SEC Filing | DIAMONDROCK HOSPITALITY COMPANY

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FORM S-11/A

As filed with the Securities and Exchange Commission on April 1, 2005

Registration No. 333-123065

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

AMENDMENT NO. 1

FORM S-11

FOR REGISTRATION

UNDER

THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

DIAMONDROCK HOSPITALITY COMPANY

(Exact Name of Registrant as Specified in its Governing Instruments)

10400 Fernwood Road, Suite 300, Bethesda, Maryland 20817, (301) 380-7100

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

William W. McCarten

Chief Executive Officer

DiamondRock Hospitality Company

10400 Fernwood Road, Suite 300, Bethesda, Maryland 20817

(301) 380-7100

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

Copies to:

Gilbert G. Menna, Esq.

Suzanne D. Lecaroz, Esq.

Goodwin Procter LLP

Exchange Place, 53 State Street

Boston, MA 02109

(617) 570-1000

David C. Wright, Esq.

Cyane B. Crump, Esq.

Hunton & Williams LLP

951 E. Byrd Street

Richmond, Virginia 23219-4074

(804) 788-8200

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement of the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ¨

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED APRIL 1, 2005

PROSPECTUS

Shares of Common Stock

DIAMONDROCK HOSPITALITY COMPANY

LOGO

We are a self-advised real estate company that owns, acquires and invests in upper upscale and upscale hotel properties located primarily in North America. This is our initial public offering of common stock and no public market currently exists for our common stock. We are offering shares of common stock and shares of common stock are being offered by the selling stockholders described in this prospectus. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders.

We expect to qualify as a real estate investment trust, or REIT, for federal income tax purposes and will elect to be taxed as a REIT under the federal income tax laws for the taxable year ending December 31, 2005 and subsequent taxable years.

We currently expect the initial public offering price of our common stock to be between $ and $ per share. We intend to apply to have our common stock listed on the New York Stock Exchange under the symbol “DRH”.

Shares of our common stock are subject to ownership limitations that we must impose in order for us to qualify, and maintain our status, as a REIT.

See “ Risk Factors” beginning on page 17 of this prospectus for certain risk factors relevant to an investment in shares of our common stock.


	Per Share	Total
Public offering price	$	$
Underwriting discount	$	$
Proceeds to us (before expenses)	$	$
Proceeds to selling stockholders (before expenses)	$	$

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

We expect to deliver the shares of common stock on or about , 2005.

The underwriters may purchase up to an additional shares of common stock from us at the public offering price, less the underwriting discount, within 30 days after the date of this prospectus solely to cover over-allotments, if any.

CitigroupFriedman Billings Ramsey

The date of this prospectus is , 2005

TABLE OF CONTENTS


		Page
SUMMARY		1
Our Company		1
Our Competitive Strengths		2
Risk Factors		3
Our Business Objective and Strategies		4
Hotel Industry		5
Our Initial Hotel Properties		6
Our Acquisition Properties		8
Our Structure		9
Hotel Industry Segments		10
Our Principal Office		10
Our Tax Status		10
Restrictions on Ownership of Our Stock		11
Our Distribution Policy		11
Registration Rights and Lock-Up Agreements		12
Selling Stockholders		12
THE OFFERING		13
SUMMARY SELECTED FINANCIAL AND OPERATING DATA		14
RISK FACTORS		17
Risks Related to Our Business, Growth Strategy and Investment Sourcing Relationship with Marriott		17
Risks Related to the Hotel Industry		26
General Risks Related to the Real Estate Industry		30
Risks Related to Our Organization and Structure		31
Risks Related to this Offering		35
FORWARD LOOKING STATEMENTS		38
MARKET DATA		39
USE OF PROCEEDS		40
DIVIDEND POLICY AND DISTRIBUTIONS		41
CAPITALIZATION		43
DILUTION		44
Net Tangible Book Value		44
Dilution After This Offering		44
Differences Between New and Existing Stockholders in Number of Shares of Common Stock and Amount Paid		44
SELECTED FINANCIAL AND OPERATING DATA		45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		49
Overview		49
Industry Trends and Outlook		50


		Page
Key Indicators of Financial Condition and Operating Performance		50
Critical Accounting Policies and Estimates		51
Other Recent Accounting Pronouncement		52
Results of Operations		52
Liquidity and Capital Resources		54
Off-Balance Sheet Arrangements		55
Outstanding Debt		55
Financing Strategy		56
Contractual Obligations		57
Cash Distribution Policy		57
Inflation		57
Seasonality		57
Geographic Concentration		57
Tax and Depreciation		58
Qualitative Disclosures about Market Risk		58
HOTEL INDUSTRY		59
OUR BUSINESS		63
Our Company		63
Our Competitive Strengths		63
Our Business Objective and Strategies		66
Hotel Industry Segments		67
Environmental Matters		67
Competition		68
Employees		69
Legal Proceedings		69
Regulation		69
Insurance		69
OUR PROPERTIES		70
Our Initial Hotel Properties		70
Mortgage Debt		81
Taxes on Proposed Capital Improvements		82
Our Acquisition Properties		82
OUR PRINCIPAL AGREEMENTS		83
The Information Acquisition Agreement		83
Our Hotel Management Agreements		83
Our TRS Leases		88
Our Ground Lease Agreements		90
MANAGEMENT		92
Our Directors and Senior Executive Officers		92
Corporate Governance Profile		94
Board of Directors and Committees		95
Audit Committee		95
Nominating and Corporate Governance Committee		95
Compensation Committee		96
Compensation Committee Interlocks and Insider Participation		96
Code of Business Conduct and Ethics		96


		Page
Conflicts of Interest		97
Vacancies on our Board of Directors		97
Compensation of Directors		97
Executive Compensation		98
Employment Agreements		99
Annual Incentive Bonus Policy		100
401(k) Plan		100
Equity Incentive Plan		100
Liability, Exculpation and Indemnification		101
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		103
Transactions with Marriott		103
Arrangements with our Senior Executive Officers and Certain Directors		105
INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES		106
Investments in Real Estate or Interests in Real Estate		106
Investments in Mortgages, Structured Financings and Other Lending Policies		106
Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers		107
Dispositions		107
Financing Policies		107
Equity Capital Policies		107
FORMATION OF OUR COMPANY		109
INSTITUTIONAL TRADING OF OUR COMMON STOCK		110
PRINCIPAL STOCKHOLDERS		111
SELLING STOCKHOLDERS		113
REGISTRATION RIGHTS AGREEMENT		114
LOCK-UP AGREEMENTS		116
DESCRIPTION OF CAPITAL STOCK AND CERTAIN MATERIAL PROVISIONS OF MARYLAND LAW, OUR CHARTER AND BYLAWS		117
General		117
Common Stock		117
Preferred Stock		117
Power to Issue Additional Shares of Common Stock and Preferred Stock		118
Restrictions on Ownership and Transfer		118
Transfer Agent and Registrar		120
Certain Provisions of Maryland Law and of Our Charter and Bylaws		120


		Page
DESCRIPTION OF THE PARTNERSHIP AGREEMENT OF DIAMONDROCK HOSPITALITY LIMITED PARTNERSHIP		124
Management of the Operating Partnership		124
Removal of the General Partners; Transfer of the General Partner’s Interest		124
Amendments of the Partnership Agreement		124
Redemption Rights		125
Issuance of Additional Units, Common Stock or Convertible Securities		125
Tax Matters		126
Extraordinary Transactions		126
Term		126
Exculpation and Indemnification of the General Partner		126
SHARES ELIGIBLE FOR FUTURE SALE		127
General		127
Rule 144		128
Rule 701		128
Redemption Rights		128
FEDERAL INCOME TAX CONSIDERATIONS		129
Taxation of the Company		129
Qualification as a REIT		131
Qualified REIT Subsidiaries and Disregarded Entities		136
Taxation of the Operating Partnership		136
Investments in Taxable REIT Subsidiaries		137
Taxation of U.S. Stockholders Holding Common Stock		138
Unrelated Business Taxable Income		139
Information Reporting Requirements and Backup Withholding Tax		140
Taxation of Non-U.S. Stockholders Holding Common Stock		141
State, Local, and Foreign Tax		142
ERISA CONSIDERATIONS		143
UNDERWRITING		145
LEGAL MATTERS		150
EXPERTS		150
WHERE YOU CAN FIND MORE INFORMATION		151
REPORTS TO STOCKHOLDERS		152
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1

SUMMARY

The following summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus, including “Risk Factors” and our historical and pro forma financial statements appearing elsewhere in this prospectus, before investing in our common stock. References in this prospectus to “we,” “our,” “us” and “our company” refer to DiamondRock Hospitality Company, including, as the context requires, DiamondRock Hospitality Limited Partnership, our operating partnership, as well as our other direct and indirect subsidiaries, including our existing taxable REIT subsidiary, Bloodstone TRS, Inc. References to “Marriott” are to Marriott International, Inc., including, as the context requires, its subsidiaries. References to “RevPAR” are to revenue per available room, which is the product of average daily rate, which we refer to as “ADR,” and occupancy, and is a key performance indicator for the hotel industry. Unless otherwise indicated, the information contained in this prospectus assumes that (i) the underwriters’ over-allotment option is not exercised and (ii) the common stock to be sold in this offering is sold at $ per share, which is the midpoint of the range of prices indicated on the front cover of this prospectus.

