NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

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



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

SB Partners, LLC	Holiday Inn Express, South Boston, MA	50.0%	N/A	$	913	$	795
Hiren Boston, LLC	Courtyard by Marriott, South Boston, MA	50.0%	N/A		2,112		4,499
Mystic Partners, LLC	Hilton and Marriott branded hotels in CT	8.8%-66.7%	8.5% non-cumulative		4,699		5,022
Cindat Hersha Owner JV, LLC	Hilton and IHG branded hotels in NYC	30.0%	*		3,717		-
				$	11,441	$	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.

Cindat Hersha Owner JV, LLC

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 30.0% 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 (collectively, the “Cindat JV Financings)” 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.

Subject to the terms of the Cindat JV Financings, 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. Pursuant to the terms of agreements governing the Cindat JV Financings, a lender determined that certain debt coverage ratio covenants contained therein were not met as of June 30, 2016. Pursuant to these agreements, the lender has elected to escrow the operating cash flow for the Owner JV. However, the failure to meet these covenants does not constitute an event of default under the Cindat JV Financings.

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

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.

Mystic Partners, LLC

On January 3, 2017, we redeemed our joint venture interest in Mystic Partners, LLC by acquiring 100% ownership interest in the Mystic Marriott Hotel & Spa and transferring our minority ownership interests in the Hartford Marriott and Hartford Hilton to the joint venture partner. We received $8,500 as part of this redemption and transfer of minority interest.

Prior to the 2017 transaction, the Mystic Partners, LLC joint venture agreement provides for an 8.5% non-cumulative preferred return based on our contributed equity interest in the venture. Cash distributions will be made from cash available for distribution, first, to us to provide an 8.5% annual non-compounded return on our unreturned capital contributions and then to our joint venture partner to provide an 8.5% annual non-compounded return of their unreturned contributions. Any remaining cash available for distribution will be distributed to us 10.5% with respect to the net cash flow from the Hartford Marriott, 7.0% with respect to the Hartford Hilton and 56.7%, with respect to the remaining property. Mystic Partners, LLC allocates income to us and our joint venture partner consistent with the allocation of cash distributions in accordance with the joint venture agreements.

The Hartford Marriott, part of the Mystic Partners, LLC joint venture, is under an Asset Management Agreement with 44 New England to provide asset management services. Fees for these services are paid monthly to 44 New England and recognized as income in the amount of 0.25% of operating revenues.

Income/Loss Allocation

For SB Partners, LLC and Hiren Boston, LLC, income or loss is allocated to us and our joint venture partners consistent with the allocation of cash distributions in accordance with the joint venture agreements. This results in an income allocation consistent with our percentage of ownership interests.

For Mystic Partners, LLC and Owner JV, LLC, income or loss is allocated using Hypothetical Liquidation at Book Value (“HLBV method”) as the liquidation rights and priorities, as defined by each venture’s governing agreements, differ from the underlying percentage ownership interests in the ventures. The Company applies the HLBV method using a balance sheet approach. A calculation is prepared at each balance sheet date to determine the amount that we would receive if the venture entity were to liquidate all of its assets at carrying value and distribute that cash to the joint venture partners based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is our share of the earnings or losses from the unconsolidated joint venture investment for the period.

Any difference between the carrying amount of any of our investments noted above 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 years ended December 31, 2016, 2015 and 2014, for our investments in unconsolidated joint ventures is as follows:




	Twelve Months Ended December 31,
		2016		2015		2014
SB Partners, LLC	$	618	$	582	$	407
Hiren Boston, LLC		839		694		603
Mystic Partners, LLC		(137)		(311)		(317)
Cindat Hersha Owner JV, LLC		(3,143)		-		-
(Loss) Income from Unconsolidated Joint Venture Investments	$	(1,823)	$	965	$	693

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

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 December 31, 2016 and December 31, 2015 and for the years ended December 31, 2016, 2015 and 2014.



Balance Sheets

		December 31, 2016		December 31, 2015
Assets
Investment in Hotel Properties, Net	$	647,548	$	105,354
Other Assets		45,576		15,558
Total Assets	$	693,124	$	120,912

Liabilities and Equity
Mortgages and Notes Payable	$	432,173	$	113,532
Other Liabilities		36,275		30,575
Equity:
Hersha Hospitality Trust		119,892		22,698
Joint Venture Partner(s)		104,784		(45,893)
Total Equity		224,676		(23,195)

Total Liabilities and Equity	$	693,124	$	120,912



Statements of Operations

	Twelve Months Ended December 31,
		2016		2015		2014
Room Revenue	$	118,645	$	57,927	$	59,135
Other Revenue		24,424		22,776		21,725
Operating Expenses		(80,091)		(55,178)		(54,831)
Lease Expense		(1,143)		(1,115)		(1,063)
Property Taxes and Insurance		(9,512)		(2,948)		(2,934)
General and Administrative		(8,976)		(5,609)		(5,783)
Depreciation and Amortization		(13,286)		(6,549)		(6,376)
Interest Expense		(18,568)		(6,677)		(11,995)
Acquisition Costs		(1,468)		-
Other Income		2,466		-		-
Debt Extinguishment and Gain on Debt Forgiveness		-		-		3,016
(Loss) Gain allocated to Noncontrolling Interests		(46)		(341)		115
Net Income	$	12,445	$	2,286	$	1,009

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 December 31, 2016 and December 31, 2015.




		December 31, 2016		December 31, 2015
Our share of equity recorded on the joint ventures' financial statements	$	119,892	$	22,698
Adjustment to reconcile our share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures(1)		(108,451)		(12,382)
Investment in Unconsolidated Joint Ventures	$	11,441	$	10,316

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

cumulative impairment of our investment in joint ventures not reflected on the joint ventures' financial statements;

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

accumulated amortization of our equity in joint ventures that reflects the difference in our 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 our consolidated statement of operations).