Commitments and Contingencies

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies

Commitments and Contingencies

15. Commitments and Contingencies

Management Agreements

Management agreements with the Company’s third-party hotel managers require the Company to pay between 2% 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 years ended December 31, 2011, 2010 and 2009 were included in the Company’s consolidated statements of operations as follows (in thousands):

	2011		2010		2009
Continuing operations — property general and administrative expense, and corporate overhead expense	$	21,902	$	15,707	$	15,160
Discontinued operations	290		2,011		3,608
	$	22,192	$	17,718	$	18,768

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 $3.6 million, $3.0 million and $2.9 million for the years ended December 31, 2011, 2010 and 2009, 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 years ended December 31, 2011, 2010 and 2009 were $29.1 million, $26.1 million, and $28.7 million, respectively, of which royalties totaled $8.8 million, $9.2 million, and $10.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. The remaining costs included advertising, reservation and priority club assessments. Total license and franchise costs incurred by the Company during the years ended December 31, 2011, 2010 and 2009 were included in the Company’s consolidated statements of operations as follows (in thousands):

	2011		2010		2009
Continuing operations — franchise costs	$	29,115	$	21,474	$	20,658
Discontinued operations	—		4,665		7,995
	$	29,115	$	26,139	$	28,653

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. Upon deed back of the Mass Mutual eight hotels in November 2010 pursuant to the 2009 secured debt restructuring program, 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. All contingencies relating to the remaining $18.1 million in termination fees were resolved in June 2011, 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 December 31, 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 December 31, 2011 totaled $25.3 million.

Ground and Operating Leases

At December 31, 2011, nine of the Company’s 32 hotels were obligated to unaffiliated parties under the terms of eight ground leases and three air leases, which mature from dates ranging from 2037 through 2096, excluding renewal options. One of the air leases requires a payment of $1.00 annually, which the Company has paid in full for the life of the lease. At both December 31, 2010 and 2009, six of the Company’s 32 hotels were obligated to unaffiliated parties under the terms of five ground leases and one air lease. Total rent expense incurred pursuant to ground and air lease agreements for the years ended December 31, 2011, 2010 and 2009 was included in the Company’s consolidated statements of operations as follows (in thousands):

	2011		2010		2009
Continuing operations — property tax, ground lease and insurance (1)	$	14,817	$	5,209	$	4,615
Discontinued operations	22		528		608
	$	14,839	$	5,737	$	5,223

(1)  Beginning in 2010, ground lease expense also includes amortization of lease intangibles on a ground lease and an easement at two of the Company’s 32 hotels in 2010, and on three ground leases and an easement at four of the Company’s 32 hotels in 2011.

At December 31, 2011, the Company was obligated to an unaffiliated party under the terms of a sublease on the corporate facility, which matures in 2018. Rent expense incurred pursuant to leases on the corporate facility totaled $0.3 million for both of the years ended December 31, 2011 and 2010, and $0.4 million for the year ended December 31, 2009, and was included in corporate overhead expense.

Future minimum payments under the terms of the eight ground leases, three air leases and the sublease on the corporate facility in effect at December 31, 2011 are as follows (in thousands):

2012	$	8,624
2013	8,699
2014	8,755
2015	8,815
2016	8,876
Thereafter	392,853
Total	$	436,622

Employment Agreements

As of December 31, 2011, the Company has employment agreements with certain executive employees, which expire through April 2014. The terms of the agreements stipulate payments of base salaries and bonuses.

Approximate minimum future obligations under employment agreements are as follows as of December 31, 2011 (in thousands):

2012	$	1,525
2013	914
2014	94
	$	2,533

Litigation

During the third quarter of 2011, the Company accrued $1.6 million in settlement costs related to litigation involving three separate claims by certain employees at four of its hotels: Marriott Del Mar; Marriott Quincy; Renaissance Los Angeles Airport; and Renaissance Long Beach. The Company had previously estimated that the ultimate liability for these lawsuits would range from between zero and $0.1 million, and, accordingly, the Company recorded a liability of $0.1 million in November 2010 in accordance with the Contingencies Topic of the FASB Accounting Standards Codification, which requires a liability be recorded based on the Company’s estimate of the probable cost of the resolution of a contingency. The Company and certain other defendants reached tentative settlements regarding two of the lawsuits comprising $1.0 million of the total $1.7 million accrual, which settlements are subject to final approval by the Superior Court of California, Los Angeles County and the Superior Court of California, Orange County. The Company is still in negotiations regarding the third claim, however the Company expects to incur a maximum of $0.7 million in related settlement or judgment costs and expenses.

Collective Bargaining Agreements

The Company is subject to exposure to collective bargaining agreements at certain hotels operated by its management companies. At December 31, 2011, approximately 23.8% of workers employed by the Company’s third-party managers were covered by such collective bargaining agreements.

Defined Benefit Retirement Plan Obligation

In connection with the Company’s formation and structuring transactions, certain predecessor companies sold their property management company to IHR, who assumed certain liabilities of the property management company including the defined benefit retirement plan. In accordance with the management agreement with IHR, the Company is still responsible for the costs of the defined benefit retirement plan.

The benefits expected to be paid each year through 2021 as of December 31, 2011 are as follows (in thousands):

2012	$	398
2013	403
2014	420
2015	438
2016	457
Thereafter	2,656
	$	4,772

401(k) Savings and Retirement Plan

The Company’s employees may participate, subject to eligibility, in the Company’s 401(k) Savings and Retirement Plan (the “401(k) Plan”). Employees are eligible to participate in the 401(k) Plan after attaining 21 years of age and after the first of the month following the performance of six months of service. Three percent of eligible employee annual base earnings is contributed by the Company as a Safe Harbor elective contribution. Safe Harbor contributions made by the Company totaled $0.2 million for each of the years ended December 31, 2011, 2010 and 2009, and were included in corporate overhead expense.

The Company is also responsible for funding various retirement plans at certain hotels operated by its management companies. Matching contributions into these various retirement plans totaled $0.6 million for the year ended December 31, 2011 and $0.9 million for both the years ended December 31, 2010 and 2009, all of which was included in property general and administrative expense.

Concentration of Risk

As of December 31, 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 and approximately 32% of the revenue generated by the Company’s 32 hotels during the year ended December 31, 2011. In addition, as of December 31, 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 the year ended December 31, 2011. The concentration of the Company’s hotels in California and New York exposes the Company’s business to natural disasters, economic conditions, competition and real and personal property tax rates unique to California and New York.

Other

The Company has provided 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 December 31, 2011, the Company had $1.5 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 December 31, 2011.