Our Company

We are a self-advised real estate company that owns, acquires and invests in upper upscale and upscale hotel properties located primarily in North America. To a lesser extent, we may invest, on a selective basis, in premium limited-service and extended-stay hotel properties in urban locations.

Our senior management team has extensive experience and a broad network of relationships in the hotel industry, which we believe provides us with ongoing access to hotel property investment opportunities and enables us to quickly identify and consummate acquisitions. We began operations in July 2004 when we completed a private placement of our common stock. Since our July 2004 private placement, we have acquired seven hotels, comprising 2,357 rooms, located in the following markets: New York City (2 hotels), Washington D.C., Los Angeles, Salt Lake City, Northern California and Lexington, Kentucky for purchase prices aggregating approximately $368.0 million.

We have an investment sourcing relationship with Marriott, a leading worldwide hotel brand, franchise and management company. Marriott has agreed to provide us, subject to certain limitations, with a “first look” at hotel property acquisition and investment opportunities known to it. This investment sourcing relationship with Marriott has already facilitated the acquisition of four of our initial seven hotel properties. We believe that our ability to implement our business strategies is greatly enhanced by the continuing source of additional acquisition opportunities generated by this relationship, as many of the properties Marriott brings to our attention are offered to us through “off-market” transactions, meaning that they are not made generally available to other hospitality companies. While we and Marriott currently intend to develop and strengthen our investment sourcing relationship, neither of us has entered into a binding agreement or commitment setting forth the terms of this relationship. As a result, our investment sourcing relationship may be modified or terminated at any time by either party.

We intend to use Marriott as our preferred, but not exclusive, hotel management company for our hotel properties and expect to benefit from Marriott’s strong brands and its excellent hotel management services. Marriott-branded hotels have an extensive record of generating premiums in RevPAR over competitive brands. Each of our initial hotel properties operates under a recognized Marriott brand, including Marriott^®, Renaissance Hotels and Resorts^® and Courtyard by Marriott^®. In connection with our July 2004 private placement, Marriott purchased 3,000,000 shares, or 13.8% of our outstanding common stock (which amount outstanding includes shares of unvested restricted stock).

Our Competitive Strengths

We believe we distinguish ourselves from other owners, acquirors and investors in hotel properties through our competitive strengths, which include:

•

Experienced Management Team. We believe the extensive hotel industry experience of our senior management team will enable us to effectively implement our business strategies. Our senior management team of William W. McCarten, John L. Williams, Mark W. Brugger, Michael D. Schecter and Sean M. Mahoney has extensive experience in lodging, real estate and related service industries, including hotel asset management, acquisitions, mergers, dispositions, development, redevelopment and financing. Collectively, they have been involved in hotel transactions aggregating several billion dollars and over 100,000 hotel rooms.

•

Marriott Investment Sourcing Relationship. Our investment sourcing relationship with Marriott provides us, subject to certain limitations, with a “first look” at hotel property acquisition and investment opportunities known to it. Our senior management team currently meets with senior representatives of Marriott approximately every two weeks to discuss, among other things, potential hotel property investment opportunities known to Marriott. As a result of Marriott’s extensive network, relationships and knowledge of hotel property investment opportunities, we believe we have preferred access to a unique source of hotel property investment opportunities, many of which may not be available to other hospitality companies. Since our formation in 2004, Marriott has provided us access to more than $1.9 billion of off-market acquisition opportunities. Our relationship with Marriott has facilitated the acquisition of four of our initial seven hotel properties, including the Marriott Griffin Gate Resort and the Lodge at Sonoma Renaissance Resort & Spa, each of which we acquired directly from Marriott.

•

Proven Acquisition Capability. Our senior management team has established a broad network of hotel industry contacts and relationships, including relationships with hotel owners, financiers, operators, commercial real estate brokers and other key industry participants. These industry relationships have provided us with another valuable source of potential hotel property investment opportunities. We believe that our ability to quickly identify, negotiate, finance and consummate acquisitions has positioned us as a preferred buyer of hotel properties.

•

Growth-Oriented Capital Structure. Upon completion of, and application of the net proceeds from, this offering, we will have $ million in secured financing, representing an initial leverage ratio of approximately % of our pro forma total investments as of December 31, 2004, including projected capital improvements, and approximately $ million in net proceeds from this offering to fund future hotel property investments and working capital. In addition, we currently are negotiating with a number of financial institutions to obtain a line of credit to fund additional acquisitions and renovations and for general working capital and other corporate purposes.

Risk Factors

See “Risk Factors” beginning on page 17 for certain risk factors relevant to an investment in our common stock, including, among others:

•

We were formed in May 2004 and commenced operations in July 2004 and have a limited operating history.

•

Our management has no prior experience operating a REIT and limited experience operating a public company and therefore may have difficulty in successfully and profitably operating our business.

•

We cannot assure you that we will qualify, or remain qualified, as a REIT.

•

All of our initial hotel properties are managed by Marriott. As a result, our success is dependent in part on the continued success of Marriott and its brands.

•

Failure of the hotel industry to continue to improve may adversely affect our ability to execute our business strategies, which, in turn, would adversely affect our ability to make distributions to our stockholders.

•

We face competition for the acquisition of hotels and we may not be successful in identifying or completing hotel acquisitions that meet our criteria, which may impede our growth.

•

Our investment sourcing relationship with Marriott is non-exclusive and based on a non-binding understanding that may be changed or terminated at any time, which could adversely affect our ability to execute our business strategies, which in turn, would adversely affect our ability to make distributions to our stockholders.

•

In order to maintain our investment sourcing relationship with Marriott, Marriott may encourage us to enter into transactions or hotel management agreements that are not in our best interests.

•

We rely on hotel management companies, including Marriott, to operate our hotel properties under the terms of hotel management agreements. Even if we believe our hotel properties are being operated inefficiently or in a manner that does not result in satisfactory RevPAR and operating profits, we may not have sufficient rights under our hotel management agreements to enable us to force the hotel management company to change its method of operation of our hotel properties.

•

Our hotel management agreements require us to bear the operating risks of our hotel properties. Our operating risks include decreased hotel revenues and increased operating expenses. Any decreases in hotel revenues or increases in operating expenses may have a material adverse impact on our earnings and cash flow.

•

We had $180.8 million in debt outstanding at December 31, 2004 and we incurred an additional $44.0 million of debt in connection with our acquisition of the Torrance Marriott in January 2005. We currently intend to obtain a secured revolving line of credit and may incur substantial additional debt in the future, including secured debt. Future debt service obligations may adversely affect our operating results, require us to liquidate our properties, jeopardize our tax status as a REIT or limit our ability to make distributions to our stockholders. Additionally, if we were to default on our secured debt in the future, the loss of any property securing the debt would harm our ability to satisfy other financial obligations.

•

If we are unable to complete the acquisitions of the hotel properties we have under contract in a timely fashion or at all, we will have no designated use for a substantial portion of the net proceeds of this offering and may experience delays in locating and securing attractive alternative investments. These delays could result in our future operating results not meeting expectations and adversely affect our ability to make distributions to our stockholders.

•

We acquired interests in three of our current properties and the golf course associated with a fourth property by acquiring a leasehold interest in the property on which the building is located, and we may

acquire additional properties in the future through the purchase of hotels subject to ground leases. As lessee under ground leases, we are exposed to the risk of losing the property upon termination, or an earlier breach by us, of the ground lease.

•

Our hotel properties are and will continue to be subject to various operating risks common to the hotel industry. Competition for acquisitions, the seasonality of the hotel industry, our investment concentration in a particular segment of the real estate industry and the need for capital expenditures could harm our future operating results and adversely affect our ability to make distributions to our stockholders.

•

The events of September 11, 2001, recent economic trends, the military action in Afghanistan and Iraq and the possibility of future terrorist acts and military action have adversely affected the hotel industry generally, and similar future events could adversely affect the industry in the future.

•

Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to our stockholders.

•

Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties in our portfolio in response to changing economic, financial and investment conditions may be limited. In addition, because our hotel management agreements contain restrictions on our ability to dispose of our hotel properties, are typically long-term and do not terminate in the event of a sale, our ability to sell our hotel properties may be further limited.

•

Provisions of our charter and bylaws may limit the ability of a third party to acquire control of our company, which may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best interests.

•

If we fail to qualify for or lose our status as a REIT, we would be subject to federal income tax on our taxable income, reducing amounts available for distribution to our stockholders.

