Note 10. Related Person Transactions

We have relationships and historical and continuing transactions with TA, RMR LLC, Sonesta and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also our trustees or officers. For further information about these and other such relationships and certain other related person transactions, please refer to our 2015 Annual Report.

TA: TA was our 100% owned subsidiary until we distributed its common shares to our shareholders in 2007. We are TA’s largest shareholder. As of March 31, 2016, we owned 3,420,000 of TA’s common shares, representing approximately 8.8% of TA’s outstanding common shares. TA is our largest tenant and property operator, leasing 36% of our gross carrying value of real estate properties as of March 31, 2016.

In June 2015, we entered a transaction agreement with TA pursuant to which, among other things, we agreed to purchase from TA five travel centers upon the completion of their development at a purchase price equal to their development costs, including the cost of the land, and we agreed to leaseback these development properties to TA. On March 31, 2016, we purchased one of these development properties from TA, a travel center located in Hillsboro, TX, for $19,683, and we amended our TA No. 4 lease to add this property. The annual minimum rent payable to us under our TA No. 4 lease increased by $1,673 as a result of the completion of this purchase and leaseback. Our purchase and leaseback of the remaining four development properties is subject to a maximum aggregate purchase price of $95,000 and we are not obligated to purchase any development property that is not substantially complete prior to June 30, 2017. TA has recently stated that it may not be able to complete development of one these properties prior to June 30, 2017.

As of March 31, 2016, we leased to TA a total of 194 travel centers. As of March 31, 2016, the number of travel centers leased, the term, the annual minimum rent and the deferred rent balances under each of our TA leases were as follows:


	Number of Travel Centers	Initial Term End (1)		Minimum Annual Rent as of March 31, 2016		Deferred Rent (2)
TA No. 1 Lease	39	December 31, 2029	$	49,198	$	27,421
TA No. 2 Lease	38	December 31, 2028		47,392		29,107
TA No. 3 Lease	38	December 31, 2026		50,630		29,324
TA No. 4 Lease	39	December 31, 2030		48,596		21,233
TA No. 5 Lease	40	June 30, 2024		65,329		42,915
	194		$	261,145	$	150,000

(1)

TA has two renewal options of 15 years each under each of our TA leases.

(2)

Deferred rent is subject to acceleration at our option upon an uncured default or a change in control of TA.

We recognized rental income from TA of $68,117 and $56,691 for the three months ended March 31, 2016 and 2015, respectively. Rental income for the three months ended March 31, 2016 and 2015 includes $3,644 and $415, respectively, of adjustments necessary to record the deferred rent obligations under our TA leases and the estimated future payment to us by TA for the cost of removing underground storage tanks on a straight line basis. As of March 31, 2016 and December 31, 2015, we had accruals for unpaid amounts owed to us by TA (and straight line rent adjustments) of $55,345 and $40,988, respectively; these amounts are included in due from related persons on our condensed consolidated balance sheets.

We funded $20,575 and $20,181 of qualifying capital improvements for the three months ended March 31, 2016 and 2015, respectively, under our TA leases, and, as a result, TA’s annual minimum rent payable to us increased by approximately $1,749, and $1,715, respectively.

We determine percentage rent due under our TA leases annually and recognize any resulting amount as rental income when all contingencies are met. We had aggregate deferred percentage rent under our TA leases of $250 and $1,240 for the three months ended March 31, 2016 and 2015, respectively, which amounts are net of any waived amounts. We waived $311 and $259 of percentage rent for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, we have cumulatively waived $2,439 of the $2,500 of percentage rent we previously agreed to waive.

RMR LLC: Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $13,781 and $18,987 for the three months ended March 31, 2016 and 2015, respectively. The business management fees for the three months ended March 31, 2016 include estimated 2016 incentive fees of $5,316 based on our common share total return as of March 31, 2016. The actual amount of incentive fees payable to RMR LLC for 2016, if any, will be based on our common share total return for the three year period ending December 31, 2016, and will be payable in 2017. The net business management fees we recognized for the three months ended March 31, 2015 included $9,027 of then estimated 2015 incentive fees; in January 2016, we paid RMR LLC an incentive fee of $62,263 for 2015. The net business management fees we recognized for the 2016 and 2015 periods are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

In accordance with the terms of our business management agreement, we issued 30,974 of our common shares to RMR LLC for the three months ended March 31, 2015 as payment for a part of the business management fee we recognized for that period. Beginning June 1, 2015, all management fees under our business management agreement are paid in cash.

Pursuant to our property management agreement with RMR LLC, we recognized property management fees of $14 and $9 for the three months ended March 31, 2016 and 2015, respectively. These amounts are included in hotel operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. We reimbursed RMR LLC $38 and $33 for property management related expenses related to the office building component of one of our hotels for the three months ended March 31, 2016 and 2015, respectively; these amounts are included in hotel operating expenses in our condensed consolidated statements of comprehensive income.

