee also will promptly pay and discharge every fine, penalty, interest and cost that may be added for non-payment or late payment of such items (the items referred to in clauses (a) and (b) of this Section 3.2 being additional rent hereunder and being referred to herein collectively as the “Additional Charges”), and Lessor shall have all legal, equitable and contractual rights, powers and remedies provided either in this Lease or by statute or otherwise in the case of non-payment of the Additional Charges as in the case of non-payment of the Percentage Rent. The Lessee’s obligations regarding the payment of Impositions are set out in Section 4.1. If any installment of Percentage Rent or Additional Charges (but only as to those Additional Charges that are payable directly to Lessor) shall not be paid on its due date, Lessee will pay Lessor on demand, as Additional Charges, a late charge (to the extent permitted by law) computed at the Overdue Rate on the amount of such installment, from the due date of such installment to the date of payment thereof. To the extent that Lessee pays any Additional Charges to Lessor pursuant to any requirement of this Lease, Lessee shall be relieved of its obligation to pay such Additional Charges to the entity to which they would otherwise be due and Lessor shall pay same from monies received from Lessee.

3.3 Lease Provision. The Rent shall be paid so that this Lease shall yield to Lessor the full amount of the installments of Percentage Rent and Additional Charges throughout the Term, all as more fully set forth in Article V, but subject to any other provisions of this Lease that expressly provide for adjustment of Rent or other charges or expressly provide that certain expenses or maintenance shall be paid or performed by Lessor.

3.4 Conversion of Property. If, during the Term, Lessee desires to provide food and beverage operations at the Facility (other than complimentary continental breakfast), Lessee shall give notice of such desire to Lessor. Lessor and Lessee shall then commence negotiations to adjust Rent to reflect the proposed change to the operation of the Facility, each acting reasonably and in good faith. All other terms of this Lease will remain substantially the same. During negotiations, which shall not extend beyond 60 days, Lessee shall not “convert” the Facility and shall continue fulfilling its obligations under the existing terms of this Lease. If no agreement is reached after such 60-day period, Lessee shall withdraw such notice and this Lease shall continue in full force. Once the “conversion” is approved or the Lessor has approved such operations, the Lessee may lease such converted facilities. If the Lessee desires to relet such facilities, the Lessor shall approve the terms of such lease unless its terms are the same or more advantageous to the Lessor than those of the prior lease.

3.5 Books and Records. Lessee shall keep full and adequate books of account and other records reflecting the results of operation of the Facility on an accrual basis, all in accordance with the Uniform System and generally accepted accounting principles and the obligations of Lessee under this Lease. The

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books of account and all other records relating to or reflecting the operation of the Facility shall be kept either at the Facility or at Lessee’s offices in Columbia, Maryland, or Norfolk, Nebraska and shall be available to Lessor and its representatives and its auditors or accountants, at all reasonable times for examination, audit, inspection, and transcription. All of such books and records pertaining to the Facility including, without limitation, books of account, guest records and front office records, at all times shall be the property of Lessor and shall not be removed from the Facility or Lessee’s offices without the approval of Lessor.

ARTICLE IV

4.1 Payment of Impositions. Subject to Article VII relating to permitted contests, Lessee will pay, or cause to be paid, all Impositions before any fine, penalty, interest or cost may be added for non-payment, such payments to be made directly to the taxing or other authorities where feasible, and will promptly furnish to Lessor copies of official receipts or other satisfactory proof evidencing such payments. Lessee’s obligation to pay such Impositions shall be deemed absolutely fixed upon the date such Impositions become a lien upon the Leased Property or any part thereof. If any such Imposition may, at the option of the taxpayer, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Lessee may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Imposition) in installments and in such event, shall pay such installments during the Term hereof (subject to Lessee’s right of contest pursuant to the provisions of Article XII as the same respectively become due and before any fine, penalty, premium, further interest or cost may be added thereto. Lessor, at its expense, shall, to the extent required or permitted by applicable law, prepare and file all tax returns in respect of Lessor’s net income, gross receipts, sales and use, single business, transaction privilege, rent, ad valorem, franchise taxes and taxes on its capital stock, and Lessee, at its expense, shall, to the extent required or permitted by applicable laws and regulations, prepare and file all other tax returns and reports in respect of any Imposition as may be required by governmental authorities. If any refund shall be due from any taxing authority in respect of any Imposition paid by Lessee, the same shall be paid over to or retained by Lessee if no Event of Default shall have occurred hereunder and be continuing. If an Event of Default shall have occurred and be continuing, any such refund shall be paid over to or retained by Lessor. Any such funds retained by Lessor due to an Event of Default shall be applied as provided in Article XVI. Lessor and Lessee shall, upon request of the other, provide such data as is maintained by the party to whom the request is made with respect to the Leased Property as may be necessary to prepare any required returns and reports. Lessee shall file all Personal Property Tax returns in such jurisdictions where it is legally required to so file. Lessor, to the extent it possesses the same, and Lessee, to the extent it possesses the same, will provide the other party, upon request, with cost and depreciation records necessary for filing returns for any property classified as personal property. Where Lessor is legally required to file Personal Property Tax returns, Lessee shall provide Lessor with copies of assessment notices in sufficient time for Lessor to file a protest. Lessor may, upon notice to Lessee, at Lessor’s option and at Lessor’s sole expense, protest, appeal, or institute such other proceedings (in its or Lessee’s name) as Lessor may deem appropriate to effect a reduction for those Impositions to be paid by Lessor, and Lessee, at Lessor’s expense as aforesaid, shall fully cooperate with Lessor in such protest, appeal, or other action. Lessee may, at its sole expense, and upon notice to Lessor, protest, appeal or institute such other proceedings (in its or in Lessor’s name) as Lessee may deem appropriate to effect a reduction for these Impositions to be paid by the Lessee, and Lessor, at Lessee’s expense, shall fully cooperate with Lessee in such protest, appeal or other action. Lessor hereby agrees to indemnify, defend, and hold harmless Lessee from and against any claims, obligations, and liabilities against or incurred by Lessee in connection with such cooperation. Lessor, however, reserves the right to effect any such protest, appeal or other action and, upon notice to Lessee, shall control any such activity, which shall then go forward at Lessor’s sole expense. Upon such notice, Lessee, at Lessor’s expense, shall cooperate fully with such activities. If requested by any lender of the Lessor relating to the Leased Property, the Lessee shall provide any funds for the escrow of any Imposition, and the Lessee shall received any income on such escrowed funds and shall receive any funds released from such escrow.

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4.2 Notice of Impositions. Lessor shall give prompt Notice to Lessee of all Impositions payable by Lessee hereunder of which Lessor at any time has knowledge, provided that Lessor’s failure to give any such Notice shall in no way diminish Lessee’s obligations hereunder to pay such Impositions, but such failure shall obviate any default hereunder for a reasonable time after Lessee receives Notice or has otherwise acquired knowledge of any Imposition which it is obligated to pay during the first taxing period applicable thereto.

4.3 Adjustment of Impositions. Impositions imposed in respect of the tax-fiscal period during which the Term terminates shall be adjusted and prorated between Lessor and Lessee, whether or not such Imposition is imposed before or after such termination, and Lessee’s obligation to pay its prorated share thereof after termination shall survive such termination.

4.4 Maintenance. Lessee will be solely responsible for obtaining and maintaining utility services to the Leased Property and will pay or cause to be paid all charges for electricity, gas, oil, water, sewer and other utilities used in the Leased Property during the Term.

4.5 Insurance Premiums. To the extent provided in Section 13.1(b), Lessee will pay or cause to be paid all premiums for the insurance coverages required to be maintained by it under Article XIII.

ARTICLE V

5.1 No Termination. Except as otherwise specifically provided in this Lease, and except for loss of the Franchise Agreement solely by reason of any action or inaction by Lessor, Lessee, to the extent permitted by law, shall remain bound by this Lease in accordance with its terms and shall neither take any action without the written consent of Lessor to modify, surrender or terminate the same, nor seek nor be entitled to any abatement, deduction, deferment or reduction of the Rent, or setoff against the Rent, nor shall the obligations of Lessee be otherwise affected by reason of (a) any damage to, or destruction of, any Leased Property or any portion thereof from whatever cause or any Taking of the Leased Property or any portion thereof, (b) the lawful or unlawful prohibition of, or restriction upon, Lessee’s use of the Leased Property, or any portion thereof, or the interference with such use by any Person, corporation, partnership or other entity, (c) any claim which Lessee has or might have against Lessor by reason of any default or breach of any warranty by Lessor under this Lease or any other agreement between Lessor and Lessee, or to which Lessor and Lessee are parties, (d) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Lessor or any assignee or transferee of Lessor, or (e) for any other cause whether similar or dissimilar to any of the foregoing other than a discharge of Lessee from any such obligations as a matter of law. Lessee hereby specifically waives all rights, arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law to (1) modify, surrender or terminate this Lease or quit or surrender the Leased Property or any portion thereof, or (2) entitle Lessee to any abatement, reduction, suspension or deferment of the Rent or other sums payable by Lessee hereunder, except as otherwise specifically provided in this Lease. The obligations of Lessee hereunder shall be separate and independent covenants and agreements and the Rent and all other sums payable by Lessee hereunder shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to the express provisions of this Lease or by termination of this Lease other than by reason of an Event of Default.

ARTICLE VI

6.1 Ownership of the Leased Property. Lessee acknowledges that the Leased Property is the property of Lessor and that Lessee has only the right to the possession and use of the Leased Property upon the terms and conditions of this Lease.

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6.2 Lessee’s Personal Property. Lessee will acquire and maintain throughout the Term such Inventory as is required to operate the Leased Property in the manner contemplated by this Lease. Lessee may (and shall as provided herein below), at its expense, install, affix or assemble or place on any parcels of the Land or in any of the Leased Improvements, any items of personal property (including Inventory) owned by Lessee. Lessee, at the commencement of the Term, and from time to time thereafter, shall provide Lessor with an accurate list of all such items of Lessee’s personal property (collectively, the “Lessee’s Personal Property”). Lessee may, subject to the first sentence of this Section 6.2 and the conditions set forth below, remove any of Lessee’s Personal Property set forth on such list at any time during the Term or upon the expiration or any prior termination of the Term. All of Lessee’s Personal Property, other than Inventory, not removed by Lessee within ten days following the expiration or earlier termination of the Term shall be considered abandoned by Lessee and may be appropriated, sold, destroyed or otherwise disposed of by Lessor without first giving Notice thereof to Lessee, without any payment to Lessee and without any obligation to account therefor. Lessee will, at its expense, restore the Leased Property to the condition required by Section 9.1(a), including repair of all damage to the Leased Property caused by the removal of Lessee’s Personal Property, effected by Lessee. Upon the expiration or earlier termination of the Term, Lessor or its designee shall have the option to purchase all Inventory on hand at the Leased Property at the time of such expiration or termination for a sale price equal to the fair market value of such Inventory. Lessee may make such financing arrangements, title retention agreements, leases or other agreements with respect to the Lessee’s Personal Property as it sees fit provided that Lessee first advises Lessor of any such arrangement and such arrangement expressly provides that in the event of Lessee’s default thereunder, Lessor (or its designee) may assume Lessee’s obligations and rights under such arrangement.

6.3 Lessor’s Lien. To the fullest extent permitted by applicable law, Lessor is granted a lien and security interest on all Lessee’s Personal Property now or hereinafter placed in or upon the Leased Property and the Lessee’s bank accounts, with the exception of the Lessee’s central disbursement, payroll and concentration bank accounts (the “Depository Accounts”), and such lien and security interest shall remain attached to such Lessee’s Personal Property and Depository Accounts until payment in full of all Rent and satisfaction of all of Lessee’s obligations hereunder; provided, however, Lessor shall subordinate its lien and security interest to that of any non-Affiliate of Lessee which finances such Lessee’s Personal Property or any non-Affiliate conditional seller of such Lessee’s Personal Property, the terms and conditions of such subordination to be satisfactory to Lessor in the exercise of reasonable discretion. Lessee shall, upon the request of Lessor, title the Depository Accounts in the name of the Lessor or execute such financing statements or other documents or instruments reasonably requested by Lessor to perfect the lien and security interests herein granted. In addition, the Lessor shall have unrestricted access to the Depository Accounts. To the extent that the Lessor withdraws from the Depository Accounts more than the rent and other obligations of the Lessee to the Lessor, the excess shall be a loan from the Lessee to the Lessor, repayable upon demand by the Lessee.