•

As a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to our stockholders. In the event of future downturns in our operating results and financial performance or the need for unanticipated capital improvements to our hotel properties, we may be unable to declare or pay distributions to our stockholders.

Our Business Objective and Strategies

Our principal business objective is to maximize stockholder value through a combination of dividends, growth in funds from operations and increases in net asset value. We believe that we can create long-term value in our hotel properties by taking advantage of individual market recovery opportunities and aggressive asset management and repositioning, which may include: (i) re-branding, (ii) capital renovation and/or (iii) changing hotel management. In order to achieve our business objective, we intend to pursue the following strategies:

•

Disciplined Acquisition of Hotel Properties. We will seek to create value by acquiring upper upscale and upscale hotel properties in geographically diverse locations, and to a lesser extent, premium limited service and extended stay hotels in urban locations, in accordance with our disciplined acquisition strategy. Our focus is on acquiring undermanaged or undercapitalized hotel properties at prices below replacement cost and that are located in markets where we expect demand growth will outpace new supply.

•

Aggressive Asset Management. We intend to aggressively manage our hotel properties by continuing to employ value-added strategies (such as re-branding, renovating, or changing management) designed to increase the operating results and value of our hotel property investments. We currently plan to invest approximately $28 million in 2005 and 2006 to renovate our initial hotels, including $23.9 million in capital that has been pre-funded into various escrow accounts. We do not operate our hotel properties,

but we have structured, and intend to continue to structure, our hotel management agreements to allow us to closely monitor the performance of our hotels and to ensure, among other things, that our third-party managers: (i) implement an approved business and marketing plan, (ii) implement a disciplined capital expenditure program and (iii) establish and prudently spend appropriate furniture, fixtures and equipment reserves.

•

Opportunistic Hotel Repositioning. We intend to seek opportunities to acquire hotel properties that will benefit from repositioning, including re-branding, renovating or changing management to increase the operating results and value of our hotel property investments. We believe our investment sourcing relationship with Marriott will yield many of these opportunities.

Hotel Industry

We believe the hotel industry, as a whole, is continuing to recover from a pronounced downturn that occurred over the three-year period from 2001-2003. This recovery has been, and we expect it to continue to be, primarily driven by increased demand for hotel rooms. According to Smith Travel Research, demand for hotel rooms, measured by total rooms sold, increased by 0.3% in 2002, 1.5% in 2003 and 4.7% in 2004 and is projected to increase by 4.0% in 2005. By comparison, hotel room supply grew by 1.6% in 2002, 1.2% in 2003 and 1.0% in 2004 and is projected to increase by 1.2% in 2005 as compared to its past 15-year historical annual average of 2.1%.

We expect that sustained growth in demand will result in continued improvement of hotel industry fundamentals. According to Smith Travel Research:

•

occupancy increased by 3.7% in 2004 and is projected to increase by 2.8% in 2005;

•

ADR increased by 4.0% in 2004 and is projected to increase by 4.2% in 2005; and

•

RevPAR increased by 7.8% in 2004 and is projected to increase by 7.1% in 2005.

LOGO

We expect that our hotel properties will be well-positioned to benefit from this recovery in hotel industry fundamentals.

Our Initial Hotel Properties

The following table sets forth certain operating information for each of our initial hotels. This information includes periods prior to our acquisition of these hotels:


Property	Location	Month/Year Acquired	Number of Rooms(1)	Average Occupancy(2)		ADR(2)		RevPAR(2)
Courtyard Manhattan/ Midtown East	New York, New York	11/04	307	89.2	%	$	199.43	$	177.85
Torrance Marriott	Los Angeles County, California	1/05	487	77.4			99.63		77.16
Salt Lake City Marriott Downtown	Salt Lake City, Utah	12/04	510	67.9			115.51		78.49
Marriott Griffin Gate Resort	Lexington, Kentucky	12/04	408	68.0			110.11		74.90
Bethesda Marriott Suites	Bethesda, Maryland	12/04	274	74.6			153.73		114.73
Courtyard Manhattan/ Fifth Avenue	New York, New York	12/04	189	89.3			140.96		125.88
The Lodge at Sonoma Renaissance Resort & Spa	Sonoma, California	10/04	182	65.1			187.34		122.03

TOTALS/WEIGHTED AVERAGES			2,357	75.0	%	$	136.21	$	102.11

(1)	As of December 31, 2004.

(2)	For the fiscal year ended December 31, 2004.

The following table sets forth information regarding our investment in each of our initial hotels:


Property	Location	Year Opened	Number of Rooms(1)	Purchase Price(2)		Pre-Funded Capital Improvements(3)		Projected Additional Capital Improvements(4)		Total Projected Investment(5)		Total Projected Investment Per Room
Courtyard Manhattan/ Midtown East	New York, New York	1998	307	$	75,357,000	$	3,500,000	$	—	$	78,857,000	$	256,862
Torrance Marriott	Los Angeles County, California	1985	487		62,002,000		10,000,000		—		72,002,000		147,848
Salt Lake City Marriott Downtown	Salt Lake City, Utah	1981	510		49,584,000		3,761,000		939,000		54,284,000		106,439
Marriott Griffin Gate Resort	Lexington, Kentucky	1981	408		46,887,000		3,000,000		—		49,887,000		122,272
Bethesda Marriott Suites	Bethesda, Maryland	1990	274		41,062,000		830,000		3,170,000		45,062,000		164,460
Courtyard Manhattan/ Fifth Avenue	New York, New York	1990	189		35,640,000		4,100,000		—		39,740,000		210,265
The Lodge at Sonoma Renaissance Resort & Spa	Sonoma, California	2001	182		32,345,000		—		—		32,345,000		177,720

TOTALS/WEIGHTED AVERAGES			2,357	$	342,877,000	$	25,191,000	$	4,109,000	$	372,177,000	$	157,903

(1)	As of December 31, 2004.

(2)

Purchase price includes, for each hotel property, all amounts paid to the seller, assumed debt and amounts paid for working capital plus costs paid with respect to third-party professional fees in connection with our purchase, but it does not include costs related to mortgage debt used by us to finance the purchase of the hotel property or escrow accounts established for the pre-funded capital improvements.

(3)	Pre-funded capital improvements are capital improvements projected to occur in 2005 and 2006 which reflect amounts pre-funded into various escrow accounts.

(4)	Represents projected additional capital improvements for 2005 and 2006 that have not been pre-funded into an escrow account.

(5)	Total projected investment, for each hotel property, is the sum of the purchase price, pre-funded capital improvements and projected additional capital improvements.

Our Acquisition Properties

Proposed Acquisitions Under Contract. We intend to use a portion of the net proceeds from this offering to acquire and invest in additional hotel properties. As of the date of this prospectus, we have properties under contract that we consider to be “probable” acquisitions. The following table sets forth information regarding those properties:

Property

Location

Year
Opened

Month/Year
Acquired

Number of
Rooms

Average
Occupancy

ADR

RevPAR

Property

Location

Year
Opened

Number
of
Rooms

Purchase
Price

Pre-Funded
Capital
Improvements

Projected
Additional
Capital
Improvements

Total
Projected
Investment

Total
Projected
Investment
Per Room

We cannot assure you that we will acquire any of these properties because each proposed acquisition is subject to a variety of factors including: (i) our completion of satisfactory due diligence and (ii) the satisfaction of closing conditions, including the receipt of third-party consents and approvals.

Letters of Intent. In addition to the properties set forth above that we have under contract and that we consider probable, as of the date of this prospectus, we have five additional properties under non-binding letters of intent. The properties under these letters of intent have an aggregate acquisition cost of approximately $377 million. We also cannot assure you that we will acquire any of the properties under these letters of intent because the letters of intent are non-binding and each of these transactions is subject to a variety of factors including: (i) the willingness of the current property owner to proceed with a transaction; (ii) our completion of satisfactory due diligence; (iii) the negotiation and execution of a mutually acceptable binding definitive purchase agreement and hotel management agreement (or assumption of an existing hotel management agreement); and (iv) the satisfaction of closing conditions, including the receipt of third-party consents and approvals.

Our Structure

We were formed as a Maryland corporation in May 2004. We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnership, DiamondRock Hospitality Limited Partnership, limited partnerships, limited liability companies or other subsidiaries of our operating partnership. We are the sole general partner of our operating partnership and currently own, either directly or indirectly, all of the limited partnership units of our operating partnership. In the future, we may issue limited partnership units to third parties from time to time in connection with acquisitions of hotel properties. In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income test required for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels. Therefore, we lease each of our hotel properties to a wholly-owned subsidiary of Bloodstone TRS, Inc., our existing taxable REIT subsidiary, or TRS. We refer to these subsidiaries as our TRS lessees. We may form additional TRSs in the future.