We have historically awarded share grants to certain RMR LLC employees under our equity compensation plans. In addition, under our business management agreement we reimburse RMR LLC for our allocable costs for internal audit services. The amounts recognized as expense for share grants to RMR LLC employees and internal audit costs were $488 and $798 for the three months ended March 31, 2016 and 2015, respectively; these amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

We lease office space to RMR LLC in the office building component of our property located in Baltimore, MD. Pursuant to our lease agreement with RMR LLC, we recognized rental income from RMR LLC for leased office space of approximately $9 for each of the three months ended March 31, 2016 and 2015.

RMR Inc.: In June 2015, we and three other real estate investment trusts, or REITs, to which RMR LLC provides management services, or collectively, the Other REITs, participated in a transaction whereby we and the Other REITs each acquired shares of class A common stock of The RMR Group Inc., or RMR Inc., and simultaneously amended our business and property managements with RMR LLC to, among other things, provide for continuing 20 year terms. RMR Inc. is the managing member of RMR LLC and RMR LLC is a subsidiary of RMR Inc. The controlling shareholder of RMR Inc., ABP Trust, is owned by our Managing Trustees.

In connection with our acquisition of shares of class A common stock of RMR Inc., we recorded a liability for the amount by which the estimated fair value of these shares exceeded the price we paid for these shares; this liability is included in accounts payable and other liabilities in our condensed consolidated balance sheets. We are amortizing this liability ratably through December 31, 2035 as a reduction to our business management fees expense. For the three months ended March 31, 2016, we amortized $896 of this liability, which is reflected in the net business management fees for the period. As of March 31, 2016, the unamortized amount of this liability was $70,866.

As of March 31, 2016, we own 2,503,777 shares of class A common stock of RMR Inc. We receive dividends on these shares as declared and paid by RMR Inc. to all holders of shares of RMR Inc. class A common stock. We did not receive any dividends on these shares during the three months ended March 31, 2016. However, on April 13, 2016, RMR Inc. declared a dividend of $0.2993 on its shares of class A common stock payable to shareholders of record on April 25, 2016. RMR Inc. has stated that this dividend represents a regular quarterly dividend of $0.25 per share of class A common stock for the quarter ended March 31, 2016 plus a pro rata dividend of $0.0493 per share of class A common stock for the period from December 14, 2015 to December 31, 2015. RMR Inc. has stated that it expects to pay this dividend on or about May 19, 2016.

Sonesta: Sonesta is owned by our Managing Trustees. As of March 31, 2016, Sonesta managed 33 of our hotels pursuant to management and pooling agreements.

On February 1, 2016, we acquired two extended stay hotels with 262 suites located in Cleveland and Westlake, OH for $12,000, excluding acquisition related costs, and entered into a long term management agreement with Sonesta for each hotel on terms substantially consistent with those of our existing management agreements with Sonesta for extended stay hotels. These management agreements were added to our existing pooling agreement with Sonesta.

Pursuant to our Sonesta agreement, we incurred management, system, reservation fees and reimbursement of certain guest loyalty, marketing program and third party reservation transmission fees from Sonesta of $5,300 and $4,514 for the three months ended March 31, 2016 and 2015, respectively, and procurement and construction supervision fees of $343 and $353 for the three months ended March 31, 2016 and 2015, respectively. These amounts are included in hotel operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

On January 4, 2016, we and Sonesta amended our pooling agreement and management agreements. Under the amended pooling agreement, a hotel may be designated as “non-economic” and removed from the pooling agreement and subject to sale and we have an early termination right under each management agreement, in each case if the applicable hotel does not meet certain criteria for the stipulated measurement period. Pursuant to the amendment, these stipulated measurement periods begin on the later of January 1, 2017 and January 1st of the year beginning at least 18 months following the effective date of the applicable management agreement. The amendment to the pooling agreement and management agreements with Sonesta were negotiated and recommended by a Special Committee of our Board of Trustees comprised solely of our Independent Trustees, and were approved by our Independent Trustees and also by our Board of Trustees.

AIC: We and six other companies to which RMR LLC provides management services each own in equal amounts AIC. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC.

As of March 31, 2016, our investment in AIC had a carrying value of $6,963; this amount is included in other assets in our condensed consolidated balance sheets. We recognized income of $77 and $72 related to our investment in AIC for the three months ended March 31, 2016 and 2015, respectively. Our other comprehensive income includes our proportionate part of unrealized gains on securities which are owned by AIC of $52 and $45 for the three months ended March 31, 2016 and 2015, respectively.

For additional information about our agreements with TA and Sonesta, please see Note 11 below.