ARTICLE VII

7.1 Condition of the Leased Property. Lessee acknowledges receipt and delivery of possession of the Leased Property. Lessee has examined and otherwise has knowledge of the condition of the Leased Property and has found the same to be satisfactory for its purposes hereunder. Lessee is leasing the Leased Property “as is” in its present condition. Lessee waives any claim or action against Lessor in respect of the condition of the Leased Property. LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE

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MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT. Provided, however, to the extent permitted by law, Lessor shall allow Lessee the benefit of all of Lessor’s rights to proceed against any predecessor in title other than Lessee (or an Affiliate of Lessee which conveyed the Property to Lessor) for breaches of warranties or representations or for latent defects in the Leased Property. Lessor shall fully cooperate with Lessee in the prosecution of any such claim, in Lessor’s or Lessee’s name, all at Lessee’s sole cost and expense. Lessee hereby agrees to indemnify, defend and hold harmless Lessor from and against any claims, obligations and liabilities against or incurred by Lessor in connection with such cooperation. Provided, however, that nothing herein shall be deemed to limit Lessor’s obligations under Section XL and 40.2.

7.2 Use of the Leased Property.

(a) Lessee covenants that it will obtain and to maintain all approvals needed to use and operate the Leased Property and the Facility under applicable local, state and federal law.

(b) Lessee shall use or cause to be used the Leased Property only as a hotel facility, and for such other uses as may be necessary or incidental to such use (the “Primary Intended Use”). Lessee shall not use the Leased Property or any portion thereof for any other use without the prior written consent of Lessor, which consent may be granted, denied or conditioned in Lessor’s sole discretion. No use shall be made or permitted to be made of the Leased Property, and no acts shall be done, which will cause the cancellation or substantially increase the premium of any insurance policy covering the Leased Property or any part thereof (unless another adequate policy satisfactory to Lessor is available and Lessee pays any premium increase), nor shall Lessee sell or permit to be kept, used or sold in or about the Leased Property any article which may be prohibited by law or fire underwriter’s regulations. Lessee shall, at its sole cost, comply with all of the requirements pertaining to the Leased Property of any insurance board, association, organization or company necessary for the maintenance of insurance, as herein provided, covering the Leased Property and Lessee’s Personal Property.

(c) Subject to the provisions of Articles XIV and XV, Lessee covenants and agrees that during the Term it will (1) operate continuously the Leased Property as a hotel facility, (2) keep in full force and effect and materially comply with all the provisions of the Franchise Agreement (except that Lessee shall have no obligation to complete any improvements to the Leased Property required by the franchisor unless the Lessor funds the cost thereof), (3) not terminate or amend the Franchise Agreement without the consent of Lessor, (4) maintain appropriate certifications and licenses for such use and (5) will seek to maximize the Gross Revenues generated therefrom consistent with sound business practices.

(d) Lessee shall not commit or suffer to be committed any waste on the Leased Property, or in the Facility, nor shall Lessee cause or permit any nuisance thereon.

(e) Lessee shall neither suffer nor permit the Leased Property or any portion thereof, or Lessee’s Personal Property, to be used in such a manner as (1) might reasonably tend to impair Lessor’s (or Lessee’s, as the case may be) title thereto or to any portion thereof, or (2) may reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or of implied dedication of the Leased Property or any portion thereof, except as necessary in the ordinary and prudent operation of the Facility on the Leased Property.

7.3 Lessor to Grant Easements, etc. Lessor will, from time to time, so long as no Event of Default has occurred and is continuing, at the request of Lessee and at Lessee’s cost and expense (but subject to the approval of Lessor, which approval shall not be unreasonably withheld or delayed), (a) grant

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easements and other rights in the nature of easements with respect to the Leased Property to third parties, (b) release existing easements or other rights in the nature of easements which are for the benefit of the Leased Property, (c) dedicate or transfer unimproved portions of the Leased Property for road, highway or other public purposes, (d) execute petitions to have the Leased Property annexed to any municipal corporation or utility district, (e) execute amendments to any covenants and restrictions affecting the Leased Property and (f) execute and deliver to any person any instrument appropriate to confirm or effect such grants, releases, dedications, transfers, petitions and amendments (to the extent of its interests in the Leased Property), but only upon delivery to Lessor of an Officer’s Certificate stating that such grant, release, dedication, transfer, petition or amendment does not interfere with the proper conduct of the business of Lessee on the Leased Property and does not materially reduce the value of the Leased Property.

ARTICLE VIII

8.1 Compliance with Legal and Insurance Requirements, etc. Subject to Section 8.3(b) below and Article XII relating to permitted contests, Lessee, at its expense, will promptly (a) comply with all applicable Legal Requirements and Insurance Requirements in respect of the use, operation, maintenance, repair and restoration of the Leased Property, and (b) procure, maintain and comply with all appropriate licenses and other authorizations required for any use of the Leased Property and Lessee’s Personal Property then being made, and for the proper erection, installation, operation and maintenance of the Leased Property or any part thereof.

8.2 Legal Requirement Covenants. Subject to Section 8.3(b) below, Lessee covenants and agrees that the Leased Property and Lessee’s Personal Property shall not be used for any unlawful purpose, and that Lessee shall not permit or suffer to exist any unlawful use of the Leased Property by others. Lessee shall acquire and maintain all appropriate licenses, certifications, permits and other authorizations and approvals needed to operate the Leased Property in its customary manner for the Primary Intended Use, and any other lawful use conducted on the Leased Property as may be permitted from time to time hereunder. Lessee further covenants and agrees that Lessee’s use of the Leased Property and maintenance, alteration, and operation of the same, and all parts thereof, shall at all times materially conform to all Legal Requirements, unless the same are finally determined by a court of competent jurisdiction to be unlawful (and Lessee shall cause all such sub-tenants, invitees or others to so materially comply with all Legal Requirements). Lessee may, however, upon prior Notice to Lessor, contest the legality or applicability of any such Legal Requirement or any licensure or certification decision if Lessee maintains such action in good faith, with due diligence, without prejudice to Lessor’s rights hereunder, and at Lessee’s sole expense. If by the terms of any such Legal Requirement compliance therewith pending the prosecution of any such proceeding may legally be delayed without the incurrence of any lien, charge or liability of any kind against the Facility or Lessee’s leasehold interest therein and without subjecting Lessee or Lessor to any liability, civil or criminal, for failure so to comply therewith, Lessee may delay compliance therewith until the final determination of such proceeding. If any lien, charge or civil or criminal liability would be incurred by reason of any such delay, Lessee, on the prior written consent of Lessor, which consent shall not be unreasonably withheld, may nonetheless contest as aforesaid and delay as aforesaid provided that such delay would not subject Lessor to criminal liability and Lessee both (a) furnishes to Lessor security reasonably satisfactory to Lessor against any loss or injury by reason of such contest or delay and (b) prosecutes the contest with due diligence and in good faith.

8.3 Environmental Covenants. Lessor and Lessee (in addition to, and not in diminution of, Lessee’s covenants and undertakings in Sections VIII and 8.2 hereof) covenant and agree as follows:

(a) At all times hereafter until the later of (i) such time as all liabilities, duties or obligations of Lessee to the Lessor under the Lease have been satisfied in full and (ii) such time as Lessee

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completely vacates the Leased Property and surrenders possession of the same to Lessor, Lessee shall fully comply with all Environmental Laws applicable to the Leased Property and the operations thereon. Lessee agrees to give Lessor prompt written notice of (1) all Environmental Liabilities; (2) all pending, threatened or anticipated Proceedings, and all notices, demands, requests or investigations, relating to any Environmental Liability or relating to the issuance, revocation or change in any Environmental Authorization required for operation of the Leased Property; (3) all Releases at, on, in, under or in any way affecting the Leased Property, or any Release known by Lessee at, on, in or under any property adjacent to the Leased Property; and (4) all facts, events or conditions that could reasonably lead to the occurrence of any of the above-referenced matters.

(b) Lessor hereby agrees to defend, indemnify and save harmless any and all Lessee Indemnified Parties from and against any and all Environmental Liabilities other than Environmental Liabilities which were caused by the acts or grossly negligent failures to act of Lessee.

(c) Lessee hereby agrees to defend, indemnify and save harmless any and all Lessor Indemnified Parties from and against any and all Environmental Liabilities which were caused by the acts or grossly negligent failures to act of Lessee.

(d) If any Proceeding is brought against any Indemnified Party in respect of an Environmental Liability with respect to which such Indemnified Party may claim indemnification under either Section 8.3(b) or 8.3(c), the Indemnifying Party, upon request, shall at its sole expense resist and defend such Proceeding, or cause the same to be resisted and defended by counsel designated by the Indemnified Party and approved by the Indemnifying Party, which approval shall not be unreasonably withheld; provided, however, that such approval shall not be required in the case of defense by counsel designated by any insurance company undertaking such defense pursuant to any applicable policy of insurance. Each Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel will be at the sole expense of such Indemnified Party unless such counsel has been approved by the Indemnifying Party, which approval shall not be unreasonably withheld. The Indemnifying Party shall not be liable for any settlement of any such Proceeding made without its consent, which shall not be unreasonably withheld, but if settled with the consent of the Indemnifying Party, or if settled without its consent (if its consent shall be unreasonably withheld), or if there be a final, nonappealable judgment for an adversary party in any such Proceeding, the Indemnifying Party shall indemnify and hold harmless the Indemnified Parties from and against any liabilities incurred by such Indemnified Parties by reason of such settlement or judgment.

(e) At any time any Indemnified Party has reason to believe circumstances exist which could reasonably result in an Environmental Liability, upon reasonable prior written notice to Lessee stating such Indemnified Party’s basis for such belief, an Indemnified Party shall be given immediate access to the Leased Property (including, but not limited to, the right to enter upon, investigate, drill wells, take soil borings, excavate, monitor, test, cap and use available land for the testing of remedial technologies), Lessee’s employees, and to all relevant documents and records regarding the matter as to which a responsibility, liability or obligation is asserted or which is the subject of any Proceeding; provided that such access may be conditioned or restricted as may be reasonably necessary to ensure compliance with law and the safety of personnel and facilities or to protect confidential or privileged information. All Indemnified Parties requesting such immediate access and cooperation shall endeavor to coordinate such efforts to result in as minimal interruption of the operation of the Leased Property as practicable.

(f) The indemnification rights and obligations provided for in this Article VIII shall be in addition to any indemnification rights and obligations provided for elsewhere in this Lease.

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(g) The indemnification rights and obligations provided for in this Article VIII shall survive the termination of this Agreement.

For purposes of this Section 8.3, all amounts for which any Indemnified Party seeks indemnification shall be computed net of (a) any actual income tax benefit resulting therefrom to such Indemnified Party, (b) any insurance proceeds received (net of tax effects) with respect thereto, and (c) any amounts recovered (net of tax effects) from any third parties based on claims the Indemnified Party has against such third parties which reduce the damages that would otherwise be sustained; provided that in all cases, the timing of the receipt or realization of insurance proceeds or income tax benefits or recoveries from third parties shall be taken into account in determining the amount of reduction of damages. Each Indemnified Party agrees to use its reasonable efforts to pursue, or assign to Lessee or Lessor, as the case may be, any claims or rights it may have against any third party which would materially reduce the amount of damages otherwise incurred by such Indemnified Party.

Notwithstanding anything to the contrary contained in this Agreement, if Lessor shall become entitled to the possession of the Leased Property by virtue of the termination of the Lease or repossession of the Leased Property, then Lessor may assign its indemnification rights under Section 8.3 of this Agreement (but not any other rights hereunder) to any Person to whom the Lessor subsequently transfers the Leased Property, subject to the following conditions and limitations, each of which shall be deemed to be incorporated into the terms of such assignment, whether or not specifically referred to therein:

(1) The indemnification rights referred to in this section may be assigned only if a known Environmental Liability then exists or if a Proceeding is then pending or, to the knowledge of Lessee or Lessor, then threatened with respect to the Leased Property.

(2) Such indemnification rights shall be limited to Environmental Liabilities relating to or specifically affecting the Leased Property; and

(3) Any assignment of such indemnification rights shall be limited to the immediate transferee of Lessor, and shall not extend to any such transferree’s successors or assigns.

ARTICLE IX

9.1 Capital Improvements, Maintenance and Repair.

(a) Subject to Section 9.1(b), Lessee will keep the Leased Property and all private roadways, sidewalks and curbs appurtenant thereto that are under Lessee’s control, including windows and plate glass, parking lots, mechanical, electrical and plumbing systems and equipment (including conduit and ductware), and non-load bearing interior walls, in good order and repair, except for ordinary wear and tear (whether or not the need for such repairs occurred as a result of Lessee’s use, any prior use, the elements or the age of the Leased Property, or any portion thereof), and, except as otherwise provided in Articles XIV or XV, with reasonable promptness, make all necessary and appropriate repairs thereto of every kind and nature, whether interior or exterior, ordinary or extraordinary, foreseen or unforeseen, or required by any governmental agency having jurisdiction over the Leased Property, except as to the structural elements of the Leased Improvements and underground utilities.

