Commitments and Contingencies

6 Months Ended

Jun. 30, 2011

Commitments and Contingencies

Commitments and Contingencies

13. Commitments and Contingencies

Management Agreements

Management agreements with the Company’s third-party hotel managers require the Company to pay between 1% and 3.5% of total revenue of the managed hotels to the third-party managers each month as a basic management fee. Total basic management fees incurred by the Company during the three and six months ended June 30, 2011 and 2010 were included in the Company’s statements of operations as follows (in thousands):

	Three Months Ended June 30, 2011		Three Months Ended June 30, 2010		Six Months Ended June 30, 2011		Six Months Ended June 30, 2010
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Continuing operations — property general and administrative expense	$	5,776	$	3,942	$	9,789	$	7,387
Discontinued operations	78		522		218		1,073
	$	5,854	$	4,464	$	10,007	$	8,460

In addition to basic management fees, provided that certain operating thresholds are met, the Company may also be required to pay certain of its third-party managers incentive management fees. Total incentive management fees incurred by the Company were $0.9 million and $0.8 million for the three months ended June 30, 2011 and 2010, respectively, and $1.6 million and $1.3 million for the six months ended June 30, 2011 and 2010, respectively, all of which were included in property general and administrative expense.

License and Franchise Agreements

The Company has entered into license and franchise agreements related to certain of its hotel properties. The license and franchise agreements require the Company to, among other things, pay monthly fees that are calculated based on specified percentages of certain revenues. The license and franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of the hotels which are established by the franchisors to maintain uniformity in the system created by each such franchisor. Such standards generally regulate the appearance of the hotel, quality and type of goods and services offered, signage and protection of trademarks. Compliance with such standards may from time to time require the Company to make significant expenditures for capital improvements.

Total license and franchise costs incurred by the Company during the three months ended June 30, 2011 and 2010 were $7.5 million and $7.0 million, respectively, of which royalties totaled $2.3 million and $2.4 million, for the three months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010, total license and franchise costs incurred by the Company were $12.7 million and $12.9 million, respectively, of which royalties totaled $4.1 million and $4.7 million, respectively. The remaining costs included advertising, reservation and priority club assessments. Total license and franchise costs incurred by the Company during the three and six months ended June 30, 2011 and 2010 were included in the Company’s statements of operations as follows (in thousands):

	Three Months Ended June 30, 2011		Three Months Ended June 30, 2010		Six Months Ended June 30, 2011		Six Months Ended June 30, 2010
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Continuing operations — franchise costs	$	7,484	$	5,636	$	12,734	$	10,151
Discontinued operations	—		1,361		—		2,734
	$	7,484	$	6,997	$	12,734	$	12,885

Several of the Company’s franchise agreements contain corporate guaranties. In the event of a default under any of these franchise agreements, the Company may be liable for termination fees. Five of the Mass Mutual eight hotels remained subject to franchise agreements which contained corporate guaranties. If the franchise agreements on these five hotels were to be terminated, the Company was potentially liable for up to $19.6 million in termination fees. In June 2011, the Company paid $1.5 million in termination fees on the Residence Inn by Marriott Manhattan Beach. As of June 30, 2011, all contingencies relating to the remaining $18.1 million in termination fees have been resolved, and the Company recorded a gain on extinguishment of debt of $18.1 million to discontinued operations in June 2011. The Company no longer has any financial liabilities related to the Mass Mutual debt restructuring.

Renovation and Construction Commitments

At June 30, 2011, the Company had various contracts outstanding with third parties in connection with the renovation of certain of its hotel properties aimed at maintaining the appearance and quality of its hotels. The remaining commitments under these contracts at June 30, 2011 totaled $26.7 million.

Ground and Operating Leases

Total rent expense incurred pursuant to ground lease agreements for the three and six months ended June 30, 2011 and 2010 was included in the Company’s statements of operations as follows (in thousands):

	Three Months Ended June 30, 2011		Three Months Ended June 30, 2010		Six Months Ended June 30, 2011		Six Months Ended June 30, 2010
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Continuing operations — property general and administrative expense	$	4,000	$	1,331	$	6,555	$	2,485
Discontinued operations	13		179		22		290
	$	4,013	$	1,510	$	6,577	$	2,775

Rent expense incurred pursuant to the lease on the corporate facility totaled $0.1 million for both the three months ended June 30, 2011 and 2010, and $0.1 million and $0.2 million for the six months ended June 30, 2011 and 2010, respectively, and was included in corporate overhead expense.

Concentration of Risk

As of June 30, 2011, 10 of the Company’s 32 hotels were located in California, the largest concentration of the Company’s hotels in any state, representing approximately 32% of the Company’s rooms, approximately 30% of the revenue generated by the Company’s 32 hotels during the three months ended June 30, 2011, and approximately 27% of the revenue generated by the Company’s 32 hotels during the six months ended June 30, 2011. In addition, as of June 30, 2011, three of the Company’s 32 hotels were located in New York, representing approximately 10% of the Company’s rooms and approximately 16% of the revenue generated by the Company’s 32 hotels during both the three and six months ended June 30, 2011. The concentration of the Company’s hotels in California and New York exposes the Company’s business to economic conditions, competition and real and personal property tax rates unique to California and New York.

Other

The Company has provided customary unsecured environmental indemnities to certain lenders. The Company has performed due diligence on the potential environmental risks, including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate the Company to reimburse the indemnified parties for damages related to certain environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, the Company could have recourse against other previous owners or a claim against its environmental insurance policies.

At June 30, 2011, the Company had $1.7 million of outstanding irrevocable letters of credit to guaranty the Company’s financial obligations related to workers’ compensation insurance programs from prior policy years. The beneficiaries of these letters of credit may draw upon these letters of credit in the event of a contractual default by the Company relating to each respective obligation.  No draws have been made through June 30, 2011.