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Independent Auditors’ Report

To the Members
Webster Street Hotel, LLC
Shelton, Connecticut

We have audited the accompanying balance sheets of Webster Street Hotel, LLC as of December 31, 2004 and 2003, and the related statements of operations, members’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the financial position of Webster Street Hotel, LLC as of December 31, 2004 and 2003 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Dworken, Hillman, LaMorte & Sterczala, P.C.

February 10, 2005

WEBSTER STREET HOTEL, LLC

BALANCE SHEETS


	December 31,
	2004		2003
Assets (Notes 4 and 5)
Current assets:
Cash	$	365,008	$	247,894
Restricted cash		558,806		124,098
Accounts receivable		97,640		82,336
Prepaid expenses and other		53,400		51,271

Total current assets		1,074,854		505,599
Property and equipment (Note 2)		27,888,747		29,001,877
Prepaid ground lease, net of accumulated amortization (2004, $20,822; 2003, $10,411) (Note 3)		968,251		978,662
Deferred costs, net of accumulated amortization (2004, $42,144; 2003, $449,561)		354,232		220,040
Other				6,553

Total Assets	$	30,286,084	$	30,712,731

Liabilities and Members’ Equity
Current liabilities:
Note payable, bank (Note 5)			$	17,641,029
Accounts payable and accrued expenses	$	612,446		473,854

Total current liabilities		612,446		18,114,883
Long-term debt (Note 4)		19,000,000
Members’ Equity		10,673,638		12,597,848

Total Liabilities and Members’ Equity	$	30,286,084	$	30,712,731



		*See notes to financial statements.*		2

WEBSTER STREET HOTEL, LLC

STATEMENTS OF OPERATIONS


	Year Ended December 31,
	2004		2003
Departmental revenues:
Rooms	$	7,077,135	$	3,821,348
Food and beverage		236,265		134,870
Parking		274,961		158,379
Other departmental		228,725		116,056

		7,817,086		4,230,653


Departmental expenses:
Rooms		1,272,456		790,329
Food and beverage		253,623		167,930
Parking		63,124		47,512
Other departmental		123,549		62,043

		1,712,752		1,067,814

Total departmental profit		6,104,334		3,162,839


Overhead expenses:
Administrative and general		435,007		290,273
Credit card commissions		183,312		96,820
Management fee (Note 7)		312,895		169,372
Advertising and sales (Notes 6 and 7)		464,136		312,124
Royalties (Note 6)		391,773		211,630
Repairs and maintenance		239,706		145,307
Utilities		330,113		184,034
General insurance (Note 7)		87,043		65,471
Real estate and personal property taxes		337,128		135,214

		2,781,113		1,610,245

Income from operations		3,323,221		1,552,594


Other charges:
Interest expense		1,206,145		823,696
Depreciation and amortization		1,336,074		1,314,441

		2,542,219		2,138,137

Net income (loss)	$	781,002	($	585,543	)



		*See notes to financial statements.*		3

WEBSTER STREET HOTEL, LLC

STATEMENTS OF CASH FLOWS


	Year Ended December 31,
	2004			2003
Cash flows from operating activities:
Net income (loss)	$	781,002		($	585,543	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		1,336,074			1,314,441
Ground rent amortization		10,411			10,411
(Increase) decrease in assets:
Accounts receivable	(	15,303		(	81,737	)
Prepaid expenses and other	(	2,130	)	(	51,241	)
Other assets	(	6,553	)	(	6,553	)
Increase in liabilities:
Accounts payable and accrued expenses		138,592			360,049

Net cash flows provided by operating activities		2,255,199			959,827

Cash flows from investing activities:
Restricted cash	(	434.708	)	(	124,098	)
Deferred costs	(	321,176	)	(	669,601	)
Prepaid ground lease				(	989,103	)
Capital expenditures	(	35,960	)	(	8,675,083	)

Net cash used in investing activities	(	791,844	)	(	10,457,885	)