(b) Notwithstanding any other provision of this Lease, unless the need for compliance

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with Section 9.1(a) is caused by Lessee’s negligence or willful misconduct or that of its employees or agents, Lessee shall not be required to bear the costs of complying with Section 9.1(a) with respect to items classified as either (i) capital items under U.S. generally accepted accounting principles or (ii) Fixtures or Furniture and Equipment in, on, or under the Facility or its components, except to the extent (X) that amounts are available therefor from Lessor under Article XL or otherwise or (Y) required under Articles XIV and XV on the conditions set forth therein.

(c) Article XL sets forth the only obligations of Lessor to fund the cost of any repairs, replacements, alterations, restorations or renewals of any nature or description to the Leased Property, whether ordinary or extraordinary, foreseen or unforeseen, or to make any expenditure whatsoever with respect thereto, in connection with this Lease, or to maintain the Leased Property in any way. Lessee hereby waives, to the extent permitted by law, the right to make repairs at the expense of Lessor pursuant to any law in effect at the time of the execution of this Lease or hereafter enacted. Lessor shall have the right to give, record and post, as appropriate, notices of nonresponsibility under any mechanic’s lien laws now or hereafter existing.

(d) Lessee shall be permitted to prosecute claims against Lessor’s predecessors in title for breach of any representation or warranty or for any latent defects in the Leased Property to be maintained by Lessee unless Lessor is already diligently pursuing such a claim. All repairs shall, to the extent reasonably achievable, be at least equivalent in quality to the original work. Lessee will not take or omit to take any action, the taking or omission of which might materially impair the value or the usefulness of the Leased Property or any part thereof for its Primary Intended Use.

(e) Intentionally Omitted.

(f) Lessee will, upon the expiration or prior termination of the Term, vacate and surrender the Leased Property to Lessor in the condition in which the Leased Property was originally received from Lessor, except as repaired, rebuilt, restored, altered or added to as permitted or required by the provisions of this Lease and except for ordinary wear and tear (subject to the obligation of Lessee to maintain the Leased Property in accordance with Section 9.1(a) above during the entire Term of the Lease), or damage by casualty or Condemnation (subject to the obligations of Lessee to restore or repair as set forth in the Lease).

9.2 Encroachments, Restrictions, Etc. If any of the Leased Improvements, at any time, materially encroach upon any property, street or right-of-way adjacent to the Leased Property, or violate the agreements or conditions contained in any lawful restrictive covenant or other agreement affecting the Leased Property, or any part thereof, or impair the rights of others under any easement or right-of-way to which the Leased Property is subject, then promptly upon the request of Lessor or at the behest of any person affected by any such encroachment, violation or impairment, Lessee shall, at its expense, subject to its right to contest the existence of any encroachment, violation or impairment and, in such case, in the event of an adverse final determination, either (a) obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation or impairment, whether the same shall affect Lessor or Lessee or (b) make such changes in the Leased Improvements, and take such other actions, as Lessee in the good faith exercise of its judgment deems reasonably practicable to remove such encroachment, and to end such violation or impairment, including, if necessary, the alteration of any of the Leased Improvements, and in any event take all such actions as may be necessary in order to be able to continue the operation of the Leased Improvements for the Primary Intended Use substantially in the manner and to the extent the Leased Improvements were operated prior to the assertion of such violation, impairment or encroachment. Any such alteration shall be made in conformity with the applicable requirements of Article X.

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Lessee’s obligations under this Section 9.2 shall be in addition to and shall in no way discharge or diminish any obligation of any insurer under any policy of title or other insurance held by Lessor.

ARTICLE X

10.1 Alterations. After receiving approval of Lessor, which approval shall not be unreasonably withheld, Lessee shall have the right to make such additions, modifications or improvements to the Leased Property from time to time as Lessee deems desirable for its permitted uses and purposes, provided that such action will not significantly alter the character or purposes or significantly detract from the value or operating efficiency thereof and will not significantly impair the revenue-producing capability of the Leased Property or adversely affect the ability of the Lessee to comply with the provisions of this Lease. The cost of such additions, modifications or improvements to the Leased Property shall be paid by Lessee, and all such additions, modifications and improvements shall, without payment by Lessor at any time, be included under the terms of this Lease and upon expiration or earlier termination of this Lease shall pass to and become the property of Lessor.

10.2 Salvage. All materials which are scrapped or removed in connection with the making of repairs required by Articles IX or X shall be or become the property of Lessor or Lessee depending on which party is paying for or providing the financing for such work.

10.3 Joint Use Agreements. If Lessee constructs additional improvements that are connected to the Leased Property or share maintenance facilities, HVAC, electrical, plumbing or other systems, utilities, parking or other amenities, the parties shall enter into a mutually agreeable cross-easement or joint use agreement, the form of which has been approved in advance by Lessor, to make available necessary services and facilities in connection with such additional improvements, to protect each of their respective interests in the properties affected, and to provide for separate ownership, use, and/or financing of such improvements.

ARTICLE XI

Liens. Subject to the provision of Article XII relating to permitted contests, Lessee will not directly or indirectly create or allow to remain and will promptly discharge at its expense any lien, encumbrance, attachment, title retention agreement or claim upon the Leased Property or any attachment, levy, claim or encumbrance in respect of the Rent, not including, however, (a) this Lease, (b) the matters, if any, included as exceptions in the title policy insuring Lessor’s interest in the Leased Property, (c) restrictions, liens and other encumbrances which are consented to in writing by Lessor or any easements granted pursuant to the provisions of Section 7.3 of this Lease, (d) liens for those taxes upon Lessor which Lessee is not required to pay hereunder, (e) subleases permitted by Article XXIII hereof, (f) liens for Impositions or for sums resulting from noncompliance with Legal Requirements so long as (1) the same are not yet payable or are payable without the addition of any fine or penalty or (2) such liens are in the process of being contested as permitted by Article XII, (g) liens of mechanics, laborers, materialmen, suppliers or vendors for sums either disputed or not yet due provided that (1) the payment of such sums shall not be postponed under any related contract for more than 60 days after the completion of the action giving rise to such lien and such reserve or other appropriate provisions as shall be required by law or generally accepted accounting principles shall have been made therefor and (2) any such liens are in the process of being contested as permitted by Article XII hereof, (h) any liens which are the responsibility of Lessor pursuant to the provisions of Article XXXIV of this Lease.

ARTICLE XII

Permitted Contests. Lessee shall have the right to contest the amount or validity of any Imposition

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to be paid by Lessee or any Legal Requirement or Insurance Requirement or any lien, attachment, levy, encumbrance, charge or claim (“Claims”) not otherwise permitted by Article XI, by appropriate legal proceedings in good faith and with due diligence (but this shall not be deemed or construed in any way to relieve, modify or extend Lessee’s covenants to pay or its covenants to cause to be paid any such charges at the time and in the manner as in this Article provided), on condition, however, that such legal proceedings shall not operate to relieve Lessee from its obligations hereunder and shall not cause the sale or risk the loss of any portion of the Leased Property, or any part thereof, or cause Lessor or Lessee to be in default under any mortgage, deed of trust, security deed or other agreement encumbering the Leased Property or any interest therein. Upon the request of Lessor, Lessee shall either (a) provide a bond or other assurance reasonably satisfactory to Lessor that all Claims which may be assessed against the Leased Property together with interest and penalties, if any, thereon will be paid, or (b) deposit within the time otherwise required for payment with a bank or trust company as trustee upon terms reasonably satisfactory to Lessor, as security for the payment of such Claims, money in an amount sufficient to pay the same, together with interest and penalties in connection therewith, as to all Claims which may be assessed against or become a Claim on the Leased Property, or any part thereof, in said legal proceedings. Lessee shall furnish Lessor and any lender of Lessor with reasonable evidence of such deposit within five days of the same. Lessor agrees to join in any such proceedings at Lessee’s expense if the same be required to legally prosecute such contest of the validity of such Claims; provided, however, that Lessor shall not thereby be subjected to any liability for the payment of any costs or expenses in connection with any proceedings brought by Lessee; and Lessee covenants to indemnify and save harmless Lessor from any such costs or expenses. Lessee shall be entitled to any refund of any Claims and such charges and penalties or interest thereon which have been paid by Lessee or paid by Lessor and for which Lessor has been fully reimbursed. In the event that Lessee fails to pay any Claims when due or to provide the security therefor as provided in this paragraph and to diligently prosecute any contest of the same, Lessor may, upon ten days advance Notice to Lessee, pay such charges together with any interest and penalties and the same shall be repayable by Lessee to Lessor as Additional Charges at the next Payment Date provided for in this Lease. Provided, however, that should Lessor reasonably determine that the giving of such Notice would risk loss to the Leased Property or cause damage to Lessor, then Lessor shall give such Notice as is practical under the circumstances. Lessor reserves the right to contest any of the Claims at its expense not pursued by Lessee. Lessor and Lessee agree to cooperate in coordinating the contest of any claims.

ARTICLE XIII

13.1 General Insurance Requirements.

(a) Coverages. During the Term of this Lease, Lessee shall at all times keep the Leased Property insured with the kinds and amounts of insurance described below provided, however, that the Lessor shall be responsible for payment of any insurance requested by it pursuant to paragraph (ix) of Section 13.1(a) of this Lease if not of a type customarily kept by similar business and properties. This insurance shall be written by companies licensed and authorized to issue insurance in the State. The policies must name Lessor as the insured or as an additional named insured, as the case may be. Losses shall be payable to Lessor or Lessee as provided in this Lease. Any loss adjustment shall require the written consent of Lessor and Lessee, each acting reasonably and in good faith. Evidence of insurance shall be deposited with Lessor. The policies on the Leased Property, including the Leased Improvements, Fixtures and Lessee’s Personal Property, shall include:

(i) Building insurance on the “Special Form” (formerly “All Risk” form) (which may include earthquake and flood in reasonable amounts as determined by Lessor) in an amount not less than 100% of the then full replacement cost thereof (as defined in Section 13.2) or such other amount which is acceptable to Lessor, and personal property insurance on the “Special Form” in the full amount of the replacement cost thereof;

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(ii) Insurance for loss or damage (direct and indirect) from steam boilers, pressure vessels or similar apparatus, now or hereafter installed in the Facility, in the minimum amount of $5,000,000 or in such lesser or greater amounts as are then customary or as may be reasonably requested by Lessor from time to time;

(iii) Loss of income insurance on the “Special Form”, in the amount of one year of Ptercentage Rent for the benefit of Lessor, and business interruption insurance on the “Special Form” in the amount of one year of gross profit, for the benefit of Lessor or Lessee;

(iv) Commercial general liability insurance, with amounts not less than $10,000,000 covering each of the following: bodily injury, death, or property damage liability per occurrence, personal and advertising injury, general aggregate, products and completed operations, with respect to Lessor, and “all risk legal liability” (including liquor law or “dram shop” liability, if liquor or alcoholic beverages are served on the Leased Property) with respect to Lessor and Lessee;

(v) Insurance covering such other hazards and in such amounts as may be customary for comparable properties in the area of the Leased Property and is available from insurance companies, insurance pools or other appropriate companies authorized to do business in the State at rates which are economically practicable in relation to the risks covered as may be reasonably requested by Lessor;

(vi) Fidelity bonds with limits and deductibles as may be reasonably requested by Lessor, covering Lessee’s employees in job classifications normally bonded under prudent hotel management practices in the United States or otherwise required by law;

(vii) Workmen’s compensation insurance to the extent necessary to protect Lessor and the Leased Property against Lessee’s workman’s compensation claims;

(viii) Vehicle liability insurance for owned, non-owned, and hired vehicles, in the amount of $1,000,000; and

(ix) Such other insurance as Lessor may reasonably request for facilities such as the Leased Property and the operation thereof.

(b) Responsibility for Premiums. Lessee shall keep in force the foregoing insurance coverages at its expense; provided, however, that Lessor shall reimburse Lessee for any other casualty coverages required by Lessor not specifically required in (i)—(viii) of subsection (a) above. If requested by any Lender of the Lessor relating to the Leased Property, the Lessee shall provide any funds for the escrow of any insurance premiums, and the Lessee shall receive any income on such escrowed funds and shall receive any funds released from such account.

13.2 Replacement Cost. The term “full replacement cost” as used herein shall mean the actual replacement cost of the Leased Property requiring replacement from time to time including an increased cost of construction endorsement, if available, and the cost of debris removal. In the event either party believes that full replacement cost (the then-replacement cost less such exclusions) has increased or decreased at any time during the Lease Term, it shall have the right to have such full replacement cost re-determined.

