NOTE 4 – DEVELOPMENT LOANS RECEIVABLE

Development Loans

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 year ended December 31, 2011, no such loans were originated by us. Interest income from development loans was $3,427, $4,686 and $7,411 for the years ended December 31, 2011, 2010, and 2009, respectively. Accrued interest on our development loans receivable was $3,096 as of December 31, 2011 and $3,013 as of December 31, 2010. Accrued interest on our development loans receivable as of December 31, 2011 does not include cumulative interest income of $7,748 which has been accrued and paid in kind by adding it to the principal balance of certain loans as indicated in the table below.

As of December 31, 2011 and 2010, our development loans receivable consisted of the following:

Hotel Property	Borrower	Principal Outstanding December 31, 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		14,444	(2)		12,939		11	%	December 31, 2012*

Construction Hotels
Hyatt Union Square - New York, NY (3)	Risingsam Union Square, LLC		13,303	(2)		12,714		10	%		N/A
Hampton Inn - New York, NY (4)	SC Waterview, LLC		-			8,000		10	%		N/A

Total Development Loans Receivable		$	35,747		$	41,653

* Indicates borrower is a related party

(1)

Represents current maturity date in effect. Agreements for our development loans receivable typically allow for multiple 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 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 as of December 31, 2011, 2010 and 2009:

	Interest Income Year Ended December 31,
Borrower	2011		2010		2009		Cumulative Interest Income Paid In Kind
Risingsam Union Square, LLC (3)	$	589	$	1,211	$	1,069	$	3,304
44 Lexington Holding, LLC		1,505		1,348		1,178		4,444

Total	$	2,094	$	2,559	$	2,247	$	7,748

(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.

Advances and repayments on our development loans receivable consisted of the following for the years ended December 31, 2011, 2010, and 2009:

	2011			2010			2009
Balance at January 1,	$	41,653		$	46,094		$	81,500
New advances		-			-			2,000
Interest added to principal		2,094			2,559			4,502
Repayments		-			-			(500	)
Principal exchanged for interest in hotel properties		(8,000	)		(7,000	)		(20,000	)
Impairments, net of discount		-			-			(21,408	)
Balance at December 31,	$	35,747		$	41,653		$	46,094

Impairment of Development Loans

We monitor our portfolio of development loans on an on-going basis to determine collectability of the loan principal and accrued interest. In 2009, we determined that our development loans to Brisam East 52, LLC and Brisam Greenwich, LLC, which were secured by the equity interest in each entity, were permanently impaired. We ceased accruing interest on the loans effective July 1, 2009. As of December 31, 2009, we determined that the fair value of each loan receivable is $0 and have incurred an impairment charge for the remaining principal on these loans in the aggregate amount of $21,408, which includes $1,408 of interest income that had been added to the principal balance of the loan.