The following chart shows our corporate structure following the completion of this offering:

LOGO

Hotel Industry Segments

References to “upper upscale” and “upscale” are to hotels classified in those categories by Smith Travel Research, Inc. Smith Travel Research, Inc. classifies the hotel industry into the following chain scales, as determined by each brand’s annual average system-wide daily rates: luxury, upper upscale, upscale, midscale with food and beverage, midscale without food and beverage, and economy. The category of “upper upscale” includes hotels such as Doubletree, Embassy Suites Hotels, Hilton, Hyatt, Marriott and Sheraton; the category of “upscale” includes hotels such as Courtyard by Marriott, Crowne Plaza, Hawthorn Suites, Hilton Garden Inn, Radisson, Residence Inn by Marriott and Wyndham; and the category of “midscale” includes hotels such as Four Points—Sheraton, Holiday Inn, Holiday Inn Express and Holiday Inn Select. ‘‘Extended-stay” hotels are hotels generally designed to accommodate guests staying more than six nights and typically provide rooms with fully equipped kitchens, entertainment systems, office spaces with computer and telephone lines and access to fitness centers and other amenities. “Limited-service” hotels target budget-conscious travelers and therefore have fewer amenities, such as in-house food and beverage facilities.

Our Principal Office

Until at least July 2005, we will sublease office space from Marriott located at its headquarters at 10400 Fernwood Road, Bethesda, MD 20817. Our telephone number is 301-380-7100. Our Internet address is http://www.drhc.com. The information on our website does not constitute a part of this offering.

Our Tax Status

We did not elect REIT tax status for our first taxable year ended December 31, 2004 but operated as a taxable C corporation for 2004. We intend to elect to be taxed as a REIT for federal income tax purposes for our taxable year ending on December 31, 2005 and for subsequent taxable years. If we qualify for taxation as a REIT, we generally will not be subject to federal income tax on that portion of our ordinary income or net capital gain that is currently distributed to our stockholders. Our ability to qualify as a REIT will depend upon our satisfaction of various operational and organizational requirements, including requirements related to the nature of our assets, the sources of our income, the diversity of our stock ownership and the distributions to our stockholders, including a requirement that we distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to our stockholders. If we fail to qualify as a REIT, we will be subject to federal income tax at regular corporate rates (up to 35%) as well as state and local taxes. Even if we qualify as a REIT, we may be subject to some federal, state, local and foreign taxes on our income and property. Our existing taxable REIT subsidiary, Bloodstone TRS, Inc., owner of our TRS lessees, is fully subject to corporate income tax as a C corporation on its earnings and the earnings of our TRS lessees.

In order to qualify as a REIT, our income must come primarily from “rents from real property,” mortgage interest and real estate gains. Qualifying “rents from real property” include rents from interests in real property, certain charges for services customarily rendered in connection with the rental of real property, and a limited amount of rent attributable to personal property that is leased under, or in connection with, a lease of real property. However, operating revenues from a hotel property are not qualifying “rents from real property.” Therefore, we generally must lease our hotel properties to another party from whom we will derive rent income that will qualify as “rents from real property” under the REIT rules. Accordingly, we generally will lease each of our hotels to a taxable TRS lessee. Each TRS lessee will pay rent to us that generally should qualify as “rents from real property,” provided that an “eligible independent contractor” operates and manages each hotel property on behalf of the TRS lessee. We expect that each of our hotel properties will be managed by an “eligible independent contractor.” The income remaining in our TRS lessees from the payment of rent to us, management fees, operating expenses and other costs will be subject to corporate tax.

Restrictions on Ownership of Our Stock

Our charter generally prohibits any stockholder from beneficially owning more than 9.8% of our common stock or of the value of the aggregate outstanding shares of our capital stock, except that certain “look-through entities,” such as mutual funds, may beneficially own up to 15% of our common stock or of the value of the aggregate outstanding shares of our capital stock. Our board of directors may, in its sole discretion, waive this ownership limitation with respect to a particular stockholder if our board is presented with evidence satisfactory to it that the ownership will not then or in the future jeopardize our qualification as a REIT. Our board of directors waived this ownership limitation for Marriott and certain institutional investors in connection with our July 2004 private placement and may waive it again in the future so long as our board of directors determines these waivers should not affect our REIT qualification. In addition, our charter also prohibits any person from:

•

owning shares of our capital stock if such ownership would result in our being “closely held” within the meaning of Section 856(h) of the Code;

•

transferring shares of our capital stock if such transfer would result in our capital stock being owned by fewer than 100 persons;

•

owning shares of our capital stock if such ownership would cause any of our income that would otherwise qualify as rents from real property to fail to qualify as such, including as a result of any of our hotel management companies’ failing to qualify as “eligible independent contractors” under the REIT rules; and

•

owning shares of our capital stock if such ownership would result in our failing to qualify as a REIT for federal income tax purposes.

In addition, our charter limits equity participation by “benefit plan investors” to less than 25% in the aggregate so that such participation in any class of our capital stock by such “benefit plan investors” will not be deemed “significant.” Additionally, our charter limits the ability of any stockholder to sell or transfer shares of our capital stock if such sale or transfer would result in ownership of such class of capital stock by “benefit plan investors” being “significant.” For such purposes, the terms “benefit plan investors” and “significant” are determined by reference to certain regulations promulgated by the U.S. Department of Labor. At the time shares of our common stock become “publicly-offered securities,” this 25% limitation will no longer be applicable to the shares of common stock, and we anticipate that our common stock will qualify as “publicly-offered securities” following this offering. Following this offering, “benefit plan investors” will not be permitted to own any class of our capital stock that does not qualify as “publicly-offered securities.”

Our Distribution Policy

We intend to generally distribute to our stockholders each year on a regular quarterly basis sufficient amounts of our REIT taxable income so as to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our taxable REIT subsidiary and TRS lessees, which are subject to tax at regular corporate rates) and to qualify for the tax benefits afforded to REITs under the Code. In order to qualify as a REIT under the Code, we generally must make distributions to our stockholders each year in an amount equal to at least:

•

90% of our REIT taxable income determined without regard to the dividends paid deduction, plus

•

90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code, minus

•

any excess non-cash income.

The actual amount and timing of distributions, however, will be at the discretion of our board of directors and will depend upon our actual results of operations and a number of other factors deemed relevant by our board

of directors. Our cash available for distribution may be less than 90% of our REIT taxable income, in which case we could be required to either sell assets or borrow funds to make distributions. Distributions to our stockholders generally will be taxable to our stockholders as ordinary income; however, because a significant portion of our investment will be equity ownership interests in hotels, which will result in depreciation and non-cash charges against our income, a portion of our distribution may constitute a tax-free return of capital rather than taxable dividend income to stockholders.

Registration Rights and Lock-Up Agreements

Registration Rights Agreement. Pursuant to a registration rights agreement among us, our operating partnership, Friedman, Billings, Ramsey & Co., Inc. and certain holders of our common stock, entered into on July 7, 2004, which we refer to as the registration rights agreement, we are required, among other things, to:

•

file with the SEC by April 7, 2005 a resale shelf registration statement registering all of the shares of common stock purchased or placed by Friedman, Billings, Ramsey & Co., Inc. in our July 2004 private placement that are not being sold in this offering and all of the 3,000,000 shares of common stock purchased by Marriott; and

•

use our commercially reasonable best efforts to cause the resale shelf registration statement to become effective under the Securities Act as promptly as practicable, not to exceed six months, after the filing (subject to certain extensions) and to maintain the resale shelf registration statement continuously effective under the Securities Act for a specified period.

Lock-up Agreements. Our senior executive officers and directors and Marriott have entered into lock-up agreements that prohibit them from selling, pledging, transferring or otherwise disposing of our common stock or securities convertible into our common stock for a period of 180 days after the date of this prospectus. In addition, in accordance with the registration rights agreement, subject to specified exceptions, holders of shares of common stock sold in our July 2004 private placement have agreed not to offer, pledge, sell or otherwise dispose of any of shares of our common stock or securities convertible into our common stock that they have acquired prior to the date of this prospectus, and are not selling in this offering, for 60 days following the effective date of the registration statement of which this prospectus is a part. Citigroup Global Markets, Inc. and Friedman, Billings, Ramsey & Co., Inc., on behalf of the underwriters, may, in their discretion, release all or any portion of the common stock subject to the lock-up agreements with our directors and officers at any time without notice or stockholder approval, in which case, our other stockholders would also be released from the restrictions pursuant to the registration rights agreement.

Selling Stockholders

Pursuant to, and subject to the terms and conditions of, the registration rights agreement, persons who purchased our common stock in connection with our July 2004 private placement and their transferees have the right to sell their common stock in this offering. We are including shares of our common stock in this offering to be sold by selling stockholders.

THE OFFERING

Common stock offered by us⁽¹⁾

Common stock offered by selling stockholders

Common stock to be outstanding upon completion of this offering⁽¹⁾⁽²⁾

Use of proceeds

The net proceeds to us from the sale of our common stock offered by this prospectus, after deducting the underwriting discount and the estimated offering expenses payable by us, will be approximately $ million if the underwriters’ over-allotment option is not exercised, or approximately $ million if the underwriters’ over-allotment option is exercised in full. We will not receive any of the proceeds from the sale of common stock by the selling stockholders.