13.3 Worker’s Compensation. Lessee, at its sole cost, shall at all times maintain adequate worker’s

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compensation insurance coverage for all persons employed by Lessee on the Leased Property. Such worker’s compensation insurance shall be in accordance with the requirements of applicable local, state and federal law.

13.4 Waiver of Subrogation. All insurance policies carried by Lessor or Lessee covering the Leased Property, the Fixtures, the Facility or Lessee’s Personal Property, including, without limitation, contents, fire and casualty insurance shall expressly waive any right of subrogation on the part of the insurer against the other party. The parties hereto agree that their policies will include such waiver clause or endorsement so long as the same are obtainable without extra cost, and in the event of such an extra charge the other party, at its election, may pay the same, but shall not be obligated to do so. Each party agrees to seek recovery from any applicable insurance coverage available to such party prior to seeking recovery against the other.

13.5 Form Satisfactory, etc. All of the policies of insurance referred to in this Article XIII shall be written in a form, with deductibles and by insurance companies satisfactory to Lessor and also shall meet and satisfy the requirements of any ground lessor, lender or franchisor having any interest in the Leased Premises. Subject to the right to reimbursement or credit specified in Section XIII, Lessee shall pay all of the premiums therefor, and deliver such policies or certificates thereof to Lessor prior to their effective date (and, with respect to any renewal policy, 30 days prior to the expiration of the existing policy), and in the event of the failure of Lessee either to effect such insurance as herein called for or to pay the premiums therefor, or to deliver such policies or binding certificates thereof to Lessor at the times required, Lessor shall be entitled, but shall have no obligation, to effect such insurance and pay the premiums therefor, and Lessee shall reimburse Lessor for any premium or premiums paid by Lessor for the coverages required under this Section (other than the premiums required to be paid or reimbursed to Lessee by Lessor in accordance with Section 13.1(b)) upon written demand therefor, and Lessee’s failure to repay the same within 30 days after Notice of such failure from Lessor shall constitute an Event of Default within the meaning of Section 16.1(c). Each insurer mentioned in this Article XIII shall agree, by endorsement to the policy or policies issued by it, or by independent instrument furnished to Lessor, that it will give to Lessor 30 days’ written notice before the policy or policies in question shall be materially altered, allowed to expire or canceled.

13.6 Change in Limits. If either Lessor or Lessee at any time deems the limits of the personal injury or property damage under the comprehensive public liability insurance then carried to be either excessive or insufficient, Lessor and Lessee shall endeavor in good faith to agree on the proper and reasonable limits for such insurance to be carried and such insurance shall thereafter be carried with the limits thus agreed on until further change pursuant to the provisions of this Section.

13.7 Blanket Policy. Notwithstanding anything to the contrary contained in this Article XIII, Lessee or Lessor may bring the insurance provided for herein within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Lessee or Lessor; provided, however, that the coverage afforded to Lessor and Lessee will not be reduced or diminished or otherwise be different from that which would exist under a separate policy meeting all other requirements of this Lease by reason of the use of such blanket policy of insurance, and provided further that the requirements of this Article XIII are otherwise satisfied.

13.8 Separate Insurance. Lessee shall not on Lessee’s own initiative or pursuant to the request or requirement of any third party, take out separate insurance concurrent in form or contributing in the event of loss with that required in this Article to be furnished, or increase the amount of any then existing insurance by securing an additional policy or additional policies, unless all parties having an insurable interest in the subject matter of the insurance, including in all cases Lessor, are included therein as additional insureds, and the loss is payable under such additional separate insurance in the same manner as losses are payable under this Lease. Lessee shall immediately notify Lessor that Lessee has obtained any such separate insurance or of the increasing of any of the amounts of the then existing insurance.

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13.9 Reports On Insurance Claims. Lessee shall promptly investigate and make a complete and timely written report to the appropriate insurance company as to all accidents, claims for damage relating to the ownership, operation, and maintenance of the Facility, any damage or destruction to the Facility and the estimated cost of repair thereof and shall prepare any and all reports required by any insurance company in connection therewith. All such reports shall be timely filed with the insurance company as required under the terms of the insurance policy involved, and a final copy of such report shall be furnished to Lessor. Lessee shall be authorized to adjust, settle, or compromise any insurance loss, or to execute proofs of such loss, in the aggregate amount of $5,000 or less, with respect to any single casualty or other event.

ARTICLE XIV

14.1 Insurance Proceeds. Subject to the provisions of Section 14.6, and the senior rights of any lender, all proceeds payable by reason of any loss or damage to the Leased Property, or any portion thereof, and insured under any policy of insurance required by Article XIII of this Lease shall be paid to Lessor and held in trust by Lessor in an interest-bearing account, shall be made available, if applicable, for reconstruction or repair, as the case may be, of any damage to or destruction of the Leased Property, or any portion thereof, and, if applicable, shall be paid out by Lessor from time to time for the reasonable costs of such reconstruction or repair upon satisfaction of reasonable terms and conditions specified by Lessor. Any excess proceeds of insurance remaining after the completion of the restoration or reconstruction of the Leased Property shall be paid to Lessee. If neither Lessor nor Lessee is required or elects to repair and restore, and the Lease is terminated without purchase by Lessee as described in Section 14.2, all such insurance proceeds shall be retained by Lessor. All salvage resulting from any risk covered by insurance shall belong to Lessor.

14.2 Reconstruction in the Event of Damage or Destruction Covered by Insurance.

(a) Except as provided in Section 14.5, if during the Term the Leased Property is totally or partially destroyed by a risk covered by the insurance described in Article XIII and the Facility thereby is rendered Unsuitable for its Primary Intended Use, Lessee shall, at Lessee’s option, either (1) restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of the Lease, or (2) offer to acquire the Leased Property from Lessor for a purchase price equal to the Rejectable Offer Price of the Leased Property. If Lessee restores the Facility, the insurance proceeds shall be paid out by Lessor from time to time for the reasonable costs of such restoration upon satisfaction of reasonable terms and conditions, and any excess proceeds remaining after such restoration shall be paid to Lessee. If Lessee acquires the Leased Property, Lessee shall receive the insurance proceeds. If Lessor does not accept Lessee’s offer so to purchase the Leased Property within 90 days, Lessee may withdraw its offer to purchase the Leased Property and, if so withdrawn, Lessee may terminate the Lease with respect to the Leased Property without further liability hereunder and Lessor shall be entitled to retain all insurance proceeds.

(b) Except as provided in Section 14.5, if during the Term the Leased Property is partially destroyed by a risk covered by the insurance described in Article XIII, but the Facility is not thereby rendered Unsuitable for its Primary Intended Use, Lessee shall restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of the Lease. Such damage or destruction shall not terminate this Lease; provided, however, that if Lessee cannot within a reasonable time obtain all necessary government approvals, including building permits, licenses and conditional use permits, after diligent efforts to do so, to perform all required repair

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and restoration work and to operate the Facility for its Primary Intended Use in substantially the same manner as that existing immediately prior to such damage or destruction and otherwise in accordance with the terms of the Lease, Lessee may make a written offer to Lessor to purchase the Leased Property for a purchase price equal to the Rejectable Offer Price of the Leased Property determined without regard to such damage or destruction. If Lessee makes such offer and Lessor does not accept the same within 30 days after Lessee delivers its offer to Lessor, Lessee shall withdraw such offer, in which event this Lease shall remain in full force and effect and Lessee shall immediately proceed to restore the Facility to substantially the same condition as existed immediately before such damage or destruction and otherwise in accordance with the terms of the Lease. If Lessee restores the Facility, the insurance proceeds shall be paid out by Lessor from time to time for the reasonable costs of such restoration upon satisfaction of reasonable terms and conditions specified by Lessor, and any excess proceeds remaining after such restoration shall be paid to Lessee.

(c) If the cost of the repair or restoration exceeds the amount of proceeds received by Lessor from the insurance required under Article XIII, Lessee shall be obligated to contribute any excess amounts needed to restore the Facility prior to commencing work thereon. Such difference shall be paid by Lessee to Lessor promptly after Lessee receives Lessor’s written invoice therefore, to be held in trust, together with any other insurance proceeds, for application to the cost of repair and restoration.

(d) If Lessor accepts Lessee’s offer to purchase the Leased Property under this Article, this Lease shall terminate as to the Leased Property upon payment of the purchase price, and Lessor shall remit to Lessee all insurance proceeds pertaining to the Leased Property being held in trust by Lessor.

14.3 Reconstruction in the Event of Damage or Destruction Not Covered by Insurance. Except as provided in Section 14.5, if during the Term the Facility is totally or materially destroyed by a risk not covered by the insurance described in Article XIII, whether or not such damage or destruction renders the Facility Unsuitable for its Primary Intended Use, Lessee at its option shall either, (a) at Lessee’s sole cost and expense, restore the Facility to substantially the same condition it was in immediately before such damage or destruction and such damage or destruction shall not terminate this Lease, or (b) make a written offer to purchase the Leased Property for a purchase price equal to the Rejectable Offer Price of the Leased Property without regard to such damage or destruction. If Lessor does not accept Lessee’s offer so to purchase the Leased Property within 90 days after Lessee delivers its offer to Lessor, Lessee may withdraw its offer to purchase the Leased Property and, if so withdrawn, Lessee may terminate the Lease with respect to the Leased Property without further liability hereunder. If such damage or destruction is not material, Lessee shall, at Lessee’s sole cost and expense, restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of the Lease, and such damage or destruction shall not terminate the Lease.

14.4 Lessee’s Property. All insurance proceeds payable by reason of any loss of or damage to any of Lessee’s Personal Property shall be paid to Lessee; provided, however, no such payments shall diminish or reduce the insurance payments otherwise payable to or for the benefit of Lessor hereunder.

14.5 Damage Near End of Term. Notwithstanding any provisions of Section 14.2 or 14.3 appearing to the contrary, if damage to or destruction of the Facility rendering it unsuitable for its Primary Intended Use occurs during the last 24 months of the Term, then either party shall have the right to terminate this Lease by giving written notice to the other within 30 days after the date of damage or destruction, whereupon all accrued Rent shall be paid immediately, and this Lease shall automatically terminate five days after the date of such notice.

14.6 Waiver. Lessee hereby waives any statutory rights of termination that may arise by reason of any damage or destruction of the Facility that Lessor is obligated to restore or may restore under any of the provisions of this Lease.

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ARTICLE XV

15.1 Definitions.

(a) “Condemnation” means a Taking resulting from (1) the exercise of any governmental power, whether by legal proceedings or otherwise, by a Condemnor, and (2) a voluntary sale or transfer by Lessor to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending.

(b) “Date of Taking” means the date the Condemnor has the right to possession of the property being condemned.

(c) “Award” means all compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation.

(d) “Condemnor” means any public or quasi-public authority, or private corporation or individual, having the power of Condemnation.

15.2 Parties’ Rights and Obligations. If during the Term there is any Condemnation of all or any part of the Leased Property or any interest in this Lease, the rights and obligations of Lessor and Lessee shall be determined by this Article XV.

15.3 Total Taking. If title to the fee of the whole of the Leased Property is condemned by any Condemnor, subject to the provisions of Section 15.6, this Lease shall cease and terminate as of the Date of Taking by the Condemnor. If title to the fee of less than the whole of the Leased Property is so taken or condemned, which nevertheless renders the Leased Property Unsuitable or Uneconomic for its Primary Intended Use, Lessee and Lessor shall each have the option, by notice to the other, at any time prior to the Date of Taking, to terminate this Lease as of the Date of Taking. Upon such date, if such Notice has been given, this Lease shall thereupon cease and terminate. All Percentage Rent and Additional Charges paid or payable by Lessee hereunder shall be apportioned as of the Date of Taking, and Lessee shall promptly pay Lessor such amounts. In the event of any such termination, the provisions of Section 15.7 shall apply.

15.4 Allocation of Award. The total Award made with respect to the Leased Property or for loss of rent, or for Lessor’s loss of business beyond the Term, shall be solely the property of and payable to Lessor. Any Award made for loss of Lessee’s business during the remaining Term, if any, for the taking of Lessee’s Personal Property, or for removal and relocation expenses of Lessee in any such proceedings shall be the sole property of and payable to Lessee. In any Condemnation proceedings Lessor and Lessee shall each seek its Award in conformity herewith, at its respective expense; provided, however, Lessee shall not initiate, prosecute or acquiesce in any proceedings that may result in a diminution of any Award payable to Lessor.