Cash flows from financing activities:
Distributions to members	(	2,705,212	)	(	2,060,752	)
Net proceeds (repayments) of note payable, bank	(	17,641,029	)		11,696,070
Proceeds from long-term debt		19,000,000

Net cash provided by (used in) financing activities	(	1,346,241	)		9,635,318

Net increase in cash		117,114			137,260
Cash, beginning		247,894			110,634

Cash, ending	$	365,008		$	247,894



		*See notes to financial statements.*		5

WEBSTER STREET HOTEL, LLC

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2004 and 2003

1. Description of the business and summary of significant accounting policies:

Description of business:

Webster Street Hotel, LLC (the Company) was formed as of February 9, 2000 as a limited liability company (LLC) for the purpose of owning and operating a 188 room “Courtyard by Marriott” located in Boston, Massachusetts. The hotel commenced operations in April 2003.

Estimates and assumptions:

Management uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities and the reported revenues and expenses. Actual results could vary from the estimates used.

Cash:

The Company maintains its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk.

Restricted cash:

Under the terms of its debt agreement, the Company is required to deposit 3% of annual gross revenues, as defined, into an account to be used for equipment replacement, repairs and renovations.

Accounts receivable:

The Company continuously monitors the creditworthiness of customers and establishes an allowance for amounts that may become uncollectible in the future based on current economic trends, historical payment and bad debt write-off experience, and any specific customer related collection issues.

Property and equipment:

Property and equipment are stated at cost. Depreciation is being provided using the straight-line method over the estimated useful asset lives.

WEBSTER STREET HOTEL, LLC

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2004 and 2003

1. Summary of significant accounting policies (continued):

Deferred expenses:

Cost related to obtaining financing and franchise application fees are capitalized and amortized over the term of the related agreement using the straight-line method.

Income taxes:

The Company was formed as an LLC and is taxed as a partnership. Federal and state income tax regulations provide that a partnership is not subject to income taxes at the partnership level. Rather, each partner is taxed on their share of the Partnership’s taxable income, whether or not distributed, and is entitled to deduct on their own income tax return their share of any net losses of the Partnership to the extent of tax basis of their partnership interest, subject to certain passive activity loss limitations.

2. Property and equipment:


	2004		2003
Building	$	27,333,577	$	27,333,577
Furniture, fixtures and equipment		2,569,140		2,533,180

		29,902,717		29,866,757
Less accumulated depreciation		2,013,970		864,880

	$	27,888,747	$	29,001,877

The Company capitalized interest costs on borrowings incurred during the period of construction. Capitalized interest was added to the cost of the underlying assets and is being amortized over the useful lives of the assets. The Company capitalized $210,000 of interest in connection with the construction of the hotel in 2003.

The Company entered into a project administration agreement with an affiliate. The agreement was completed in 2003 for a total cost of $700,000. The project administration fee was capitalized as part of the building.

3. Prepaid ground lease:

In October 2000, the Company entered into a noncancellable ground lease with the City of Brookline, Massachusetts for a period not to exceed 95 years. Under the terms of the ground lease, the Company was required to pay an initial lease payment of $75,000, perform improvements to the property, as defined, and pay the City 50% of all parking fees collected from the 60 overnight resident parking spaces located on the property.

WEBSTER STREET HOTEL, LLC

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2004 and 2003

3. Prepaid ground lease (continued):

The initial lease payment and property improvements are being amortized on a straight-line basis over the term of the ground lease. Rent expense was $10,411 and $12,871 in 2004 and 2003, respectively.

4. Long-term debt:

Note payable, Prudential Insurance (Prudential), payable in monthly installments of interest only at 5.98% through July 2006. Beginning in August 2006, monthly principal and interest payments of $126,854 are required through July 2009, at which time the remaining outstanding balance is due.

