NOTE 6 – DEBT

Mortgages and Notes Payable

We had total mortgages payable at December 31, 2011, and December 31, 2010 of $717,367 (including $61,758 in outstanding mortgage indebtedness related to assets held for sale) and $596,949, respectively. These balances consisted of mortgages with fixed and variable interest rates, which ranged from 2.28% to 8.25% as of December 31, 2011. Aggregate interest expense incurred under the mortgage loans payable totaled $39,786, $37,600, and $35,878 during 2011, 2010, and 2009, respectively.

Our mortgage indebtedness contains various financial and non-financial covenants customarily found in secured, non-recourse financing arrangements. Our mortgage loans payable typically require that specified debt service coverage ratios be maintained with respect to the financed properties before we can exercise certain rights under the loan agreements relating to such properties. If the specified criteria are not satisfied, the lender may be able to escrow cash flow generated by the property securing the applicable mortgage loan. We have determined that certain debt service coverage ratio covenants contained in the loan agreements securing 12 of our hotel properties were not met as of December 31, 2011. Pursuant to these loan agreements, the lender has elected to escrow the operating cash flow for a number of these properties. However, these covenants do not constitute an event of default for these loans. As of December 31, 2011, we were in compliance with all events of default covenants under the applicable loan agreements, with the exception of our non-recourse mortgage loan payable on the Comfort Inn, North Dartmouth, MA. As noted in “Note 2 – Investment in Hotel Properties,” the Comfort Inn, North Dartmouth, MA, ceased operations on March 31, 2011. We are currently in discussions to transfer title to the property to the lender. As of December 31, 2011, the remaining principal and accrued interest due on the mortgage loan payable related to this asset were $2,968 and $212, respectively.

As of December 31, 2011, the maturity dates for the outstanding mortgage loans ranged from February 2012 to September 2023.

Subordinated Notes Payable

We have two junior subordinated notes payable in the aggregate amount of $51,548 to the Hersha Statutory Trusts pursuant to indenture agreements which will mature on July 30, 2035, but may be redeemed at our option, in whole or in part, prior to maturity in accordance with the provisions of the indenture agreement. Effective July 30, 2010, the $25,774 notes issued to Hersha Statutory Trust I and Hersha Statutory Trust II, bear interest at a variable rate of LIBOR plus 3% per annum. This rate resets two business days prior to each quarterly payment. Prior to this, the $25,774 note issued to Hersha Statutory Trust I incurred interest at a fixed rate of 7.34% per annum through July 30, 2010, and the $25,774 note issued to Hersha Statutory Trust II incurred interest at a fixed rate of 7.173% per annum through July 30, 2010. The weighted average interest rate on our two junior subordinated notes payable during the years ended December 31, 2011, 2010, and 2009 was 3.35%, 5.69%, and 7.31%, respectively. Interest expense in the amount of $1,727, $2,934, and $3,766 was recorded for the years ended 2011, 2010, and 2009, respectively.

Other Notes Payable

HHLP entered into a management agreement with an unaffiliated hotel manager that has extended a $498 interest-free loan to HHLP for working capital contributions that are due at either the termination or expiration of the management agreement. A discount was recorded on the note payable which reduced the principal balances recorded in the mortgages and notes payable. The discount is being amortized over the remaining life of the loan and is recorded as interest expense. Between December 31, 2010 and December 31, 2011, we terminated the management agreement with Lodgeworks, L.P. (“Lodgeworks”), for the management services they provided for the seven Hyatt Summerfield Suites locations located in White Plains, NY, Gaithersburg, MD, Charlotte, NC, Bridgewater, NY, Pleasanton, CA, Pleasant Hill, CA, and Scottsdale, AZ. In connection with this termination, which occurred on three separate dates (December 31, 2010, September 1, 2011 and December 31, 2011), we repaid the $217 interest free loan due to Lodgeworks as a result of our acquisition of the Summerfield Suites portfolio. The balance of the note payable, was $217 and $223 as of December 31, 2011 and December 31, 2010, respectively. We repaid the final balance of this note on January 5, 2012.

Aggregate annual principal payments for the Company's mortgages and notes payable for the five years following December 31, 2011 and thereafter are as follows:

Year Ending December 31,	Amount

2012		101,120
2013		63,038
2014		43,969
2015		119,296
2016		215,717
Thereafter		226,659
Net Unamortized Discount		(667	)
	$	769,132

Revolving Credit Facility

On November 5, 2010, we entered into a Revolving Credit Loan and Security Agreement with T.D. Bank, NA and various other lenders. The credit agreement provides for a senior secured revolving credit facility in the principal amount of up to $250,000, including a sub-limit of $25,000 for irrevocable stand-by letters of credit and a $10,000 sub-limit for the swing line loans. On November 5, 2010, our previous $135,000 revolving credit facility was terminated and replaced by the new credit facility and as a result all amounts outstanding under our previous credit facility were repaid with borrowings from our new credit facility. Additional borrowings under the $250,000 revolving credit facility may be used for working capital and general corporate purposes and for the future purchase of additional hotels. The $250,000 revolving credit facility expires on November 1, 2013, and, provided no event of default has occurred and remains uncured, we may request that T.D. Bank, NA and the other lenders renew the credit facility for an additional one-year period.