15.5 Partial Taking. If title to less than the whole of the Leased Property is condemned, and the Leased Property is still suitable for its Primary Intended Use, and not Uneconomic for its Primary Intended Use, or if Lessee or Lessor is entitled but neither elects to terminate this Lease as provided in Section 15.3, Lessee at the expense of the Lessor shall with all reasonable dispatch restore the untaken portion of any Leased Improvements so that such Leased Improvements constitute a complete architectural unit of the same general character and condition (as nearly as may be possible under the circumstances) as the Leased Improvements existing immediately prior to the Condemnation. In the event of any Condemnation as described in this Section 15.5, the entire amount of the Award shall be paid to the Lessor.

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15.6 Temporary Taking. If the whole or any part of the Leased Property or of Lessee’s interest under this Lease is condemned by any Condemnor for its temporary use or occupancy, this Lease shall not terminate by reason thereof, Lessee, however, shall be released from its obligations to pay, in the manner and at the terms herein specified, the Additional Charges. Except only to the extent that Lessee may be prevented from so doing pursuant to the terms of the order of the Condemnor, Lessee shall continue to perform and observe all of the other terms, covenants, conditions and obligations hereof on the part of the Lessee to be performed and observed, as though such Condemnation had not occurred. In the event of any Condemnation as described this Section 15.6, the entire amount of any Award made for such Condemnation allocable to the Term of this Lease, whether paid by way of damages, rent or otherwise, shall be paid to Lessor. Lessor covenants that upon the termination of any such period of temporary use or occupancy it will, at its sole cost and expense, restore the Leased Property as nearly as may be reasonably possible to the condition in which the same was immediately prior to such Condemnation, unless such period of temporary use or occupancy extends beyond the expiration of the Term, in which case Lessor shall not be required to make such restoration.

15.7 Lessee’s Offer. In the event of the termination of this Lease as provided in Section 15.3, Lessee shall offer to acquire the Leased Property from Lessor for a purchase price equal to the Rejectable Offer Price of the Leased Property without regard to such taking and, if accepted, Lessee shall receive the entire Award. If Lessor does not accept Lessee’s offer to purchase the Leased Property, Lessee shall withdraw its offer to purchase the Leased Property and, if so withdrawn, Lessee may terminate the Lease with respect to the Leased Property without further liability hereunder, except for payment of Rent as provided in the penultimate sentence of Section 15.3 or for matters which by their express terms survive termination of this Lease, and Lessor shall be entitled to retain the Award except as provided in Section 15.4.

ARTICLE XVI

16.1 Events of Default. If any one or more of the following events (individually, an “Event of Default”) occurs:

(a) if an Event of Default occurs, which is not cured, under any other lease between Lessor or any Affiliate of Lessor and Lessee or any Affiliate of Lessee; or

(b) if Lessee fails to make payment of the Percentage Rent or Additional Charges within ten days after the same becomes due and payable;

(c) if Lessee fails to observe or perform any other term, covenant or condition of this Lease and such failure is not cured by Lessee within a period of 30 days after receipt by the Lessee of Notice thereof from Lessor, unless such failure cannot with due diligence be cured within a period of 30 days, in which case it shall not be deemed an Event of Default if Lessee proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof provided, however, in no event shall such cure period extend beyond 90 days after such Notice; or

(d) if the Lessee shall file a petition in bankruptcy or reorganization for an arrangement pursuant to any federal or state bankruptcy law or any similar federal or state law, or shall be adjudicated a bankrupt or shall make an assignment for the benefit of creditors or shall admit in writing its inability to pay its debts generally as they become due, or if a petition or answer proposing the adjudication of the Lessee as a bankrupt or its reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law shall be filed in any court and the Lessee shall be adjudicated a bankrupt and such

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adjudication shall not be vacated or set aside or stayed within 60 days after the entry of an order in respect thereof, or if a receiver of the Lessee or of the whole or substantially all of the assets of the Lessee shall be appointed in any proceeding brought by the Lessee or if any such receiver, trustee or liquidator shall be appointed in any proceeding brought against the Lessee and shall not be vacated or set aside or stayed within 120 days after such appointment; or

(e) if Lessee is liquidated or dissolved, or begins proceedings toward such liquidation or dissolution, or, in any manner, permits the sale or divestiture of substantially all of its assets; or

(f) if the estate or interest of Lessee in the Leased Property or any part thereof is voluntarily or involuntarily transferred, assigned, conveyed, levied upon or attached in any proceeding (unless Lessee is contesting such lien or attachment in good faith in accordance with Article XI hereof); or

(g) if, except as a result of damage, destruction or a partial or complete Condemnation, Lessee voluntarily ceases operations on the Leased Property; or

(h) if a material event of default has been declared by the franchisor under the Franchise Agreement with respect to the Facility on the Leased Premises which has not been cured within any applicable cure period or such Franchise Agreement has been terminated as a result of any action or failure to act by the Lessee; then, and in any such event, Lessor may exercise one or more remedies available to it herein or at law or in equity, including but not limited to its right to terminate this Lease by giving Lessee not less than ten days’ Notice of such termination except in the case of a default under Sections 16.1(e), 16.1(f), or 16.1(g), in which case notice shall not be required.

If litigation is commenced with respect to any alleged default under this Lease, the prevailing party in such litigation shall receive, in addition to its damages incurred, such sum as the court shall determine as its reasonable attorneys’ fees, and all costs and expenses incurred in connection therewith.

No Event of Default (other than a failure to make a payment of money) shall be deemed to exist under clause (d) during any time for up to one year the curing thereof is prevented by an Unavoidable Delay, provided that upon the cessation of such Unavoidable Delay, Lessee remedies such default or Event of Default without further delay.

16.2 Surrender. If an Event of Default occurs (and the event giving rise to such Event of Default has not been cured within the curative period relating thereto as set forth in Section XVI) and is continuing, whether or not this Lease has been terminated pursuant to Section XVI, Lessee shall, if requested by Lessor so to do, immediately surrender and assign to Lessor or Lessor’s designee the Leased Property including, without limitation, any and all books, records, files, licenses, permits and keys relating thereto, and quit the same and Lessor may enter upon and repossess the Leased Property by reasonable force, summary proceedings, ejectment or otherwise, and may remove Lessee and all other persons and any and all personal property from the Leased Property, subject to rights of any hotel guests and to any requirement of law. Lessee hereby waives any and all requirements of applicable laws for service of notice to re-enter the Leased Property. Lessor shall be under no obligation to, but may if it so chooses, relet the Leased Property or otherwise mitigate Lessor’s damages.

16.3 Damages. Neither (a) the termination of this Lease, (b) the repossession of the Leased Property, (c) the failure of Lessor to relet the Leased Property, nor (d) the reletting of all or any portion thereof, shall relieve Lessee of its liability and obligations hereunder, all of which shall survive any such termination, repossession or reletting. In the event of any such termination, Lessee shall forthwith pay to Lessor all Rent due and payable with respect to the Leased Property to and including the date of such termination.

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Lessee shall forthwith pay to Lessor, at Lessor’s option, as and for liquidated and agreed current damages for Lessee’s default, either:

(1) Without termination of Lessee’s right to possession of the Leased Property, each installment of Rent and other sums payable by Lessee to Lessor under the Lease as the same becomes due and payable, which Rent and other sums shall bear interest at the Overdue Rate, and Lessor may enforce, by action or otherwise, any other term or covenant of this Lease;

(2) the sum of:

(A) the unpaid Rent which had been earned at the time of termination, repossession or reletting, and

(B) the worth at the time of termination, repossession or reletting of the amount by which the unpaid Rent for the balance of the Term after the time of termination, repossession or reletting, exceeds the amount of such rental loss that Lessee proves could be reasonably avoided and as reduced for rentals received after the time of termination, repossession or reletting, if and to the extent required by applicable law, the worth at the time of termination, repossession or reletting of the amount referred to in this subparagraph 16.3(2)(B) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of New York at the time of award plus 1%, and

(C) any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things, would be likely to result therefrom.

16.4 Waiver. If this Lease is terminated pursuant to Section XXVI, Lessee waives, to the extent permitted by applicable law, (a) any right to a trial by jury in the event of summary proceedings to enforce the remedies set forth in this Article XVI, and (b) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt and Lessor waives any right to “pierce the corporate veil” of Lessee other than to the extent funds shall have been inappropriately paid any Affiliate of Lessee following a default resulting in an Event of Default.

16.5 Application of Funds. Any payments received by Lessor under any of the provisions of this Lease during the existence or continuance of any Event of Default shall be applied to Lessee’s obligations in the order that such obligations are due or as may be prescribed by the laws of the State.

ARTICLE XVII

Lessor’s Right to Cure Lessee’s Default. If Lessee fails to make any payment or to perform any act required to be made or performed under this Lease including, without limitation, Lessee’s failure to comply with the terms of any Franchise Agreement other than a failure to complete improvements required by the franchisor because the Lessor has not provided Lessee with the funds therefor, and fails to cure the same within the relevant time periods provided in Section XVI, Lessor, without waiving or

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releasing any obligation of Lessee, and without waiving or releasing any obligation or default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of Lessee, and may, to the extent permitted by law, enter upon the Leased Property for such purpose and, subject to Section 16.4, take all such action thereon as, in Lessor’s reasonable opinion, may be necessary or appropriate therefore. Before entering the Leased Property for the purposes provided in this Article XVI, Lessor shall notify the Lessee of its intention to enter the Leased Property unless such Notice would be impractical. No such entry shall be deemed an eviction of Lessee. All sums so paid by Lessor and all costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses, in each case to the extent permitted by law) so incurred, together with a late charge thereon (to the extent permitted by law) at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessors, shall be paid by Lessee to Lessor on demand. The obligations of Lessee and rights of Lessor contained in this Article shall survive the expiration or earlier termination of this Lease.

ARTICLE XVIII

Provisions Relating to Purchase of the Leased Property. If Lessee purchases the Leased Property from Lessor pursuant to any of the terms of this Lease, the closing of the purchase shall occur 90 days after Lessor accepts Lessee’s offer to purchase the Leased Property, unless the provision of the Lease under which such offer was made specifies a different closing date, in which case the date set forth in such provision shall be the closing date. At such closing, Lessor shall, upon receipt from Lessee of the applicable purchase price, together with full payment of any unpaid Rent due and payable with respect to any period ending on or before the date of the purchase, deliver to Lessee an appropriate limited or special warranty deed or other conveyance conveying the entire interest of Lessor in and to the Leased Property to Lessee free and clear of all encumbrances other than (a) those that Lessee has agreed hereunder to pay or discharge, (b) those mortgage liens, if any, that Lessee has agreed in writing to accept and to take title subject to, (c) encumbrances, easements, licenses or rights of way required to be imposed on the Leased Property under Section 7.3, (d) any other encumbrances permitted to be imposed on the Leased Property under the provisions of Section XXXIV that are assumable at no cost to Lessee or to which Lessee may take subject without cost to Lessee and relating to the period of time after the purchase (e) any taxes not yet due and payable; and (f) those encumbrances created, requested or consented to by Lessee. The difference between the applicable purchase price and the total of the encumbrances assumed or taken subject to shall be paid in cash to Lessor or as Lessor may direct, in federal or other immediately available funds, except as otherwise mutually agreed by Lessor and Lessee. All expenses of such conveyance, including, without limitation, the cost of title examination or title insurance, if desired by Lessee, Lessee’s attorneys’ fees incurred in connection with such conveyance and release, and transfer taxes and recording fees, shall be paid by Lessee. Lessor shall pay its attorney’s fees. This Article XVIII is subject to the prior rights of any lender whose lien is secured by the Leased Premises.

ARTICLE XIX

19.1 Personal Property Limitation. Anything contained in this Lease to the contrary notwithstanding, the average of the fair market values of the items of personal property that are leased to the Lessee under this Lease at the beginning and at the end of any Fiscal Year shall not exceed 15% of the average of the fair market values of the Leased Property at the beginning and at the end of such Fiscal Year. This Section XIX is intended to ensure that the Rent qualifies as “rents from real property,” within the meaning of Section 856(d) of the Code, or any similar or successor provisions thereto, and shall be interpreted in a manner consistent with such intent.

19.2 Sublease Rent Limitation. Anything contained in this Lease to the contrary notwithstanding, Lessee shall not sublet the Leased Property on any basis such that the rental or other amounts to be paid

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by the sublessee thereunder would be based, in whole or in part, on either (a) the net income or profits derived by the business activities of the sublessee, or (b) any other formula such that any portion of the Rent would fail to qualify as “rents from real property” within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto.

19.3 Sublease Tenant Limitation. Anything contained in this Lease to the contrary notwithstanding, Lessee shall not sublease the Leased Property or any portions thereof to any Person in which Humphrey Hospitality Trust, Inc. owns, directly or indirectly, a 10% or more interest, within the meaning of Section 856(d)(2)(B) of the Code, or any similar or successor provisions thereto.