The aggregate maturities of long-term debt as of December 31, 2004 are as follows:


Year Ending December 31:
2005	$	—
2006		162,464
2007		406,791
2008		431,795
2009		17,998,950

	$	19,000,000

In January 2005, the Company borrowed an additional $4,000,000 from Prudential. The additional borrowing is payable in monthly installments of interest only at 5.69% through July 2006. Beginning in August 2006, monthly principal and interest payments of $26,018 are required through July 2009, at which time the remaining outstanding balance is due.

The notes are secured by substantially all assets of the Company.

5. Note payable, bank:

Note payable, bank, is subject to the terms of a building loan agreement and provides for a borrowing limit of $19,200,000. The note requires monthly payments of interest only. The note matures in April 2004, but provides for up to four six-month extensions, subject to certain terms and conditions. The note is secured by substantially all assets of the Company and is guaranteed by, among others, New Castle Hotels, LLC, an affiliate of the Company. The note was paid in full in June 2004.

WEBSTER STREET HOTEL, LLC

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2004 and 2003

6. Franchise agreement:

In June 2001, the Company entered into a franchise agreement to operate the hotel as a “Courtyard by Marriott” franchise. The initial term of the agreement is for 20 years and requires monthly payments of 7.50% of gross room revenues, as defined, which includes a 2% advertising fee. Total franchise expense was $533,720, including advertising expense of $141,949, in 2004 and $288,059, including advertising expense of $76,429, in 2003.

7. Related party transactions:

Management agreement:

In April 2001, the Company entered into a management agreement with Brookline Hotel Management, LLC, an affiliate of the Company. The agreement calls for a monthly fee of 4% of gross revenues. The initial term of the agreement is ten years, but provides for two five-year extensions at the Company’s option.

Insurance:

The Company obtains general and workers compensation insurance through an affiliate. Total insurance premiums paid to the affiliate were $107,226 and $115,679 in 2004 and 2003, respectively.

Marketing fees:

An affiliate provides marketing services to the Company. Total marketing fees paid to the affiliate were $2,090 and $29,645 in 2004 and 2003, respectively.

8. Supplemental disclosure of cash flow information:

Cash paid for interest was $1,155,647 and $1,033,116 in 2004 and 2003, respectively.

To the Members
Webster Street Hotel, LLC
Shelton, Connecticut

We have reviewed the balance sheets of Webster Street Hotel, LLC (the Company) as of March 31, 2005 and 2004, and the related statements of operations, members’ equity, and cash flows for the three months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Information in these financial statements is the representation of the management of the Company.

A review consists of principally of inquiries of Company personnel and analytical procedures applied to financial information. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States of America, the objective of which is to express an opinion on the financial statements taken as a whole. Accordingly, we do not express an opinion.

Based on our reviews, we are not aware of material modifications that should be made to the financial statements for them to conform with accounting principles generally accepted in the United States of America.

Dworken, Hillman, LaMorte & Sterczala, P.C.

June 27, 2005

WEBSTER STREET HOTEL, LLC

BALANCE SHEETS
(See Accountants’ Review Report)


	March 31,
	2005		2004
Assets (Notes 4 and 5)
Current assets:
Cash	$	390,406	$	175,300
Restricted cash		606,773		157,096
Accounts receivable		118,196		170,683
Prepaid expenses and other		132,241		76,744

Total current assets		1,247,616		579,823
Property and equipment (Note 2)		27,609,429		28,723,192
Prepaid ground lease, net of accumulated amortization (2005, $23,425; 2004, $13,014) (Note 3)		965,648		976,059
Deferred costs, net of accumulated amortization (2005, $59,456; 2004, $599,414)		381,599		70,187
Other				3,200

Total Assets	$	30,204,292	$	30,352,461

Liabilities and Members’ Equity
Current liabilities:
Note payable, bank (Note 4)			$	17,641,029
Accounts payable and accrued expenses	$	797,227		640,045

Total current liabilities		797,227		18,281,074
Long-term debt (Note 5)		23,000,000
Members’ Equity		6,407,065		12,071,387

