NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

As of September 30, 2017 and December 31, 2016, our investment in unconsolidated joint ventures consisted of the following:



		Percent	Preferred
Joint Venture	Hotel Properties	Owned	Return		September 30, 2017		December 31, 2016

SB Partners, LLC	Holiday Inn Express, South Boston, MA	50.0%	N/A	$	1,364	$	913
Hiren Boston, LLC	Courtyard by Marriott, South Boston, MA	50.0%	N/A		2,341		2,112
Cindat Hersha Owner JV, LLC	Hilton and IHG branded hotels in NYC	30.0%	*		-		3,717
Mystic Partners, LLC	Hilton and Marriott branded hotels in CT	8.8%-66.7%	8.5% non-cumulative		-		4,699
				$	3,705	$	11,441

*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 January 3, 2017, we redeemed our joint venture interest in Mystic Partners, LLC by acquiring a 100% ownership interest in the Mystic Marriott Hotel & Spa and transferring our minority ownership interests in the Hartford Marriott and Hartford Hilton to our joint venture partner. We received $11,623 in cash and assumed a mortgage on the Mystic Marriott Hotel & Spa of $41,333 as consideration for this redemption and transfer of our minority interest. Subsequent to the assumption of the mortgage, the Company fully paid off the outstanding balance of the debt and added the property to the borrowing base of our Credit Facility. As a result of the remeasurement of the consideration received to fair value, the Company recognized a gain of $16,239 in conjunction with this transaction.

Income/Loss Allocation

For the Cindat Hersha Owner JV, LLC cash available for distribution will be distributed (1) to us until we receive a 9% annual rate of return on our contributed $43,194 preferred equity interest, (2) then to Cindat until they receive a return on their contributed $142,000 senior common equity interest, currently at 9.5%, and (3) then to us until we receive an 8% return on our contributed $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. Beginning June 30, 2016, a lender to the Owner JV determined that certain debt coverage ratio covenants contained in its loan agreement were not met. Pursuant to these agreements, the lender elected to escrow the operating cash flow for Owner JV, which continues as of September 30, 2017. The failure to meet these covenants, however, does not constitute an event of default. As of September 30, 2017, based on the income allocation methodology described above, the Company has absorbed cumulative losses equal to our accounting basis in the joint venture resulting in a $0 investment balance in the table above, however, we currently maintain a positive equity balance within the venture. This difference is due to difference in our basis inside the venture versus our basis outside of the venture, which is explained later in this note.

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.

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.

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

Income (loss) recognized during the three and nine months ended September 30, 2017 and 2016, for our investments in unconsolidated joint ventures is as follows:




		Three Months Ended September 30,			Nine Months Ended September 30,
		2017		2016		2017		2016
SB Partners, LLC	$	216	$	195	$	451	$	483
Hiren Boston, LLC		323		406		630		692
Cindat Hersha Owner JV, LLC		-		(80)		(3,717)		(239)
Mystic Partners, LLC		-		(4,238)		-		(3,346)
Income (Loss) from Unconsolidated Joint Venture Investments	$	539	$	(3,717)	$	(2,636)	$	(2,410)

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 September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016.



Balance Sheets

		September 30, 2017		December 31, 2016
Assets
Investment in Hotel Properties, Net	$	563,409	$	647,548
Other Assets		42,331		45,576
Total Assets	$	605,740	$	693,124

Liabilities and Equity
Mortgages and Notes Payable	$	351,906	$	432,173
Other Liabilities		8,238		36,275
Equity:
Hersha Hospitality Trust		90,090		119,892
Joint Venture Partner(s)		155,763		104,784
Accumulated Other Comprehensive Loss		(257)		-
Total Equity		245,596		224,676

Total Liabilities and Equity	$	605,740	$	693,124

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)



Statements of Operations

		Three Months Ended September 30,			Nine Months Ended September 30,
		2017		2016		2017		2016
Room Revenue	$	25,837	$	37,757	$	66,845	$	81,715
Other Revenue		499		5,718		1,453		17,213
Operating Expenses		(11,632)		(23,433)		(31,988)		(56,999)
Lease Expense		(164)		(278)		(504)		(860)
Property Taxes and Insurance		(2,948)		(3,326)		(8,444)		(6,404)
General and Administrative		(1,428)		(2,636)		(3,956)		(5,985)
Depreciation and Amortization		(3,152)		(4,040)		(9,157)		(9,049)
Interest Expense		(5,375)		(6,146)		(15,473)		(12,410)
Acquisition Costs		-		-		-		(1,499)
Loss Allocated to Noncontrolling Interests		-		(10)		-		(50)
Net Income (Loss)	$	1,637	$	3,606	$	(1,224)	$	5,672

The following table is a reconciliation of our share in the unconsolidated joint ventures’ equity to our investment in the unconsolidated joint ventures as presented on our balance sheets as of September 30, 2017 and December 31, 2016.




		September 30, 2017		December 31, 2016
Our share of equity recorded on the joint ventures' financial statements	$	90,090	$	119,892
Adjustment to reconcile our share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures(1)		(86,385)		(108,451)
Investment in Unconsolidated Joint Ventures	$	3,705	$	11,441

(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:

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

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); and

cumulative impairment of our investment in joint ventures not reflected on the joint ventures' financial statements, if any.