19.4 TRS Election and Limitations. Lessee agrees to make an election to be and to operate as a “taxable REIT subsidiary” of Humphrey Hospitality Trust, Inc. within the meaning of Section 856(1) of the Code. Lessee shall not (A) directly or indirectly operate or manage a “lodging facility” within the meaning of Section 856(d)(9)(D)(ii) of the Code or a “health care facility” within the meaning of Section 856(e)(6)(D)(ii) of the Code or (B) directly or indirectly provide to any other person (under a franchise, license, or otherwise) rights to any brand name under which any lodging facility or health care facility is operated; provided, however, that Lessee may provide such rights to a manager to operate or manage a lodging facility as long as such rights are held by Lessee as a franchisee, licensee, or in a similar capacity and such lodging facility is either owned by Lessee or is leased to Lessee by Lessor or one of its Affiliates. Lessee agrees that it will, at all times during the Term, cause the Leased Property to be operated and managed by a manager that meets all of the following requirements

(a) The manager does not own, directly or indirectly, more than 35% of the outstanding stock of Humphrey Hospitality Trust, Inc.

(b) If the manager is a corporation, no more than 35% of the total combined voting power of its outstanding stock (or 35% of the total shares of all classes of its outstanding stock) or, if it is not a corporation, no more than 35% of the ownership interest in its assets or net profits is owned, directly or indirectly, by one or more Persons owning 35% or more of the outstanding stock of Humphrey Hospitality Trust, Inc.

(c) Neither Humphrey Hospitality Trust, Inc., the Lessor, the Lessee, nor any Affiliate thereof derives any income from the manager, except for income from the leasing of the Norfolk, Nebraska office building.

(d) At the time that the manager enters into a management agreement with the Lessee to operate the Leased Property, the manager (or any “related person” within the meaning of Section 856(d)(9)(F) of the Code) is actively engaged in the trade or business of operating “qualified lodging facilities” within the meaning of Section 856(d)(9)(D) of the Code for any Person who is not a “related person” within the meaning of Section 856(d)(9)(F) of the Code with respect to Humphrey Hospitality Trust, Inc or the Lessee (an “Unrelated Person”). For purposes of determining whether the requirement of this paragraph (d) has been met, a manager shall be treated as being actively engaged in such a trade or business if the manager (i) derives at least 10% of both its profits and revenue from operating “qualified lodging facilities” within the meaning of Section 856(d)(9)(D) of the Code for Unrelated Persons or (ii) complies with any regulations or other administrative guidance under Section 856(d)(9) of the Code that provide a “safe harbor “ rule with respect to the amount of hotel management business with Unrelated Persons that is necessary to qualify as an “eligible independent contractor” within the meaning such Code section.

19.5 Manager Officer and Employee Limitation. Anything contained in this Lease to the contrary notwithstanding, none of the officers or employees of the manager (or any Person who furnishes or

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renders services to the tenants of the Leased Property, or manages or operates the Leased Property) shall be officers or employees of Humphrey Hospitality Trust, Inc. In addition, if a Person serves as both (a) a director of the manager (or any Person who furnishes or renders services to the tenants of the Leased Property, or manages or operates the Leased Property) and (b) a trustee and officer (or employee) of Humphrey Hospitality Trust, Inc. that Person shall not receive any compensation for serving as a director of the manager (or any Person who furnishes or renders services to the tenants of the Leased Property, or manages or operates the Leased Property). Furthermore, if a Person serves as both (a) a trustee of Humphrey Hospitality Trust, Inc. and (b) a director and officer (or employee) of the manager (or any Person who furnishes or renders services to the tenants of the Leased Property, or manages or operates the Leased Property), that Person shall not receive any compensation for serving as a trustee of Humphrey Hospitality Trust, Inc.

ARTICLE XX

Holding Over. If Lessee for any reason remains in possession of the Leased Property after the expiration or earlier termination of the Term, such possession shall be as a tenant at sufferance during which time Lessee shall pay as rental each month two times the aggregate of (a) one-twelfth of the aggregate Percentage Rent payable with respect to the last Fiscal Year of the Term, (b) all Additional Charges accruing during the applicable month and (c) all other sums, if any, payable by Lessee under this Lease with respect to the Leased Property. During such period, Lessee shall be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenancies at sufferance, to continue its occupancy and use of the Leased Property. Nothing contained herein shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease.

ARTICLE XXI

Risk of Loss. During the Term, the risk of loss or of decrease in the enjoyment and beneficial use of the Leased Property in consequence of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise, or in consequence of foreclosures, attachments, levies or executions (other than those caused by Lessor and those claiming from, through or under Lessor) is assumed by Lessee, and, in the absence of gross negligence, willful misconduct or breach of this Lease by Lessor pursuant to Section 34.3, Lessor shall in no event be answerable or accountable therefor, nor shall any of the events mentioned in this Section entitle Lessee to any abatement of Rent except as specifically provided in this Lease.

ARTICLE XXII

Indemnification. Notwithstanding the existence of any insurance, and without regard to the policy limits of any such insurance or self-insurance, but subject to the last sentence of Section 13.4 if any insurance coverage is applicable, Section 16.4 and Article VII, Lessee will protect, indemnify, hold harmless and defend Lessor Indemnified Parties from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorney’s fees and expenses) to the extent permitted by law imposed upon or incurred or asserted against Lessor Indemnified Parties by reason of: any accident, injury to or death of persons or loss of or damage to property occurring on or about the Leased Property or adjoining sidewalks, including without limitation any claims under liquor liability, “dram shop” or similar laws, (b) any past, present or future use, misuse, non-use, condition, management, maintenance or repair by Lessee or any of its agents, employees or invitees of the Leased Property or Lessee’s Personal Property or any litigation, proceeding or claim by governmental entities or other third parties to which a Lessor Indemnified Party is made a party or participant related to such use, misuse, non-use, condition, management, maintenance, or repair

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thereof by Lessee or any of its agents, employees or invitees, including any failure of Lessee or any of its agents, employees or invitees to perform any obligations under this Lease or imposed by applicable law (other than arising out of Condemnation proceedings), (c) any Impositions that are the obligations of Lessee pursuant to the applicable provisions of this Lease, (d) any failure on the part of Lessee to perform or comply with any of the terms of this Lease, and (e) the non-performance of any of the terms and provisions of any and all existing and future subleases of the Leased Property to be performed by the landlord thereunder and (f) the gross negligent acts and omissions and willful misconduct of Lessee.

Lessor shall indemnify, save harmless and defend Lessee Indemnified Parties from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses imposed upon or incurred by or asserted against Lessee Indemnified Parties as a result of the gross negligence or willful misconduct of Lessor arising in connection with this Lease. The Lessor’s obligations to indemnify Lessee Indemnified Parties shall be limited to the value of Lessor’s equity interest in the Facilities. Nothing herein shall be construed as requiring Lessor to indemnify a Lessee Indemnified Party against its own grossly negligent acts and omissions and willful misconduct.

Any amounts that become payable by an Indemnifying Party under this Section shall be paid within ten days after liability therefor on the part of the Indemnifying Party is determined by litigation or otherwise, and if not timely paid, shall bear a late charge (to the extent permitted by law) at the Overdue Rate from the date of such determination to the date of payment. An Indemnifying Party, at its expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against the Indemnified Party. The Indemnified Party, at its expense, shall be entitled to participate in any such claim, action, or proceeding, and neither the Indemnifying Party nor the Indemnified Party may compromise or otherwise dispose of the same without the consent of the Indemnified Party or the Indemnifying Party, which may not be unreasonably withheld. Nothing herein shall be construed as indemnifying a Lessor Indemnified Party against its own grossly negligent acts or omissions or willful misconduct.

Lessee’s or Lessor’s liability for a breach of the provisions of this Article shall survive any termination of this Lease.

ARTICLE XXIII

23.1 Subletting and Assignment. Subject to the provisions of Article XIX and Section 23.2 and any other express conditions or limitations set forth herein, Lessee may not without the consent of Lessor, which consent may be withheld in Lessor’s sole discretion, (a) assign this Lease or sublet all or any part of the Leased Property or (b) sublet any retail or restaurant portion of the Leased Improvements in the normal course of the Primary Intended Use; provided that any subletting to any party other than an Affiliate of Lessee shall not individually as to any one such subletting, or in the aggregate, materially diminish the Rent payable under this Lease. In the case of a subletting, the sublessee shall comply with the provisions of Section 23.2, and in the case of an assignment, the assignee shall assume in writing and agree to keep and perform all of the terms of this Lease on the part of Lessee to be kept and performed and shall be, and become, jointly and severally liable with Lessee for the performance thereof. In case of either an assignment or subletting made during the Term, Lessee shall remain primarily liable, as principal rather than as surety, for the prompt payment of the Rent and for the performance and observance of all of the covenants and conditions to be performed by Lessee hereunder. An original counterpart of each such sublease and assignment and assumption, duly executed by Lessee and such sublessee or assignee, as the case may be, in form and substance satisfactory to Lessor, shall be delivered promptly to Lessor.

23.2 Attornment. Lessee shall insert in each sublease permitted under Section XXIII provisions to the effect that (a) such sublease is subject and subordinate to all of the terms and provisions of this Lease

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and to the rights of Lessor hereunder, (b) if this Lease terminates before the expiration of such sublease, the sublessee thereunder will, at Lessor’s option, attorn to Lessor and waive any right the sublessee may have to terminate the sublease or to surrender possession thereunder as a result of the termination of this Lease, and (c) if the sublessee receives a written Notice from Lessor or Lessor’s assignees, if any, stating that an uncured Event of Default exists under this Lease, the sublessee shall thereafter be obligated to pay all rentals accruing under said sublease directly to the party giving such Notice, or as such party may direct. All rentals received from the sublessee by Lessor or Lessor’s assignees, if any, as the case may be, shall be credited against the amounts owing by Lessee under this Lease.

ARTICLE XXIV

Officer’s Certificates; Lessor’s Estoppel Certificates and Covenants.

(a) At any time and from time to time upon not less than 30 days Notice by Lessor, Lessee will furnish to Lessor an Officer’s Certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, whether to the knowledge of Lessee there is any existing default or Event of Default hereunder by Lessor or Lessee, and such other information as may be reasonably requested by Lessor. Any such certificate furnished pursuant to this Section may be relied upon by Lessor, any lender and any prospective purchaser of the Leased Property.

(b) At any time and from time to time upon not less than 10 days Notice by Lessee, Lessor will furnish to Lessee or to any person designated by Lessee an estoppel certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which Rent has been paid, whether to the knowledge of Lessor there is any existing default or Event of Default on Lessee’s part hereunder, and such other information as may be reasonably requested by Lessee.

ARTICLE XXV

Lessor’s Right to Inspect. Lessee shall permit Lessor and its authorized representatives as frequently as reasonably requested by Lessor to inspect the Leased Property and Lessee’s accounts and records pertaining thereto and make copies thereof, during usual business hours upon reasonable advance notice, subject only to any business confidentiality requirements reasonably requested by Lessee.

ARTICLE XXVI

No Waiver. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of full or partial payment of Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. To the extent permitted by law, no waiver of any breach shall affect or alter this Lease, which shall continue in full force and effect with respect to any other then existing or subsequent breach.

ARTICLE XXVII

Remedies Cumulative. To the extent permitted by law, each legal, equitable or contractual right, power and remedy of Lessor or Lessee now or hereafter provided either in this Lease or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power and remedy and the exercise or beginning of the exercise by Lessor or Lessee of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Lessor or Lessee of any or all of such other rights, powers and remedies.

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ARTICLE XXVIII

Acceptance of Surrender. No surrender to Lessor of this Lease or of the Leased Property or any part thereof, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Lessor and no act by Lessor or any representative or agent of Lessor, other than such a written acceptance by Lessor, shall constitute an acceptance of any such surrender.

ARTICLE XXIX

No Merger of Title. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same person or entity may acquire, own or hold, directly or indirectly: (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate and (b) the fee estate in the Leased Property.

ARTICLE XXX

Conveyance by Lessor. If Lessor or any successor owner of the Leased Property conveys the Leased Property in accordance with the terms hereof other than as security for a debt, and the grantee or transferee of the Leased Property expressly assumes all obligations of Lessor hereunder arising or accruing from and after the date of such conveyance or transfer, Lessor or such successor owner, as the case may be, shall thereupon be released from all future liabilities and obligations of Lessor under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Leased Property and all such future liabilities and obligations shall thereupon be binding upon the new owner.