Total Liabilities and Members’ Equity	$	30,204,292	$	30,352,461



		*See notes to financial statements.*		2

WEBSTER STREET HOTEL, LLC

STATEMENTS OF OPERATIONS
(See Accountants’ Review Report)


	Three Months
	Ended March 31,
	2005			2004
Departmental revenues:
Rooms	$	1,384,537		$	1,064,061
Food and beverage		49,896			43,092
Parking		67,445			54,786
Other departmental		51,831			43,133

		1,553,709			1,205,072


Departmental expenses:
Rooms		293,535			232,729
Food and beverage		57,805			47,479
Parking		9,672			19,461
Other departmental		32,152			16,751

		393,164			316,420

Total departmental profit		1,160,545			888,652


Overhead expenses:
Administrative and general		79,664			94,659
Credit card commissions		35,383			25,782
Management fee (Note 7)		62,511			52,020
Advertising and sales (Notes 6 and 7)		91,591			78,645
Royalties (Note 6)		76,764			60,088
Repairs and maintenance		64,807			53,810
Utilities		110,545			93,268
General insurance (Note 7)		20,625			23,282
Real estate and personal property taxes		101,514			84,282

		643,404			565,836

Income from operations		517,141			322,816


Other charges:
Interest expense		320,724			312,148
Depreciation and amortization		305,480			437,129

		626,204			749,277

Net loss	($	109,063	)	($	426,461	)



		*See notes to financial statements.*		3

WEBSTER STREET HOTEL, LLC

STATEMENTS OF CASH FLOWS
(See Accountants’ Review Report)


	Three Months
	Ended March 31,
	2005			2004
Cash flows from operating activities:
Net loss	($	109,063	)	($	426,461	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		305,480			437,129
Ground rent amortization		2,603			2,603
Increase in assets:
Accounts receivable	(	20,556	)	(	88,347	)
Prepaid expenses and other	(	78,838	)	(	25,473	)
Increase in liabilities:
Accounts payable and accrued expenses		184,781			169,544

Net cash flows provided by operating activities		284,407			68,995

Cash flows from investing activities:
Restricted cash	(	47,967	)	(	32,998	)
Deferred costs	(	44,680	)
Capital expenditures	(	8,852	)	(	8,591	)

Net cash used in investing activities	(	101,499	)	(	41,589	)

Cash flows from financing activities:
Distributions to members	(	4,157,510	)	(	100,000	)
Proceeds from long-term debt		4,000,000

Net cash used in financing activities	(	157,510	)	(	100,000	)

Net increase (decrease) in cash		25,398		(	72,594	)
Cash, beginning		365,008			247,894

Cash, ending	$	390,406		$	175,300

See notes to financial statements.

WEBSTER STREET HOTEL, LLC

NOTES TO FINANCIAL STATEMENTS

Three Months Ended March 31, 2005 and 2004
(See Accountants’ Review Report)

1. Description of the business and summary of significant accounting policies:

Description of business:

Estimates and assumptions:

Cash:

Restricted cash:

Under the terms of its debt agreement, the Company is required to deposit 3% of annual gross revenues, as defined, into an account to be used for equipment replacement, repairs and renovations.

Accounts receivable:

Property and equipment:

Property and equipment are stated at cost. Depreciation is being provided using the straight-line method over the estimated useful asset lives.

WEBSTER STREET HOTEL, LLC

NOTES TO FINANCIAL STATEMENTS

Three Months Ended March 31, 2005 and 2004
(See Accountants’ Review Report)

1. Summary of significant accounting policies (continued):

Deferred expenses:

Cost related to obtaining financing and franchise application fees are capitalized and amortized over the term of the related agreement using the straight-line method.

Income taxes:

The Company was formed as an LLC and is taxed as a partnership. Federal and state income tax regulations provide that a partnership is not subject to income taxes at the partnership level. Rather, each partner is taxed on their share of the partnership’s taxable income, whether or not distributed, and is entitled to deduct on their own income tax return their share of any net losses of the partnership to the extent of tax basis of their partnership interest, subject to certain passive activity loss limitations.