We intend to use the net proceeds from this offering as follows:

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approximately $ million to repay existing indebtedness;

•

approximately $ to fund the purchase and renovation of those acquisition properties currently under contract as of the date of this prospectus that we consider probable acquisitions;

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approximately $4.1 million to renovate our initial hotels; and

•

the remainder for general corporate and working capital purposes, including possible future acquisitions.

Pending these uses, we intend to invest the net offering proceeds in interest-bearing, short-term marketable investment securities or money-market accounts that are consistent with our intention to qualify as a REIT.

Proposed New York Stock Exchange symbol

DRH

(1)	Excludes shares of common stock that may be issued by us upon exercise of the underwriters’ over-allotment option.

(2)

Includes 20,000 unrestricted shares of our common stock issued to our independent directors and 700,500 restricted shares of our common stock issued to our executive officers and other employees pursuant to our equity incentive plan. Excludes shares available for future issuance under our equity incentive plan.

SUMMARY SELECTED FINANCIAL AND OPERATING DATA

We present in this prospectus certain historical and pro forma financial data. We also present certain operational data and non-U.S. generally accepted accounting principles, or GAAP, financial measures on a historical and pro forma basis.

The summary historical financial information as of December 31, 2004, and the period from May 6, 2004 (inception) to December 31, 2004, has been derived from our historical financial statements audited by KPMG LLP, independent registered public accounting firm, whose report with respect to such financial information is included elsewhere in this prospectus. The summary historical financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements as of December 31, 2004 and for the period from May 6, 2004 (inception) to December 31, 2004, and the related notes.

The unaudited pro forma consolidated balance sheet data is presented as if:

•

the completion of this offering and application of the net proceeds,

•

the acquisition of the Torrance Marriott in January 2005, and

•

the acquisition of those properties currently under contract as of the date of this prospectus that we consider probable acquisitions

had occurred on December 31, 2004.

The unaudited pro forma consolidated statement of operations and other data for the fiscal year ended December 31, 2004, are presented as if:

•

the completion of this offering and application of the net proceeds,

•

the acquisition of our initial seven hotels,

•

the acquisition of those properties currently under contract as of the date of this prospectus that we consider probable acquisitions, and

•

our July 2004 private placement

had occurred on the first day of the period presented.

These adjustments are also discussed in detail under “Unaudited Pro Forma Financial Data.” The pro forma information is not necessarily indicative of what our actual financial position or results of operations would have been as of the dates or for the periods indicated, nor does it purport to represent our future financial position or results of operations.

We present the following two non-GAAP financial measures throughout this prospectus that we believe are useful to investors as key measures of our operating performance: (1) earnings before interest expense, taxes, depreciation and amortization, or EBITDA; and (2) funds from operations, or FFO. These financial measures are discussed further under “Selected Financial and Operating Data.”

Amounts presented in accordance with our definitions of EBITDA and FFO may not be comparable to similar measures disclosed by other companies, as not all companies calculate these non-GAAP measures in the same manner. EBITDA and FFO should not be considered as an alternative measure of our net income (loss), operating performance, cash flow or liquidity. EBITDA and FFO may include funds that may not be used for our discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions

and other commitments or uncertainties. Although we believe that EBITDA and FFO can enhance your understanding of our results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily better indicators of any trend as compared to GAAP measures such as net income (loss) or cash flow from operations. In this section and under “Selected Financial and Operating Data,” we include a quantitative reconciliation of EBITDA and FFO to the most directly comparable GAAP financial performance measure, which is net income (loss).


	Historical			Pro Forma
	Period from May 6, 2004 to December 31, 2004			Fiscal Year ended December 31, 2004
Statement of operations data:

Total revenues	$	7,073,864		$	125,351,329

Operating costs and expenses:
Hotel operating expenses		6,166,890			102,276,510
Corporate expenses		4,114,165			8,384,457
Depreciation and amortization		1,053,283			17,713,467

Total operating expenses		11,334,338			128,374,434

Operating loss		(4,260,474	)		(3,023,105	)

Interest and other income		(1,333,837	)		(1,333,837	)
Interest expense		773,101			12,337,504

Loss before income taxes		(3,699,738	)		(14,026,772	)

Income tax benefit		1,582,113			2,993,596

Net loss	$	(2,117,625	)	$	(11,033,176	)

FFO(1)	$	(1,064,342	)	$	6,680,291

EBITDA(2)(3)	$	(1,873,354	)	$	16,024,199


	As of December 31, 2004			As of December 31, 2004
Balance sheet data:

Property and equipment, net	$	285,642,439		$	347,796,435
Total assets		391,691,179			439,179,953
Total debt		180,771,810			224,771,810
Total other liabilities		15,331,951			16,903,964
Shareholders’ equity		195,587,418			197,504,179

Statistical data:

Number of hotels		6			7
Number of rooms		1,870			2,357
Occupancy(4)		67.8	%		75.0	%
ADR(4)	$	184.22		$	136.21
RevPAR(4)	$	124.99		$	102.11

(1)

Funds from operations (FFO), as defined by the National Association of Real Estate Investment Trusts (NAREIT), is net income (loss) (determined in accordance with GAAP), excluding gains (losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). The calculation of FFO may vary from entity to entity, thus our presentation of FFO may not be comparable to other similarly titled measures of other reporting companies. FFO is not intended to represent cash flows for the period. FFO has not been presented as an alternative to operating income, but as an indicator of operating performance, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

FFO is a supplemental industry-wide measure of REIT operating performance, the definition of which was first proposed by NAREIT in 1991 (and clarified in 1995, 1999 and 2002). Since the introduction of the definition by NAREIT, the term has come to be widely used by REITs. Historical GAAP cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical GAAP cost accounting to be insufficient by themselves. Accordingly, we believe FFO (combined with our primary GAAP presentations) help improve our stockholders’ ability to understand our operating performance. We only use FFO as a supplemental measure of operating performance. The following is a reconciliation between net income (loss) and FFO:


	Historical			Pro Forma
	Period from May 6, 2004 to December 31, 2004			Fiscal Year ended December 31, 2004
Net loss	$	(2,117,625	)	$	(11,033,176	)
Depreciation and amortization		1,053,283			17,713,467

FFO	$	(1,064,342	)	$	6,680,291

(2)

EBITDA is defined as net income (loss) before interest, taxes, depreciation and amortization. We believe it is a useful financial performance measure for us and for our stockholders and is a complement to net income and other financial performance measures provided in accordance with GAAP. We use EBITDA to measure the financial performance of our operating hotels because it excludes expenses such as depreciation and amortization, taxes and interest expense, which are not indicative of operating performance. By excluding interest expense, EBITDA measures our financial performance irrespective of our capital structure or how we finance our properties and operations. By excluding depreciation and amortization expense, which can vary from hotel to hotel based on a variety of factors unrelated to the hotels’ financial performance, we can more accurately assess the financial performance of our hotels. Under GAAP, hotel properties are recorded at historical cost at the time of acquisition and are depreciated on a straight line basis. By excluding depreciation and amortization, we believe EBITDA provides a basis for measuring the financial performance of hotels unrelated to historical cost. However, because EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed assets. In addition, because EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt nor does it show trends in interest costs due to changes in our borrowings or changes in interest rates. EBITDA, as calculated by us, may not be comparable to EBITDA reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance, we reconcile it to net income (loss) which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity. The following is a reconciliation between net income (loss) and EBITDA:


	Historical			Pro Forma
	Period from May 6, 2004 to December 31, 2004			Fiscal Year ended December 31, 2004
Net loss	$	(2,117,625	)	$	(11,033,176	)

Interest expense		773,101			12,337,504
Income tax benefit		(1,582,113	)		(2,993,596	)
Depreciation and amortization		1,053,283			17,713,467

EBITDA	$	(1,873,354	)	$	16,024,199

(3)

Fiscal year 2004 pro forma EBITDA includes the impact of approximately $7.2 million of non-cash straight-line ground rent expense recorded for the Bethesda Marriott Suites and Courtyard Manhattan/Fifth Avenue ground leases.

(4)

Historical amounts relate to the period from hotel acquisition to December 31, 2004. Pro forma amounts relate to the fiscal year ended December 31, 2004.

RISK FACTORS

An investment in our common stock involves a number of risks. The risks described below represent the material risks you should carefully consider before making an investment decision. These risks may materially and adversely affect our business, liquidity, financial condition and results of operations, in which case the value of our common stock could decline significantly and you could lose all or a part of your investment. The risk factors described below are not the only risks that may affect us. Some statements in this prospectus, including statements in the following risk factors, constitute forward looking statements. Please refer to the section entitled “Forward Looking Statements.”