Other Interests. This Lease and Lessee’s interest hereunder shall at all times be subject and subordinate to the lien and security title of any deeds to secure debt, deeds of trust, mortgages, or other interests heretofore or hereafter granted by Lessor or which otherwise encumber or affect the Leased Property and to any and all advances to be made thereunder and to all renewals, modifications, consolidations, replacements, substitutions, and extensions thereof (all of which are herein called the “Mortgage”). In confirmation of such subordination, however, Lessee shall, at Lessor’s request, promptly execute, acknowledge and deliver any instrument which may be required to evidence subordination to any Mortgage and attornment to the holder thereof, conditioned upon receipt of a nondisturbance clause. In the event of Lessee’s failure to deliver such subordination and if the Mortgage does not change any term of the Lease, Lessor may, in addition to any other remedies for breach of covenant hereunder, execute, acknowledge, and deliver the instrument as the agent or attorney-in-fact of Lessee, and Lessee hereby irrevocably constitutes Lessor its attorney-in-fact for such purpose, Lessee acknowledging that the appointment is coupled with an interest and is irrevocable. Lessee hereby waives and releases any claim it might have against Lessor or any other party for any actions lawfully taken by the holder of any Mortgage.

ARTICLE XXXI

Quiet Enjoyment. So long as Lessee pays all Rent as the same becomes due and complies with all of the terms of this Lease and performs its obligations hereunder, in each case within the applicable grace periods, if any, Lessee shall peaceably and quietly have, hold and enjoy the Leased Property for the Term hereof, free of any claim or other action by Lessor or anyone claiming by, through or under Lessor, but subject to all liens and encumbrances subject to which the Leased Property was conveyed to Lessor or hereafter consented to by Lessee or provided for herein and free and clear of any interference by Lessor with Lessee’s use and occupancy of the premises. Notwithstanding the foregoing, Lessee shall have the right by separate and independent action to pursue any claim it may have against Lessor as a result of a breach by Lessor of the covenant of quiet enjoyment contained in this Section.

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ARTICLE XXXII

Notices. All notices, demands, requests, consents approvals and other communications (“Notice” or “Notices”) hereunder shall be in writing and personally served or mailed (by registered or certified mail, return receipt requested and postage prepaid or by overnight courier), if to Lessor at 7170 Riverwood Drive, Columbia, Maryland 21046, and if to Lessee 7170 Riverwood Drive, Columbia, Maryland 21046 at or to such other address or addresses as either party may hereafter designate. Personally delivered Notice shall be effective upon receipt, and Notice given by mail shall be complete at the time of deposit in the U.S. Mail system, but any prescribed period of Notice and any right or duty to do any act or make any response within any prescribed period or on a date certain after the service of such Notice given by mail shall be extended five days.

ARTICLE XXXIII

Appraisers. If it becomes necessary to determine the Fair Market Value or Fair Market Rental of the Leased Property for any purpose of this Lease, the party required or permitted to give Notice of such required determination shall include in the Notice the name of a person selected to act as appraiser on its behalf. Within 20 days after Notice, Lessor (or Lessee, as the case may be) shall by Notice to Lessee (or Lessor, as the case may be) appoint a second person as appraiser on its behalf. The appraisers thus appointed, each of whom must be a member of the American Institute of Real Estate Appraisers (or any successor organization thereto) with at least five years experience in the State appraising property similar to the Leased Property, shall, within 45 days after the date of the Notice appointing the first appraiser, proceed to appraise the Leased Property to determine the Fair Market Value or Fair Market Rental thereof as of the relevant date (giving effect to the impact, if any, of inflation from the date of their decision to the relevant date); provided, however, that if only one appraiser shall have been so appointed, then the determination of such appraiser shall be final and binding upon the parties. To the extent consistent with sound appraisal practice as then existing at the time of any such appraisal, such appraisal shall be made on a basis consistent with the basis on which the Leased Property was appraised for purposes of determining its Fair Market Value at the time the Leased Property was acquired by Lessor. If two appraisers are appointed and if the difference between the amounts so determined does not exceed 5% of the lesser of such amounts, then the Fair Market Value or Fair Market Rental shall be an amount equal to 50% of the sum of the amounts so determined. If the difference between the amounts so determined exceeds 5% of the lesser of such amounts, then such two appraisers shall have 20 days to appoint a third appraiser. If no such appraiser shall have been appointed within such 20 days or within 90 days of the original request for a determination of Fair Market Value or Fair Market Rental, whichever is earlier, either Lessor or Lessee may apply to any court having jurisdiction to have such appointment made by such court. Any appraiser appointed by the original appraisers or by such court shall be instructed to determine the Fair Market Value or Fair Market Rental within 45 days after appointment of such appraiser. The determination of the appraiser which differs most in the terms of dollar amount from the determinations of the other two appraisers shall be excluded, and 50% of the sum of the remaining two determinations shall be final and binding upon Lessor and Lessee as the Fair Market Value or Fair Market Rental of the Leased Property, as the case may be. This provision for determining by appraisal shall be specifically enforceable to the extent such remedy is available under applicable law, and any determination hereunder shall be final and binding upon the parties except as otherwise provided by applicable law. Lessor and Lessee shall each pay the fees and expenses of the appraiser appointed by it and each shall pay one-half of the fees and expenses of the third appraiser and one-half of all other costs and expenses incurred in connection with each appraisal.

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ARTICLE XXXIV

34.1 Lessor May Grant Liens. Without the consent of Lessee, Lessor may, subject to the terms and conditions set forth below in this Section XXXIV, from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement (“Encumbrance”) upon the Leased Property, or any portion thereof or interest therein, whether to secure any borrowing or other means of financing or refinancing. Any such Encumbrance shall (a) contain the right to prepay (whether or not subject to a prepayment penalty); (b) provide that it is subject to the rights of Lessee under this Lease and (c) contain the Agreement by the holder of the Encumbrance that it will (1) give Lessee the same notice, if any, given to Lessor of any default or acceleration of any obligation underlying any such Encumbrance or any sale in foreclosure under such Encumbrance, (2) permit Lessee to cure any such default on Lessor’s behalf within any applicable cure period, and Lessee shall be reimbursed by Lessor for any and all costs incurred in effecting such cure, including without limitation out-of-pocket costs incurred to effect any such cure (including reasonable attorneys’ fees) and (3) permit Lessee to appear by its representative and to bid at any sale in foreclosure made with respect to any such Encumbrance. Upon the request of Lessor, Lessee shall subordinate this Lease to the lien of a new mortgage on the Leased Property and agree to attorn to the new mortgagee, on the condition that the proposed mortgagee executes a non-disturbance agreement recognizing this Lease, and agreeing, for itself and its successors and assigns, to comply with the provisions of this Article XXXIV.

34.2 Lessee’s Right to Cure. Subject to the provisions of Section 34.3, if Lessor breaches any covenant to be performed by it under this Lease, Lessee, after Notice to and demand upon Lessor, without waiving or releasing any obligation hereunder, and in addition to all other remedies available to Lessee, may (but shall be under no obligation at any time thereafter to) make such payment or perform such act for the account and at the expense of Lessor. All sums so paid by Lessee and all costs and expenses (including, without limitation, reasonable attorneys’ fees) so incurred, together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessee, shall be paid by Lessor to Lessee on demand or, following entry of a final, nonappealable judgment against Lessor for such sums, may be offset by Lessee against the Rent payments next accruing or coming due. The rights of Lessee hereunder to cure and to secure payment from Lessor in accordance with this Section 34.2 shall survive the termination of this Lease with respect to the Leased Property.

34.3 Breach by Lessor. It shall be a breach of this Lease if Lessor fails to observe or perform any term, covenant or condition of this Lease on its part to be performed and such failure continues for a period of 30 days after Notice thereof from Lessee, unless such failure cannot with due diligence be cured within a period of 30 days, in which case such failure shall not be deemed to continue if Lessor, within such 30-day period, proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof within 90 days. The time within which Lessor shall be obligated to cure any such failure also shall be subject to extension of time due to the occurrence of any Unavoidable Delay.

ARTICLE XXXV

35.1 Miscellaneous. Anything contained in this Lease to the contrary notwithstanding, all claims against, and liabilities of, Lessee or Lessor arising prior to any date of termination of this Lease shall survive such termination. If any term or provision of this Lease or any application thereof is invalid or unenforceable, the remainder of this Lease and any other application of such term or provisions shall not be affected thereby. If any late charges or any interest rate provided for in any provision of this Lease are based upon a rate in excess of the maximum rate permitted by applicable law, the parties agree that such charges shall be fixed at the maximum permissible rate. Neither this Lease nor any provision hereof may be changed, waived, discharged or terminated except by a written instrument in recordable form signed by Lessor and Lessee. All the terms and provisions of this Lease shall be binding upon and inure to the

36

benefit of the parties hereto and their respective successors and assigns. The headings in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Lease shall be governed by and construed in accordance with the laws of the State, but not including its conflicts of laws rules.

35.2 Transition Procedures. Upon the expiration or termination of the Term of this Lease, for whatever reason, Lessor and Lessee shall do the following (and the provisions of this Section 35.2 shall survive the expiration or termination of this Agreement until they have been fully performed) and, in general, shall cooperate in good faith to effect an orderly transition of the management lease or of the Facility.

(a) Transfer of Licenses. Upon the expiration or earlier termination of the Term, Lessee shall use its best efforts (i) to transfer to Lessor or Lessor’s nominee all licenses, operating permits and other governmental authorizations and all contracts, including contracts with governmental or quasi-governmental entities, that may be necessary for the operation of the Facility, including any Franchise Agreement (collectively, “Licenses”), or (ii) if such transfer is prohibited by law or Lessor otherwise elects, to cooperate with Lessor or Lessor’s nominee in connection with the processing by Lessor or Lessor’s nominee of any applications for, all Licenses; provided, in either case, that the costs and expenses of any such transfer or the processing of any such application shall be paid by Lessor or Lessor’s nominee

(b) Leases and Concessions. Lessee shall assign to Lessor or Lessor’s nominee simultaneously with the termination of this Agreement, and the assignee shall assume all leases and concession agreements in effect with respect to the Facility then in Lessee’s name.

(c) Books and Records. All books and records for the Facility kept by Lessee pursuant to Section 3.5 shall be delivered promptly to Lessor or Lessor’s nominee, simultaneously with the termination of this Agreement, but such books and records shall thereafter be available to Lessee at all reasonable times for inspection, audit, examination, and transcription for a period of one (1) year and Lessee may retain (on a confidential basis) copies or computer records thereof

(d) Remittance. Lessee shall remit to Lessor or Lessor’s nominee, simultaneously with the termination of this Lease, all funds remaining, if any, after payment of all accrued Gross Operating Expenses, and other amounts due Lessee and after deducting the costs of any scheduled repair, replacement, or refurbishment of Furniture and Equipment with respect to which deposits have been made.

35.3 Waiver of Presentment, etc. Lessee waives all presentments, demands for payment and for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance and waives all notices of the existence, creation, or incurring of new or additional obligations, except as expressly granted herein

ARTICLE XXXVI

Memorandum of Lease. Lessor and Lessee shall promptly upon the request of either enter into a short form memorandum of this Lease, in form suitable for recording under the laws of the State in which reference to this Lease, and all options contained herein, shall be made. Lessee shall pay all costs and expenses of recording such memorandum of this Lease.

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ARTICLE XXXVII

Lessor’s Option to Purchase Assets of Lessee. Effective on not less than 90 days prior Notice given at any time within 180 days before the expiration of the Term, but not later than 90 days prior to such expiration, or upon such shorter Notice period as shall be appropriate if this Lease is terminated prior to its expiration date, Lessor shall have the option to purchase all (but not less than all) of the assets of Lessee, tangible and intangible, relating to the Leased Property (other than this Lease), at the expiration or termination of this Lease for an amount (payable in cash on the expiration date of this Lease) equal to the fair market value thereof as appraised in conformity with Article XXXIII, except that the appraisers need not be members of the American Institute of Real Estate Appraisers, but rather shall be appraisers having at least ten years experience in valuing similar assets. Notwithstanding any such purchase, Lessor shall obtain no rights to any trade name or logo used in connection with the Franchise Agreement unless separate agreement as to such use is reached with the applicable franchisor.

ARTICLE XXXVIII

Lessor’s Option to Terminate Lease. In the event Lessor enters into a bona fide contract to sell the Leased Property to a non-Affiliate, Lessor may terminate the Lease by giving not less than 30 days prior Notice to Lessee of Lessor’s election to terminate the Lease effective upon the closing under such contract or Lessor may convey the Lease pursuant to Article XXX. Effective upon such closing, this Lease shall terminate and be of no further force and effect except as to any obligations of the parties existing as of such date that survive termination of this Lease. As compensation for the early termination of its leasehold estate under this Article XXVIII, Lessor shall within six months of such closing either (a) pay to Lessee the fair market value of the Lessee’s leasehold estate hereunder as the Lease Termination Payment or (b) offer to lease to Lessee one or more substitute hotel facilities pursuant to one or more leases that would create for the Lessee leasehold estates that have an aggregate fair market value of no less than the fair market value of Lessee’s leasehold estate hereunder, with the fair market value of Lessee’s leasehold estate hereunder determined as of the closing of the sale of the Lease Property. If Lessor elects and complies with the option described in (b) above, regardless of whether Lessee enters into the lease(s) described therein, Lessor shall have no further obligations to Lessee with respect to compensation for the early termination of this Lease. In the event Lessor and Lessee are unable to agree upon the fair market value of an original or replacement leasehold estate within 30 days, it shall be determined by appraisal using the appraisal procedure set forth in Article XXXIII.

