Note 6. Impairment Losses

In accordance with FASB ASC 360-10-35 Property Plant and Equipment – Overall - Subsequent Measurement, the Company analyzes its assets for impairment loss when events or circumstances occur that indicate the carrying amount may not be recoverable. As part of this process, the Company utilizes a two-step analysis to determine whether a trigger event (within the meaning of ASC 360-10-35) has occurred with respect to cash flow of, or a significant adverse change in business climate for, its hotel properties. Quarterly and annually the Company reviews all of its held for use hotels to determine any property whose cash flow or operating performance significantly underperformed from budget or prior year, which the Company has set as a shortfall against budget or prior year as 15% or greater.

At year end the Company applies a second analysis on the entire held for use portfolio. The analysis estimates the expected future cash flows to identify any property whose carrying amount potentially exceeded the recoverable value. (Note that at the end of each quarter, this analysis is performed only on those properties identified in the 15% change analysis). In performing this year end analysis, the Company makes the following assumptions:

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Holding periods range from three to five years for non-core assets, and ten years for those assets considered as core.

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Cash flow from trailing twelve months for the individual properties multiplied by the holding period as noted above. The Company does not assume growth rates on cash flows as part of its step one analysis.

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A revenue multiplier for the terminal value based on an average of historical sales from leading industry brokers of like properties was applied according to the assigned holding period.

As of June 30, 2011 and December 31, 2011, the analysis above was used to determine that a trigger event as described in ASC 360-10-35 occurred for one and two of our held for use properties, respectively. In each case the carrying value of the hotel exceeded the sum of the undiscounted cash flows expected over its remaining anticipated holding period and from its disposition. Each property was then tested to determine if the carrying amount was recoverable using property specific assumptions. When testing the recoverability for a property, in accordance with FASB ASC 360-10-35 35-29 Property Plant and Equipment – Overall – Subsequent Measurement, Estimates of Future Cash Flows Used to Test a Long-Lived Asset for Recoverability, the Company uses estimates of future cash flows associated with the individual property over the expected holding period and eventual disposition.

In estimating these future cash flows, the Company incorporates its own assumptions about its use of the hotel property and expected hotel performance. Assumptions used for the individual hotels were determined by management, based on discussions with our asset management group and our third party management companies. Each property was then subjected to a probability-weighted cash flow analysis as described in FASB ASC 360-10-55 Property Plant and Equipment – Overall – Implementation. In this analysis, the Company completed a detailed review of each hotel's market conditions and future prospects, which incorporated specific detailed cash flow and revenue multiplier assumptions over the remaining expected holding periods, including the probability that the property will be sold. Based on the results of this analysis, it was determined that the Company's investment in the subject properties was not fully recoverable; accordingly, impairment was recognized.

To determine the amount of impairment on the properties identified above, in accordance with FASB ASC 360-10-55, the Company calculated the excess of the carrying value of the property in comparison to its fair market value as of June 30, 2011 and December 31, 2011. As discussed in Note 1 - Fair Value Measurements, the fair market values were determined using Level 3 inputs in accordance with ASC 820-10-35 Fair Value Measurements and Disclosures – Overall – Subsequent Measurement. Based on this calculation, the Company determined total impairment of $2.8 million existed as of June 30, 2011 on the one held for use asset and $2.8 million existed as of December 31, 2011 on the two assets previously noted. Fair market value was determined by multiplying trailing 12 months' revenue for the property by a revenue multiplier that was determined based on the company's experience with similar hotel sales in the current year, available industry information and brokers' opinions of value. As the fair market value of the properties impaired for the year ending December 31, 2011, was determined in part by management estimates, a reasonable possibility exists that future changes to inputs and assumptions could affect the accuracy of management's estimates and such future changes could lead to further possible impairment in the future. During the 12 months ending December 31, 2011, the Company recorded impairment losses of $3.3 million and the recovery of previously recorded impairment of $0.4 million on four hotels reclassified from held for sale to held for use in the fourth quarter of 2011.