Risks Related to Our Business, Growth Strategy and Investment Sourcing Relationship with Marriott

We were formed in May 2004 and commenced operations in July 2004 and have a limited operating history.

We have only recently been organized and commenced operations and, as a result, we have a limited operating history. We are subject to the risks generally associated with the formation of any new business, including unproven business models, untested plans, uncertain market acceptance and competition with established businesses. Consequently, it may be difficult for you to evaluate our historical performance.

Our management has no prior experience operating a REIT and limited experience operating a public company and therefore may have difficulty in successfully and profitably operating our business.

Prior to joining our company, our management had no experience operating a REIT and limited experience operating a public company. As a result, we cannot assure you that we will be able to successfully operate as a REIT or execute our business strategies as a public company and you should be especially cautious in drawing conclusions about the ability of our management team to execute our business plan.

We cannot assure you that we will qualify, or remain qualified, as a REIT.

We currently plan to elect to be taxed as a REIT for our taxable year ending December 31, 2005 and subsequent taxable years, and we expect to qualify as a REIT for such taxable year and future taxable years, but we cannot assure you that we will qualify, or will remain qualified, as a REIT. If we fail to qualify as a REIT for federal income tax purposes, all of our earnings will be subject to federal income taxation, which will reduce the amount of cash available for distribution to our stockholders.

Because our senior executive officers will have broad discretion to invest the net proceeds of this offering, they may make investments for which the returns are substantially below expectations or which result in net operating losses.

Because we intend to use a substantial portion of the net proceeds of this offering to acquire properties under contract and under non-binding letters of intent, if we are not successful in acquiring these properties, our senior executive officers will have broad discretion, within the investment criteria established by our board of directors, to invest the net proceeds of this offering and to determine the timing of these investments. This discretion could result in investments that may not yield returns consistent with your expectations or which may result in net operating losses.

Our business strategy is focused in the hotel industry, and we cannot assure you that hotel industry fundamentals will continue to improve. Economic slowdown and world events outside our control, such as

terrorism, have adversely affected the hotel industry in the recent past and if these events reoccur, may adversely affect the industry in the future. In the event conditions in the hotel industry do not continue to improve as we expect, our ability to execute our business strategies will be adversely affected, which, in turn, would adversely affect our ability to make distributions to our stockholders.

Most of our hotels are upper upscale and upscale hotels; the upper upscale segments of the hotel market are highly competitive and generally subject to greater volatility than other segments of the market, which could harm our profitability.

The upper upscale and upscale segments of the hotel business are highly competitive. Our hotels compete on the basis of location, room rates and quality, service levels, reputation and reservation systems, among many other factors. There are many competitors in our hotel chain scale segments, and many of these competitors have substantially greater marketing and financial resources than we have. This competition could reduce occupancy levels and rental revenue at our hotels, which would harm our operations. Also, over-building in the hotel industry may increase the number of rooms available and may decrease the average occupancy and room rates at our hotels. In addition, in periods of weak demand, profitability is negatively affected by the relatively high fixed costs of operating upper upscale and upscale hotels when compared to other classes of hotels.

We are experiencing and expect to continue to experience rapid growth and may not be able to adapt our management and operational systems to integrate the hotel properties we expect to invest in and reposition without unanticipated disruption or expense.

Since we commenced operations in July 2004, we have experienced rapid growth, acquiring seven hotels containing an aggregate of 2,357 rooms and have developed our business strategies based on the expectation of continued rapid growth. We cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain qualified operational staff to integrate and manage our investment in or repositioning of any hotel properties. Our failure to successfully integrate and manage acquisitions could have a material adverse effect on our financial condition and results of operations and our ability to make distributions to our stockholders.

We face competition for the acquisition of hotels and we may not be successful in identifying or completing hotel acquisitions that meet our criteria, which may impede our growth.

One component of our business strategy is expansion through acquisitions, and we may not be successful in identifying or completing acquisitions that are consistent with our strategy. We compete with institutional pension funds, private equity investors, REITs, hotel companies and others who are engaged in the acquisition of hotels. This competition for hotel investments may increase the price we pay for hotels and these competitors may succeed in acquiring those hotels that we seek to acquire. Furthermore, our potential acquisition targets may find our competitors to be more attractive suitors because they may have greater marketing and financial resources, may be willing to pay more or may have a more compatible operating philosophy. In addition, the number of entities competing for suitable hotels may increase in the future, which would increase demand for these hotels and the prices we must pay to acquire them. If we pay higher prices for hotels, our returns on investment and profitability may be reduced. Also, future acquisitions of hotels or hotel companies may not yield the returns we expect and may result in stockholder dilution.

Our success depends in part on the success of Marriott.

All of our current hotel properties are managed by Marriott. As a result, our success is dependent in part on the continued success of Marriott and its brands. If market recognition or the positive perception of these Marriott brands is reduced or compromised, the goodwill associated with Marriott branded hotels may be adversely affected and the results of operations of our hotel properties managed by Marriott may be adversely affected. Similarly, if Marriott experiences a general decline in its business, no longer has access to high quality investment opportunities or experiences a reduction in its access to hotel investment opportunities, our business strategies could be adversely affected.

Our investment sourcing relationship with Marriott is non-exclusive and based on a non-binding understanding that creates limited legal obligations. Both parties are free to terminate or attempt to change our investment sourcing relationship at any time, without notice or explanation. While Marriott intends to provide us a “first look” at hotel investment opportunities known to it that are consistent with our stated business strategies, it will not provide us with opportunities where it is contractually or ethically prohibited from doing so, or where Marriott believes it would be damaging to existing Marriott relationships. The only limited legal obligation that will arise from this understanding is that we and Marriott have agreed for a two-year period beginning on July 1, 2004 not to enter into certain strategic agreements with other third parties. While we retain the right to utilize any hotel brand and any hotel management company, we believe that our utilization of brands or hotel management companies other than Marriott could adversely affect our investment sourcing relationship with Marriott. Termination of, or an adverse change in, our investment sourcing relationship with Marriott may limit our sources of acquisition and investment opportunities and therefore adversely affect our ability to execute our business strategies. Our inability to execute our business strategies would adversely affect our ability to make distributions to our stockholders.

Our investment sourcing relationship with Marriott may not result in the acquisition of any future hotel properties.

We believe that access to information about hotel property investment opportunities known to Marriott will provide us with a competitive advantage by providing us with knowledge about a potential investment opportunity before it has been widely marketed. Therefore, while we expect that this competitive advantage will lead to favorable investments by us, we cannot assure you that this “first look” will result in the acquisition of any future hotel properties or provide us with a competitive advantage. Additionally, as a result of our investment sourcing relationship with Marriott, we may not be aware, or in a position to take advantage, of favorable investment opportunities known to other hotel operators.

Marriott may encourage us to enter into transactions or hotel management agreements that are favorable to Marriott.

Pursuant to our investment sourcing relationship with Marriott, we have pursued and intend to continue to pursue, hotel property investment opportunities referred to us by Marriott, and we intend to utilize Marriott as our preferred hotel management company. It is possible that in connection with a particular hotel property acquisition or hotel management agreement, Marriott will encourage us to enter into an acquisition or hotel management agreement with terms that are more favorable to Marriott than we might otherwise agree to with a third party. In order to maintain our investment sourcing relationship with Marriott, we may not seek the most advantageous terms with Marriott with regard to a particular acquisition or hotel management agreement as we might otherwise seek with third parties.

Our success depends in part on maintaining good relations with Marriott.

Our senior executive officers are familiar with the Marriott management, strategy and processes but do not have significant experience with other brand companies or hotel management companies. Over the last several years, Marriott has been involved in contractual and other disputes with owners of the hotel properties it manages. Although we currently maintain good relations with Marriott, we cannot assure you that disputes between us and Marriott regarding the management of our properties or the services it provides to us will not arise. Should our relationship with Marriott deteriorate, we believe that one of our competitive advantages could be eliminated. In particular, we may be denied access to information about which hotel properties may be available for sale and how such hotel properties may be repositioned. As a result, we would seek to grow by investing in hotel properties that are being competitively pursued in the marketplace, which may result in our paying higher prices for assets or being denied access to otherwise attractive hotel investment opportunities.

Our objectives may conflict from time to time with the objectives of Marriott, which conflict may adversely impact the operation and profitability of a hotel property.

Marriott and its affiliates own, operate or franchise properties other than our hotel properties, including properties that directly compete with our hotel properties. Therefore, Marriott may have short-term or long-term goals and objectives that conflict with our own, including with respect to the brands under which our hotel properties operate. These differences may be significant and may include the remaining term of any hotel management agreement, trade area restrictions with respect to competition by Marriott or its affiliates or differing policies, procedures or practices. As a result of these potentially differing objectives, Marriott may present to us, and we may invest in, hotel investment opportunities, and enter into management agreements, that are less favorable to us than other alternatives. These differing objectives could result in a deterioration in our relationship with Marriott and may adversely affect our ability to execute our business strategies, which in turn, would adversely affect our ability to make distributions to our stockholders.