The $250,000 revolving credit facility is collateralized by a first lien-security interest in all existing and future unencumbered assets of HHLP, a collateral assignment of all hotel management contracts of the management companies in the event of default, and title-insured, first-lien mortgages on the following hotel properties:

- Hampton Inn, Danville, PA	- Residence Inn, Langhorne, PA
- Hampton Inn, Philadelphia, PA	- Residence Inn, Norwood, MA
- Hampton Inn, Carlisle, PA	- Sheraton Hotel, JFK Airport, New York, NY
- Hampton Inn, Selinsgrove, PA	- Hampton Inn, Washington, DC
- Holiday Inn, Norwich, CT	- Hampton Inn (Pearl Street), New York, NY
- Towneplace Suites, Harrisburg, PA	- Hyatt Place, King of Prussia, PA
- Comfort Inn, Harrisburg, PA

At our option, the interest rate on loans provided under the line of credit will be either (i) the variable prime rate, as defined in the credit agreement, plus an applicable margin ranging between 150 and 175 basis points per annum or (ii) LIBOR plus an applicable margin ranging between 350 and 375 basis points per year, subject to a floor of 4.25%.

The credit agreement providing for the $250,000 revolving credit facility includes certain financial covenants and requires that we maintain: (1) a minimum tangible net worth of $500,000, which is subject to increases under certain circumstances; (2) maximum accounts and other receivables from affiliates of $125,000; (3) annual distributions not to exceed 95% of adjusted funds from operations; (4) maximum variable rate indebtedness to total debt of 30%; and (5) certain financial ratios, including the following:

-	a fixed charge coverage ratio of not less than 1.25 to 1.00 which increased to 1.35 to 1.00 as of September 30, 2011, and will increase to 1.45 to 1.00 as of September 30, 2012; and

-	a total funded liabilities to gross asset value ratio of not more than 0.65 to 1.00.

The Company is in compliance with each of the covenants listed above as of December 31, 2011.

Prior to November 5, 2010, we maintained a Revolving Credit Loan and Security Agreement with T.D. Bank, NA and various other lenders, which provided for a revolving line of credit in the principal amount of up to $175,000, including a sub-limit of $25,000 for irrevocable stand-by letters of credit. The bank group had committed $135,000, and the credit agreement was structured to allow for an increase of an additional $40,000 under the line of credit, provided that additional collateral was supplied and additional lenders joined the bank group. On December 11, 2009, we amended this credit agreement to modify certain financial covenants, resulting in changes to the annual interest rate incurred on prime rate and LIBOR rate loans borrowed under this facility. Hersha paid the lenders a fee of $338 in connection with the amendment the credit agreement.

The outstanding principal balance under the $250,000 revolving credit facility was $51,000 at December 31, 2011 and $46,000 at December 31, 2010. The Company recorded interest expense of $2,103, $2,737, and $3,235 related to borrowings drawn on the $135,000 revolving credit facility and the $250,000 revolving credit facility, for the years ended December 31, 2011, 2010, and 2009, respectively. The weighted average interest rate on our Line of Credit during the years ended December 31, 2011, 2010, and 2009 was 4.43%, 4.29%, and 3.25%, respectively.

As of December 31, 2011 we had $8,563 in irrevocable letters of credit issued and our remaining borrowing capacity under the Line of Credit was $190,437.

Fair Value of Debt

The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. As of December 31, 2011, the carrying value and estimated fair value of the Company's debt was $758,374 and $785,453 respectively (excluding outstanding mortgage indebtedness related to assets held for sale). As of December 31, 2010, the carrying value and estimated fair value of the Company's debt was $694,720 and $658,487 respectively.

Capitalized Interest

We utilize mortgage debt and our $250,000 revolving credit facility to finance on-going capital improvement projects at our hotels. Interest incurred on mortgages and the revolving credit facility that relates to our capital improvement projects is capitalized through the date when the assets are placed in service. For the years ended December 31, 2011, 2010, and 2009, we capitalized $1,372, $46 and $10, respectively, of interest expense related to these projects.

Deferred Financing Costs

Costs associated with entering into mortgages and notes payable and our revolving line of credit are deferred and amortized over the life of the debt instruments. Amortization of deferred financing costs is recorded in interest expense. As of December 31, 2011, deferred costs were $9,023, net of accumulated amortization of $9,138. As of December 31, 2010, deferred costs were $10,204, net of accumulated amortization of $5,852. Amortization of deferred costs for the years ended December 31, 2011, 2010, and 2009 was $3,535, $2,381 and $2,059, respectively.

New Debt/Refinance

On January 31, 2012, we repaid outstanding mortgage debt of $32,500 secured by the Capitol Hill Suites, Washington, D.C., and simultaneously entered into a new mortgage obligation of $27,500. The new mortgage debt bears interest at a variable rate of one month U.S. dollar LIBOR plus 3.25% and matures on January 30, 2015. On the same date, we entered into an interest rate swap that effectively fixes the interest at 3.79%.

On September 29, 2011, we entered into a $30,000 mortgage loan secured by our Courtyard by Marriott, Westside, Los Angeles, CA, property. Previously, this property was included as collateral on our revolving credit facility. The new mortgage loan bears interest at a variable rate of one month U.S. dollar LIBOR plus 3.85% with a floor of 0.75% and matures on September 29, 2015. As a result of this new debt, we capitalized $404 in deferred financing costs. On the same date, we entered into an interest rate swap that effectively fixes the interest at 4.947%. See “Note 8 – Fair Value Measurements and Derivative Instruments” for more information.

Also, on September 29, 2011, we refinanced the $11,913 mortgage loan secured by a land parcel located on Eighth Avenue, New York, NY. The new mortgage loan bears interest at a variable rate of Wall Street Journal Prime Rate plus 1.0%, at no time less than 6.0% or more than 16.0% and matures on July 1, 2013. As a result of this refinancing, we capitalized $152 in deferred financing costs.

During 2010, we repaid seven mortgages and two notes payable. In addition, we replaced our previous line of credit with a new credit facility with T.D. Bank, NA and various other lenders. As a result of these extinguishments, we expensed $932 in unamortized deferred costs and fees, which are included in the Loss on Debt Extinguishment caption on the consolidated statements of operations for the year ended December 31, 2010.