NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

As of June 30, 2016 and December 31, 2015, our investment in unconsolidated joint ventures consisted of the following:



		Percent	Preferred		June 30,		December 31,
Joint Venture	Hotel Properties	Owned	Return		2016		2015

SB Partners, LLC	Holiday Inn Express, South Boston, MA	50.0%	N/A	$	982	$	795
Hiren Boston, LLC	Courtyard by Marriott, South Boston, MA	50.0%	N/A		3,034		4,499
Mystic Partners, LLC	Hilton and Marriott branded hotels in CT	8.8%-66.7%	8.5% non-cumulative		4,864		5,022
Cindat Hersha Owner JV, LLC	Hilton and IHG branded hotels in NYC	30.0%	*		8,364		-
				$	17,244	$	10,316

*See explanation below of the Cindat Hersha Owner JV, LLC (“Owner JV”) for more information on the preferred return provisions of this joint venture.

On April 29, 2016, we entered into two limited liability company agreements with Cindat, which formed Owner JV and Cindat Hersha Lessee JV, LLC (“Lessee JV”), for the purpose of owning and operating hotel properties initially consisting of the JV Properties. All hotel properties owned by Owner JV are leased to Lessee JV. Our interest in Owner JV is held by our operating partnership, HHLP, while our interest in Lessee JV is held by our wholly owned taxable REIT subsidiary (“TRS”), 44 New England Management Company (“44 New England”).

As described in “Note 2 – Investment in Hotel Properties” the Contribution Agreements valued the JV Properties at $543,500. In accordance with the Contribution Agreements, Cindat contributed $354,550 in cash, in exchange for a 70.0% senior common equity interest in Owner JV. We contributed the JV Properties to Owner JV and received $354,550 in cash, a preferred equity interest initially valued at $37,000, and a 30% junior common equity interest in Owner JV. In addition, Cindat, contributed $14,105 and we contributed $12,239 for working capital and closing costs for the formation of Owner JV and for finance costs related to debt originated on the JV Properties by Owner JV. Of the $12,239 in additional funds contributed by us, $6,045 was attributed to our junior common equity interest and $6,194 was attributed to our preferred equity interest. We also incurred $361 of costs related to our contribution which is included in our investment in unconsolidated joint ventures as outside basis and will be amortized over the life of the venture.

Prior to the contribution to Owner JV, our basis in the JV Properties was $264,658. Our preferred equity and junior common equity interest in Owner JV was initially recorded at $104,248 which represents our retained interest in the JV Properties at our basis prior to contribution and additional contributions made for the formation of Owner JV. The difference between our interest in the fair value of the assets contributed to Owner JV and our basis prior to contribution is $96,941, which will be amortized over the life of the underlying assets.

At closing, mortgage debt of $285,000 and mezzanine debt of $50,000 was placed on the JV Properties. Owner JV distributed proceeds of $323,793 from the debt originated, of which $226,655 was distributed to Cindat and $97,138 was distributed to us, reducing our investment in Owner JV accordingly.

Cash available for distribution will be distributed (1) to us until we receive a 9% annual rate of return on our $43,194 preferred equity interest, (2) then to Cindat until they receive a 10% return on their remaining $142,000 senior common equity interest and (3) then to us until we receive an 8% return on our $60,857 junior common equity interest. Any cash available for distribution remaining will be split 30% to us and 70% to Cindat. Cindat’s senior common equity return is reduced by 0.5% annually for 4 years following the closing until it is set at a rate of 8% for the remainder of the life of the joint venture.

The Owner JV is under an Asset Management Agreement with us and Cindat whereby it is provided asset management services. Fees for these services are calculated as 1.0% of operating revenues, of which we are entitled to 30% which we recognize as income in other revenues on the consolidated statement of operations.

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

Income or loss from our unconsolidated joint ventures is allocated to us and our joint venture partners consistent with the allocation of cash distributions in accordance with the joint venture agreements. Any difference between the carrying amount of these investments and the underlying equity in net assets is amortized over the expected useful lives of the properties and other intangible assets. Income recognized during the three and six months ended June 30, 2016 and 2015, for our investments in unconsolidated joint ventures is as follows:




		Three Months Ended June 30,			Six Months Ended June 30,
		2016		2015		2016		2015
SB Partners, LLC	$	326	$	287	$	287	$	198
Hiren Boston, LLC		379		316		285		207
Mystic Partners, LLC		(76)		(77)		(157)		(153)
Cindat Hersha Owner JV, LLC		892		-		892		-
Income from Unconsolidated Joint Venture Investments	$	1,521	$	526	$	1,307	$	252

The following tables set forth the total assets, liabilities, equity and components of net income or loss, including the Company’s share, related to the unconsolidated joint ventures discussed above as of June 30, 2016 and December 31, 2015 and for the three and six months ended June 30, 2016 and 2015.



Balance Sheets
		June 30,		December 31,
		2016		2015
Assets
Investment in Hotel Properties, Net	$	652,905	$	105,354
Other Assets		37,513		15,558
Total Assets	$	690,418	$	120,912

Liabilities and Equity
Mortgages and Notes Payable	$	444,392	$	113,532
Other Liabilities		24,911		30,575
Equity:
Hersha Hospitality Trust		126,224		22,698
Joint Venture Partner(s)		94,891		(45,893)
Total Equity		221,115		(23,195)

Total Liabilities and Equity	$	690,418	$	120,912



Statements of Operations

		Three Months Ended June 30,			Six Months Ended June 30,
		2016		2015		2016		2015
Room Revenue	$	31,578	$	15,939	$	43,958	$	28,621
Other Revenue		6,789		6,131		11,492		11,199
Operating Expenses		(20,681)		(14,313)		(33,565)		(27,506)
Lease Expense		(276)		(276)		(581)		(551)
Property Taxes and Insurance		(2,316)		(720)		(3,077)		(1,475)
General and Administrative		(2,116)		(1,333)		(3,348)		(2,738)
Depreciation and Amortization		(3,335)		(1,572)		(5,009)		(3,138)
Interest Expense		(4,658)		(1,635)		(6,264)		(3,257)
Acquisition Costs		(1,499)		-		(1,499)		-
Loss allocated to Noncontrolling Interests		(72)		(62)		(40)		(86)
Net Income	$	3,414	$	2,159	$	2,067	$	1,069

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

The following table is a reconciliation of the Company’s share in the unconsolidated joint ventures’ equity to the Company’s investment in the unconsolidated joint ventures as presented on the Company’s balance sheets as of June 30, 2016 and December 31, 2015.



		June 30,		December 31,
		2016		2015
Company's share of equity recorded on the joint ventures' financial statements	$	126,224	$	22,698
Adjustment to reconcile the Company's share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures(1)		(108,980)		(12,382)
Investment in Unconsolidated Joint Ventures	$	17,244	$	10,316

(1) Adjustment to reconcile the Company's share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures consists of the following:

cumulative impairment of the Company’s investment in joint ventures not reflected on the joint ventures' financial statements;

the difference between the Company’s basis in the investment in joint ventures and the equity recorded on the joint ventures' financial statements; and

accumulated amortization of the Company’s equity in joint ventures that reflects the difference in the Company’s portion of the fair value of joint ventures' assets on the date of our investment when compared to the carrying value of the assets recorded on the joint ventures’ financial statements (this excess or deficit investment is amortized over the life of the properties, and the amortization is included in Income (Loss) from Unconsolidated Joint Venture Investments on the Company’s consolidated statement of operations).