2. Property and equipment:


	2005		2004
Building	$	27,333,577	$	27,333,577
Furniture, fixtures and equipment		2,577,990		2,541,771

		29,911,567		29,875,348
Less accumulated depreciation		2,302,138		1,152,156

	$	27,609,429	$	28,723,192

3. Prepaid ground lease:

WEBSTER STREET HOTEL, LLC

NOTES TO FINANCIAL STATEMENTS

Three Months Ended March 31, 2005 and 2004
(See Accountants’ Review Report)

3. Prepaid ground lease (continued):

The initial lease payment and property improvements are being amortized on a straight-line basis over the term of the ground lease. Rent expense was $2,603 for the three months ended March 31, 2005 and 2004.

4. Note payable, bank:

5. Long-term debt:


Note payable, Prudential Insurance (Prudential), payable in monthly installments of interest only at 5.98% through July 2006. Beginning in August 2006, monthly principal and interest payments of $126,854 are required through July 2009, at which time the remaining outstanding balance is due.	$	19,000,000
Note payable, Prudential, payable in monthly installments of interest only at 5.69% through July 2006. Beginning in August 2006, monthly principal and interest payments of $26,018 are required through July 2009, at which time the remaining outstanding balance is due.		4,000,000

	$	23,000,000

The notes are secured by substantially all assets of the Company.

The aggregate maturities of long-term debt as of March 31, 2005 are as follows:


Year Ending December 31:
2005	$	–
2006		205,275
2007		496,145
2008		526,368
2009		21,772,212

	$	23,000,000

WEBSTER STREET HOTEL, LLC

NOTES TO FINANCIAL STATEMENTS

Three Months Ended March 31, 2005 and 2004
(See Accountants’ Review Report)

6. Franchise agreement:

In June 2001, the Company entered into a franchise agreement to operate the hotel as a “Courtyard by Marriott” franchise. The initial term of the agreement is for 20 years and requires monthly payments of 7.50% of gross room revenues, as defined, which includes a 2% advertising fee. Total franchise expense was $104,678, including advertising expense of $27,914 and $81,375, including advertising expense of $21,287 for the three months ended March 31, 2005 and 2004, respectively.

7. Related party transactions:

Management agreement:

Insurance:

The Company obtains general and workers compensation insurance through an affiliate. There were no insurance premiums paid to the affiliate during the three months ended March 31, 2005 and 2004.

Marketing fees:

An affiliate provides marketing services to the Company. Total marketing fees paid to the affiliate were $628 and $1,580 for the three months ended March 31, 2005 and 2004, respectively.

8. Supplemental disclosure of cash flow information:

Cash paid for interest was $312,768 and $205,812 for the three months ended March 31, 2005 and 2004, respectively.

9. Subsequent event:

In June 2005, the Company sold substantially all of its assets to Hersha Hospitality Limited Partnership for $54,500,000. The Company used the proceeds to repay all outstanding debt.


	Page
Independent auditors’ report		1

Financial statements:

Balance sheets		2

Statements of operations		3

Statements of members’ equity		4

Statements of cash flows		5

Notes to financial statements		6-9


	Page
Accountants’ review report		1

Financial statements:

Balance sheets		2

Statements of operations		3

Statements of members’ equity		4

Statements of cash flows		5

Notes to financial statements		6-9


Balance, January 1, 2003	$	15,244,143
Net loss	(	585,543	)
Distributions	(	2,060,752	)

Balance, December 31, 2003		12,597,848
Net income		781,002
Distributions	(	2,705,212	)

Balance, December 31, 2004	$	10,673,638

1.		Description of the business and summary of significant accounting policies:

		Description of business:

1.		Summary of significant accounting policies (continued):

		Deferred expenses:


	2005			2004
Balance, January 1	$	10,673,638		$	12,597,848
Net loss	(	109,063	)	(	426,461	)
Distributions	(	4,157,510	)	(	100,000	)

Balance, March 31	$	6,407,065		$	12,071,387