Our results of operations are highly dependent on the management of our hotel properties by third-party hotel management companies.

In order to qualify as a REIT, we cannot operate our hotel properties or participate in the decisions that affect the daily operations of our hotel properties. Our TRS lessees may not operate these hotel properties and, therefore, they must enter into third-party hotel management agreements with one or more eligible independent contractors (including Marriott). Thus, third-party hotel management companies that enter into management contracts with our TRS lessees will control the daily operations of our hotel properties.

Under the terms of the hotel management agreements that we have entered into with Marriott (or its affiliates), or will enter into in the future with Marriott or other third-party hotel management companies, our ability to participate in operating decisions regarding our hotel properties will be limited. We currently rely and will continue to rely on these hotel management companies to adequately operate our hotel properties under the terms of the hotel management agreements. We do not have the authority to require any hotel property to be operated in a particular manner or to govern any particular aspect of its operations (for instance, setting room rates). Thus, even if we believe our hotel properties are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, ADRs and operating profits, we may not have sufficient rights under our hotel management agreements to enable us to force the hotel management company to change its method of operation. We can only seek redress if a hotel management company violates the terms of the applicable hotel management agreement with the TRS lessee, and then only to the extent of the remedies provided for under the terms of the hotel management agreement. Our current hotel management agreements are generally non-terminable, subject to certain exceptions for cause or performance (see “Our Principal Agreements—Our Hotel Management Agreements”), and in the event that we need to replace any of our hotel management companies pursuant to termination for cause or performance, we may experience significant disruptions at the affected properties, which may adversely affect our ability to make distributions to our stockholders.

Our current hotel management agreements contain certain restrictions against the sale of a hotel property to certain parties, which may affect the value of our hotel properties.

The hotel management agreements that we have entered into with Marriott (and those we expect to enter into in the future) contain provisions restricting our ability to dispose of our hotel properties to certain parties, which, in turn, may have an adverse affect on the value of our hotel properties. Marriott’s hotel management agreements generally prohibit the sale of a hotel property to:

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certain competitors of Marriott;

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purchasers who are insufficiently capitalized; or

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purchasers who might jeopardize certain liquor or gaming licenses.

Our mortgage agreements and ground leases contain certain provisions that may limit our ability to sell our hotel properties.

In order to assign or transfer our rights and obligations under certain of our mortgage agreements, we generally must:

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obtain the consent of the lender;

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pay a fee equal to a fixed percentage of the outstanding loan balance; and

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pay any costs incurred by the lender in connection with any such assignment or transfer.

Additionally, our ground lease agreements with respect to Bethesda Marriott Suites and Salt Lake City Marriott Downtown require consent of the lessor for assignment or transfer. These provisions of our mortgage agreements and ground leases may limit our ability to sell our hotel properties which, in turn, could adversely impact the price realized from any such sale.

Our current hotel management agreements contain provisions requiring us to pay certain fees to the property manager even if the hotel property is not profitable, which may adversely affect our ability to sell the hotel property.

The hotel management agreements that we have entered into with Marriott (and those we expect to enter into in the future) contain provisions that require us to pay substantial base management fees to Marriott irrespective of whether the hotels are profitable and incentive management fees that represent a substantial portion of the net operating income from the particular hotel property. As a result, because our hotel properties would have to be sold subject to the applicable hotel management agreement, these fee payment provisions may deter some potential purchasers and could adversely impact the price realized from any such sale.

Our current hotel management agreements are generally long term, which may adversely affect our ability to sell the hotel property.

Our current hotel management agreements that we have entered into with Marriott contain initial terms ranging from twenty to forty years and certain agreements have renewal periods, at Marriott’s option, of ten to forty-five years. Because our hotel properties would have to be sold subject to the applicable hotel management agreement, the term length of a hotel management agreement may deter some potential purchasers and could adversely impact the price realized from any such sale.

Our TRS lessee structure subjects us to the risk of increased operating expenses.

Our hotel management agreements require us to bear the operating risks of our hotel properties. Our operating risks include not only changes in hotel revenues and changes in our TRS lessees’ ability to pay the rent due under the leases, but also increased operating expenses, including, among other things:

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wage and benefit costs;

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repair and maintenance expenses;

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energy costs;

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property taxes;

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insurance costs; and

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other operating expenses.

Any decreases in hotel revenues or increases in operating expenses could have a materially adverse effect on our earnings and cash flow.

Our ability to make distributions to our stockholders is subject to fluctuations in our financial performance, operating results and capital improvement requirements.

As a REIT, we generally will be required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to our stockholders. In the event of future downturns in our operating results and financial performance or unanticipated capital improvements to our hotel properties, we may be unable to declare or pay distributions to our stockholders. The timing and amount of distributions are in the sole discretion of our board of directors, which will consider, among other factors, our actual results of operations, debt service requirements, capital expenditure requirements for our properties and our operating expenses. We may not generate sufficient cash in order to fund distributions to our stockholders.

Among the factors which could adversely affect our results of operations and our distributions to stockholders are reduced net operating profits or operating losses, increased debt service requirements and capital expenditures at our hotel properties. Among the factors which could reduce our net operating profits are decreases in hotel property revenues and increases in hotel property operating expenses. Hotel property revenue can decrease for a number of reasons, including increased competition from a new supply of rooms and decreased demand for rooms. These factors can reduce both occupancy and room rates at our hotel properties.

If we were to default on our secured debt in the future, the loss of any property securing the debt would harm our ability to satisfy other obligations.

We expect that a substantial portion of our debt will be secured by first mortgage deeds of trust on our properties. Although our existing secured debt documents do not contain cross-default provisions, using our properties as collateral increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property that secures any loans for which we are in default. For tax purposes, a foreclosure on any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not receive any cash proceeds. As a result, we may be required to identify and utilize other sources of cash for distributions to our stockholders. If this occurs, our financial condition, cash flow and ability to satisfy our other debt obligations or ability to pay dividends may be adversely affected.

Future debt service obligations could adversely affect our operating results, may require us to liquidate our properties, may jeopardize our tax status as a REIT and limit our ability to make distributions to our stockholders.

Assuming the application of a portion of our net proceeds from this offering to repay approximately $ million of mortgage debt and the acquisition of the hotel properties currently under contract as described in “Use of Proceeds,” we will have approximately $ million in outstanding debt, which represents approximately % of our aggregate property investment and repositioning costs. We currently maintain a policy that limits our total debt level to no more than 60% of our aggregate property investment and repositioning costs. Our board of directors, however, may change or eliminate this debt limit, and/or the policy itself, at any time without the approval of our stockholders. In the future, we and our subsidiaries may be able to incur substantial additional debt, including secured debt. Incurring such debt could subject us to many risks, including the risks that:

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our cash flow from operations will be insufficient to make required payments of principal and interest;

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we may be more vulnerable to adverse economic and industry conditions;

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we may be required to dedicate a substantial portion of our cash flow from operations to the repayment of our debt, thereby reducing the cash available for distribution to our stockholders, funds available for operations and capital expenditures, future investment opportunities or other purposes;

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the terms of any refinancing may not be as favorable as the terms of the debt being refinanced; and

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the use of leverage could adversely affect our stock price and the ability to make distributions to our stockholders.

If we violate covenants in our future indebtedness agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on favorable terms, if at all.

If we obtain debt in the future and do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance this debt through additional debt financing, private or public offerings of debt securities, or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancings, increases in interest expense could adversely affect our cash flow, and, consequently, our cash available for distribution to our stockholders. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our hotel properties on disadvantageous terms, potentially resulting in losses adversely affecting cash flow from operating activities. In addition, we may place mortgages on our hotel properties to secure our line of credit or other debt. To the extent we cannot meet these debt service obligations, we risk losing some or all of those properties to foreclosure. Additionally, our debt covenants could impair our planned strategies and, if violated, result in a default of our debt obligations.

Higher interest rates could increase debt service requirements on our floating rate debt and could reduce the amounts available for distribution to our stockholders, as well as reduce funds available for our operations, future investment opportunities or other purposes. We may obtain in the future one or more forms of interest rate protection—in the form of swap agreements, interest rate cap contracts or similar agreements—to “hedge” against the possible negative effects of interest rate fluctuations. However, we cannot assure you that any hedging will adequately mitigate the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations. In addition, we may be subject to risks of default by hedging counter-parties. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable.

We currently are negotiating with a number of financial institutions to obtain a secured revolving line of credit that may contain financial covenants that could limit our operations and our ability to make distributions to our stockholders.