For the purposes of this Section, fair market value of the leasehold estate means, as applicable, an amount equal to the price that a willing buyer not compelled to buy would pay a willing seller not compelled to sell for Lessee’s leasehold estate under this Lease or an offered replacement leasehold estate.

ARTICLE XXXIX

Compliance with Franchise Agreement. To the extent any of the provisions of the Franchise Agreement impose a greater obligation on Lessee than the corresponding provisions of the Lease, then Lessee shall be obligated to comply with, and to take all reasonable actions necessary to prevent breaches or defaults under, the provisions of the Franchise Agreement. It is the intent of the parties hereto that, except as otherwise specifically provided by this Lease, Lessee shall comply in every respect with the provisions of the Franchise Agreement so as to avoid any default thereunder during the term of this Lease. Lessor and Lessee agree to cooperate fully with each other in the event it becomes necessary to obtain a franchise extension or modification or a new franchise for the Leased Property.

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ARTICLE XL

40.1 Room Set-Aside. Lessee is obligated to repair or replace in any Fiscal Year Fixtures and Furniture and Equipment (i) as required by the terms of any Franchise Agreement, (ii) as required by Article IX and Article XXXIX and (iii) otherwise when and in a manner it deems fit, to the extent funds are available therefor from amounts the Lessor is obligated to make available to Lessee under this Section 40.1 or otherwise makes available to Lessee. During the Term Lessor shall be obligated to make available to Lessee for repairing or replacing Fixtures and Furniture and Equipment an amount equal to 4% of Room Revenues from the Facility for each twelve month period. Lessor shall be required to make such amounts available to Lessee on a quarterly basis. Upon written request by Lessee to Lessor stating the specific use to be made and the reasonable approval thereof by Lessor, such funds shall be made available by Lessor for use by Lessee for periodic repairing or replacement of Fixtures and Furniture and Equipment that constitute Leased Property in connection with the Primary Intended Use. Lessor’s obligation shall be cumulative, but not compounded, and any amounts that have accrued hereunder shall be payable in future periods for such uses and in accordance with the procedure set forth herein. Lessee shall be obligated to return any funds forwarded by Lessor pursuant to this Section XL, but not spent for (i) repair or replacement of Fixtures and Furniture and Equipment that constitute Leased Property in connection with the Primary Intended Use or (ii) Capital Expenditures pursuant to Section 40.2. Other than as specifically set forth above in this Section XL, Lessee shall have no interest in any accrued obligation of Lessor hereunder and Lessor shall have no obligation to segregate or separate any such funds for the benefit of Lessee.

40.2 Capital Expenditures. Lessor shall be obligated to pay the actual costs of any items that are classified as capital items under U.S. generally accepted accounting principles which are necessary for the continued operation of the Facility and otherwise approved by Lessor. To the extent that at the end of a Fiscal Year the amount set aside exceeds the amount spent on repair or replacement of Fixtures and Furniture and Equipment, the Lessee may apply such excess amount towards Lessor’s obligations under Section XL.

40.3 Prohibited Expenditures. No amounts made available under this Article shall be used to purchase property (other than “real property” within the meaning of Treasury Regulations Section 1.856-3(d)), to the extent that doing so would cause the Lessor to recognize income other than “rents from real property” as defined in Section 856(d) of the Code.

IN WITNESS WHEREOF, the parties have executed this Lease by their duly authorized officers as of the date first above written.

HUMPHREY HOSPITALITY LIMITED PARTNERSHIP
	By:	Humphrey Hospitality REIT Trust
	Its:	General Partner
	By:	/s/ George R. Whittemore
	Name:	George R. Whittemore
	Title:	President

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E&P FINANCING LIMITED PARTNERSHIP
	By:	E&P REIT Trust,
		General Partner
	By:	/s/ George R. Whittemore
	Name:	George R. Whittemore
	Title:	President
SOLOMONS BEACON INN LIMITED PARTNERSHIP
	By:	Humphrey Hospitality Limited Partnership,     its general partner
	By:	Humphrey Hospitality REIT Trust,
		its general partner
	By:	/s/ George R. Whittemore
	Name:	George R. Whittemore
	Title:	President
TRS LEASING, INC.
	By:	/s/ George R. Whittemore
	Name:	George R. Whittemore
	Title:	President

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EX-21.0

EXHIBIT 21.0

LIST OF SUBSIDIARIES

Supertel Hospitality, Inc. owns, directly or indirectly, 100% of the voting securities, partnership interests or limited liability company interests of the entities listed below (unless otherwise indicated).

Subsidiary	Jurisdiction of Incorporation
Supertel Hospitality REIT Trust	Maryland
E&P REIT Trust	Maryland
TRS Leasing, Inc.	Virginia
Supertel Hospitality Management, Inc.	Maryland
Supertel Limited Partnership (SLP) (96%)	Virginia
E&P Financing Limited Partnership	Maryland
Solomons GP, LLC (SGLLC) (100% owned by SLP)	Delaware
Solomons Beacon Inn Limited Partnership (1%; 99% owned by SGLLC)	Maryland
TRS Subsidiary, LLC	Delaware
SPPR Holdings, Inc.	Delaware
SPPR – Hotels, LLC (1%; 99% owned by SLP)	Delaware
SPPR – South Bend, LLC (100% owned by SLP)	Delaware
SPPR TRS Subsidiary, LLC	Delaware

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Supertel Hospitality, Inc.:

We consent to the incorporation by reference in the registration statements on Form S-3 (File No. 333-138304) and Form S-8 (File No. 333-134822) of Supertel Hospitality, Inc. of our report dated March 22, 2007, with respect to the consolidated balance sheets of Supertel Hospitality, Inc. and subsidiaries as of December 31, 2006 and 2005, the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006 and the related financial statement schedule III, which report appears in the December 31, 2006 annual report on Form 10-K of Supertel Hospitality, Inc.

/s/ KPMG LLP

Omaha, Nebraska

March 22, 2007

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Paul J. Schulte, certify that:

1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2006 of Supertel Hospitality, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) 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 officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 20, 2007	/s/ Paul J. Schulte
	Paul J. Schulte
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Donavon A. Heimes, certify that:

1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2006 of Supertel Hospitality, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) 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 officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 20, 2007	/s/ Donavon A. Heimes
	Donavon A. Heimes
	Chief Financial Officer, Treasurer and Secretary

EX-32.1

Exhibit 32.1

Certification Pursuant to

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 of Supertel Hospitality, Inc., on Form 10-K for the year ending December 31, 2006 as filed with the Securities and Exchange Commission (the “Report”), I, Paul J. Schulte, President and Chief Executive Officer of Supertel Hospitality, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Supertel Hospitality, Inc. at the dates and for the periods indicated.

March 20, 2007	/s/ Paul J. Schulte
	Paul J. Schulte
	President and Chief Executive Officer

Certification Pursuant to

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 of Supertel Hospitality, Inc., on Form 10-K for the year ending December 31, 2006 as filed with the Securities and Exchange Commission (the “Report”), I, Donavon A. Heimes, Chief Financial Officer, Treasurer, and Secretary of Supertel Hospitality, Inc., certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Supertel Hospitality, Inc. at the dates and for the periods indicated.

March 20, 2007	/s/ Donavon A. Heimes
	Donavon A. Heimes
	Chief Financial Officer, Treasurer and Secretary

EX-99.1

Exhibit 99.1

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

The following unaudited pro forma consolidated financial data gives effect to our acquisition of seven hotels from Savannah Suites, six hotels were acquired in August of 2006 and 1 hotel in November of 2006.

The pro forma consolidated statement of operations for the year ended December 31, 2006 is presented as if the acquisitions of the seven Savannah Suites hotels had occurred on January 1, 2006.

We are a self-administered real estate investment trust and the unaudited pro forma consolidated financial data is presented on the assumption that we distribute at least 90% of our taxable income to our shareholders and do not incur federal income tax liability for the periods presented. In the opinion of our management, all adjustments necessary to reflect the effects of these transactions have been made.

The unaudited pro forma consolidated financial data is presented for comparative purposes only and is not necessarily indicative of what would have been our actual consolidated financial position or results on the date and for the periods presented and does not purport to represent our future consolidated financial position or results. The unaudited pro forma consolidated financial data should be read in conjunction with, and is qualified in its entirety by our historical consolidated financial statements and notes incorporated by reference herein and the historical consolidated financial statements and notes of the acquired hotels included in this prospectus.

Supertel Hospitality, Inc. and Subsidiaries

Pro Forma Consolidated Statement of Operations (Unaudited)

(In thousands, except per share data)

For the Twelve Months Ended December 31, 2006

	Historical Supertel			Consummated Acquisition			Supertel Pro Forma Consolidated
REVENUES
Room rentals and other hotel services	$	77,134		$	5,402	(a)	$	82,536
EXPENSES
Hotel and property operations		53,591			3,272	(a)		56,863
Depreciation and amortization		8,680			639	(c)		9,319
General and administrative		2,842			—			2,842
		65,113			3,911			69,024
EARNINGS FROM CONTINUING OPERATIONS BEFORE GAIN (LOSS) ON DISPOSITIONS OF ASSETS, INTEREST EXPENSE AND MINORITY INTEREST		12,021			1,491			13,512
Net loss on disposition of assets		(3	)		(4	)		(7	)
Other income		185						185
Interest		(8,255	)		(1,784	)(d)		(10,039	)
Minority interest		(334	)		—			(334	)
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		3,614			(297	)		3,317
Income tax benefit		107			—			107
NET EARNINGS		3,721			(297	)		3,424
Preferred Stock Dividend		(1,215	)		—			(1,215	)
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS	$	2,506		$	(297	)	$	2,209
Weighted average shares outstanding—basic		12,261						12,261
Weighted average shares outstanding—diluted		12,272						12,272
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS
EPS Basic and diluted	$	0.20					$	0.18

See accompanying notes to Pro Forma Consolidated Statement of Operations

Notes to Unaudited Pro Forma Consolidated Statements of Operation

For the Year Ended December 31, 2006

(dollar amounts in thousands, except per share amounts)

The following notes provide information regarding the assumptions used for the pro forma adjustments for the acquisitions the six Savannah Suites hotels and the seventh Savannah Suites hotel up to the dates of their acquisitions on August 18, 2006 and November 16, 2006 respectively.

(a) Reflects the operations of the seven hotels using unaudited financials statements obtained from the sellers for the period beginning January 1, 2006, but not including the date of our acquisition and adjusting those numbers for specific verifiable and continuing changes in operating expenses.

	For the 12 months ended December 31, 2006
	Historical		Adjustments		Pro Forma Adjustments
Room rentals and other hotel services	$	5,402			$	5,402
Hotel and property operations:	$	3,414	(106	)(i)	$	3,272
			(36	)(ii)

(i) To reflect the cost reductions resulting from the terms of our agreements with Guest House Inc. which reduced the cost of the management fee to 4.8% for the Savanna Suites properties that are managed by Guest House, Inc.

(ii) The companies obtained insurance coverage for the hotels which cost less than that previously charged to the hotels by the sellers.

(b) To reflect pro forma depreciation and amortization based on the depreciable basis of the company’s acquisition cost assuming asset lives of 39 years for buildings, five years for furniture, fixtures and equipment. The land lease and cell tower lease were amortized over the remaining contract at 62 and 3.5 years respectively.

(c) To reflect interest expense including amortization of deferring financing costs related to:

The acquisition of the six Savannah Suite hotels with a mortgage note payable of $17,850 at a variable rate of 7.1% adjustable monthly, $3,756 (which includes approximately $294 of acquisition costs and approximately $79 of deferred financing) of borrowings from the Company’s revolving credit facility at 8.25% and $6,417 of borrowings from a bridge loan at 10.4%, which is then refinanced after four months with $6,417 of borrowings from the Company’s revolving credit facility at 8.25%

The acquisition of a seventh Savannah Suites hotel for $5,350 and estimated acquisition costs of $59 from the Company’s existing credit facility at 8.25%.

If the variable rates of the mortgage loans, bridge loans and revolving credit facilities were to increase by 1/8%, the annual fluctuation of interest expense would be $28.