NOTE 4 - DEVELOPMENT LOANS RECEIVABLE

Historically, we provided first mortgage and mezzanine loans to hotel developers, including entities in which certain of our executive officers and trustees own an interest that enabled such entities to construct hotels and conduct related improvements on specific hotel projects at interest rates ranging from 10% to 11%. These loans were initially originated as part of our acquisition strategy. During the nine months ended September 30, 2011, no such loans were originated by us. Interest income from development loans was $656 and $1,049 for the three months ended September 30, 2011 and 2010, respectively. Interest income from development loans was $2,810 and $3,599 for the nine months ended September 30, 2011 and 2010, respectively. Accrued interest on our development loans receivable was $3,486 and $3,013 as of September 30, 2011 and December 31, 2010, respectively. Accrued interest on our development loans receivable as of September 30, 2011 does not include cumulative interest income of $7,353 which has been accrued and paid in-kind by adding it to the principal balance of certain loans as indicated in the table below.

Hotel Property	Borrower	Principal Outstanding September 30, 2011			Principal Outstanding December 31, 2010		Interest Rate			Maturity Date (1)
Operational Hotels
Renaissance by Marriott - Woodbridge, NJ	Hersha Woodbridge Associates, LLC*		5,000			5,000		11	%	April 1, 2012
Element Hotel - Ewing, NJ	American Properties @ Scotch Road, LLC*		2,000			2,000		11	%	August 6, 2012
Hilton Garden Inn - Dover, DE	44 Aasha Hospitality Associates, LLC*		1,000			1,000		10	%	November 1, 2012
Hyatt 48Lex - New York, NY	44 Lexington Holding, LLC*		14,048	(2)		12,939		11	%	December 31, 2011

Construction Hotels
Hyatt Union Square - New York, NY (3)	Risingsam Union Square, LLC		13,304	(2)		12,714		10	%	December 31, 2011
Hampton Inn - New York, NY (4)	SC Waterview, LLC		-			8,000		10	%	December 31, 2011

Total Development Loans Receivable		$	35,352		$	41,653

* Indicates borrower is a related party.

(1)

Represents current maturity date in effect. Agreements for our development loans receivable typically allow for two one-year extensions which can be exercised by the borrower if the loan is not in default. As these loans typically finance hotel development projects, it is common for the borrower to exercise their options to extend the loans, in whole or in part, until the project has been completed and the project provides cash flow to the developer or is refinanced by the developer.

(2)	We have amended the following development loans to allow the borrower to elect, quarterly, to pay accrued interest in-kind by adding the accrued interest to the principal balance of the loan:

	Three Months Ended September 30,				Interest Income Nine Months Ended September 30,				Cumulative
Borrower	2011		2010		2011		2010		Interest Income Paid In Kind
Risingsam Union Square, LLC	$	-	$	309	$	589	$	894	$	3,304
44 Lexington Holding, LLC		384		344		1,110		994		4,049

Total	$	384	$	653	$	1,699	$	1,888	$	7,353

(3)

On June 14, 2011, we entered into a purchase and sale agreement to acquire the Hyatt Union Square hotel in New York, NY for total consideration of $104,303. The consideration to the seller consists of $36,000 to be paid to the seller in cash, the cancellation by the Company of a $10,000 development loan, and $3,304 of accrued interest on the loan and the assumption by the Company of two mortgage loans secured by the hotel in the original aggregate principal amount of $55,000. In accordance with terms of the purchase and sale agreement, we have ceased accruing interest on this $10,000 development loan as of June 14, 2011.

(4)

On July 22, 2011, we completed the acquisition of the real property and improvements located at 32 Pearl Street, New York, NY from SC Waterview, LLC. Consideration given in exchange for the property and improvements include the cancellation of a development loan in the original principal amount of $8,000, made to an affiliate of the seller and the cancellation $300 of the accrued interest receivable on the development loan. See “Note 2 – Investment in Hotel Properties” for additional discussion of this transaction.