Our anticipated secured revolving credit facility may contain financial and operating covenants, including net worth requirements, fixed charge coverage and debt ratios and other limitations on our ability to make distributions or other payments to our stockholders (other than those required by the Code), sell all or substantially all of our assets and engage in mergers, consolidations and certain acquisitions. Failure to meet our financial covenants could result from, among other things, changes in our results of operations, the incurrence of debt or changes in general economic conditions. Advances under our anticipated secured revolving credit facility may be subject to borrowing base requirements based on the hotels securing the facility. These covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders. Failure to comply with any of the covenants in our anticipated secured revolving credit facility could result in a default under one or more of our debt instruments. This could cause one or more of our lenders to accelerate the timing of payments and could harm our business, operations, financial condition or liquidity.

If we are unable to complete the acquisitions of the hotel properties we have under contract in a timely fashion or at all, we will have no designated use for a majority of the net proceeds of this offering and may experience delays in locating and securing attractive alternative investments.

We intend to use a substantial portion of the net proceeds from this offering to acquire hotel properties that we have under contract that we consider to be “probable” acquisitions. We cannot assure you that we will acquire any of these properties because each proposed acquisition is subject to a variety of factors including: (i) our completion of satisfactory due diligence and (ii) the satisfaction of closing conditions, including

the receipt of third-party consents and approvals. If we do not complete these acquisitions within our anticipated time frame or at all, we may experience delays in locating and securing attractive alternative investments. These delays could result in our future operating results not meeting expectations and adversely affect our ability to make distributions to our stockholders. If we are unable to complete the purchase of the hotel properties that we have under contract, we will have no specific designated use for a majority of the net proceeds from this offering and investors will be unable to evaluate in advance the manner in which we invest the net proceeds or the economic merits of the properties we may ultimately acquire with the net proceeds.

We may be unable to acquire any of the hotel properties that we have under non-binding letters of intent, which could adversely affect our future operating results and our ability to make distributions to our stockholders.

As of the date of this prospectus, we have five additional properties under non-binding letters of intent having an aggregate acquisition cost of approximately $377 million. We also cannot assure you that we will acquire any of the properties under these letters of intent because the letters of intent are non-binding and each of these transactions is subject to a variety of factors including: (i) the willingness of the current property owner to proceed with a transaction, (ii) our completion of satisfactory due diligence, (iii) the negotiation and execution of a mutually acceptable binding definitive purchase agreement and hotel management agreement (or assumption of an existing hotel management agreement) and (iv) the satisfaction of closing conditions, including the receipt of third-party consents and approvals. Accordingly, we cannot assure you that we will be in a position to acquire any of the properties under non-binding letters of intent following this offering. If we are unsuccessful in completing the acquisition of additional hotel properties in the future, our future operating results will not meet expectations and our ability to make distributions to our stockholders will be adversely affected.

Our ownership of properties through ground leases exposes us to the loss of such properties upon breach or termination of the ground leases.

We acquired interests in three of our current hotel properties and the golf course associated with a fourth property by acquiring a leasehold interest in land underlying the property and we may acquire additional hotel properties in the future through the purchase of hotel properties subject to ground leases. As lessee under ground leases, we would be exposed to the possibility of losing the hotel property upon termination, or an earlier breach by us, of the ground lease.

Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturer’s financial condition and disputes between us and our co-venturers.

We may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In this event, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt, fail to fund their share of required capital contributions, make dubious business decisions or block or delay necessary decisions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by, or disputes with, partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers.

Our success depends on key personnel whose continued service is not guaranteed.

We depend on the efforts and expertise of our senior executive officers to manage our day-to-day operations and strategic business direction. The loss of any of their services could have an adverse effect on our operations.

We have entered into an agreement with each of our senior executive officers that provides each of them benefits in the event his employment is terminated by us without cause, by him for good reason, or under certain circumstances following a change of control of our company.

We have entered into an agreement with each of our senior executive officers, except Mr. Mahoney, that provides each of them with severance benefits if his employment is terminated by us without cause, by him for good reason, or with respect to all our senior executive officers, under certain circumstances following a change of control of our company. Certain of these benefits and the related tax indemnity could prevent or deter a change of control of our company that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

A portion of our revenues may be attributable to operations outside of the United States, which will subject us to different legal, monetary and political risks, as well as currency exchange risks, and may cause unpredictability in a significant source of our cash flows that could adversely affect our ability to make distributions to our stockholders.

We may acquire selective hotel properties outside of the United States, although we do not expect our international assets to exceed 10% of our total assets. International investments and operations generally are subject to various political and other risks that are different from and in addition to risks in U.S. investments, including:

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the enactment of laws prohibiting or restricting the foreign ownership of property;

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laws restricting us from removing profits earned from activities within the foreign country to the United States, including the payment of distributions, i.e., nationalization of assets located within a country;

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variations in the currency exchange rates, mostly arising from revenues made in local currencies;

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change in the availability, cost and terms of mortgage funds resulting from varying national economic policies;

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changes in real estate and other tax rates and other operating expenses in particular countries; and

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more stringent environmental laws or changes in such laws.

In addition, currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions. Liabilities arising from differing legal, monetary and political risks as well as currency fluctuations could adversely affect our financial condition, operating results and our ability to make distributions to our stockholders. In addition, the requirements for qualifying as a REIT limit our ability to earn gains, as determined for federal income tax purposes, attributable to changes in currency exchange rates. These limitations may significantly limit our ability to invest outside of the United States or impair our ability to qualify as a REIT.

Any properties we invest in outside of the United States may be subject to foreign taxes.

In the future, we may invest in hotel properties in foreign countries. Those foreign countries will impose taxes on our hotel properties and our operations within their jurisdictions. To the extent possible, we will structure our investments and activities to minimize our foreign tax liability, but we will likely incur foreign taxes with respect to non-U.S. properties. Moreover, the requirements for qualification as a REIT may preclude us from always using the structure that minimizes our foreign tax liability. Furthermore, because we are a REIT, we and our stockholders will derive little or no benefit from the foreign tax credits arising from the foreign taxes we pay. As a result, foreign taxes we pay will reduce our income and available cash flow from our foreign hotel properties, which, in turn, could reduce our ability to make distributions to our stockholders.

Risks Related to the Hotel Industry

Our ability to make distributions to our stockholders may be affected by factors unique to the hotel industry.

Operating Risks. Our hotel properties are and will continue to be subject to various operating risks common to the hotel industry, many of which are beyond our control, including:

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competition from other hotel properties that may be located in our markets, some of which may have greater marketing and financial resources than us;

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an over-supply or over-building of hotel properties in our markets, which could adversely affect occupancy rates and revenues at our properties;

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dependence on business and commercial travelers and tourism;

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increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;

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increases in operating costs due to inflation and other factors that may not be offset by increased room rates;

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necessity for periodic capital reinvestment to repair and upgrade our hotel properties;

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changes in interest rates and in the availability, cost and terms of debt financing;

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changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

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adverse effects of a downturn in the hotel industry; and

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risks generally associated with the ownership of hotel properties and real estate, as we discuss in detail below.

These factors could reduce the net operating profits of our TRS lessees, which in turn could adversely affect our ability to make distributions to our stockholders.

Competition for Acquisitions. We compete for hotel investment opportunities with competitors that may have a different appetite for risk than we do or have substantially greater financial resources than we do. This competition may generally limit the number of suitable investment opportunities offered to us and may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new hotel properties on attractive terms.

Seasonality of Hotel Industry. Some hotel properties that we have acquired or may acquire in the future have business that is seasonal in nature. This seasonality can be expected to cause quarterly fluctuations in our revenues. Our quarterly earnings may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these fluctuations in revenues and to make distributions to our stockholders.

Investment Concentration in Single Industry. Our entire business is related to the hotel industry. Therefore, a downturn in the hotel industry, in general, will have a material adverse effect on our hotels’ revenues and the net operating profits of our TRS lessees and amounts available for distribution to our stockholders.

Capital Expenditures. Our hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. These capital improvements may give rise to the following risks:

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construction cost overruns and delays;

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a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on affordable terms;

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uncertainties as to market demand or a loss of market demand after capital improvements have begun; and

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disputes with franchisors/managers regarding compliance with relevant management/franchise agreements.

The costs of these capital improvements could adversely affect our financial condition and amounts available for distribution to our stockholders.

The development of hotel properties is subject to timing, budgeting and other risks that may adversely affect our operating results and our ability to make distributions to stockholders.

We may selectively engage in new developments of hotel properties as market conditions warrant. Developing hotel properties involves a number of risks, including risks associated with:

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construction delays or cost overruns that may increase project costs;

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receipt of zoning, occupancy and other required governmental permits and authorizations;

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development costs incurred for projects that are not pursued to completion;

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acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;

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ability to raise capital; and

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governmental restrictions on the nature or size of a project.

We cannot assure you that any development project will be completed on time or within budget. Our inability to complete a project on time or within budget may adversely affect our operating results and our ability to make distributions to our stockholders.

The hotel industry is capital intensive and our inability to obtain financing could limit our growth.

Our hotel properties require periodic capital expenditures and renovations to remain competitive and the acquisition of additional hotel properties requires significant capital expenditures. We may not be able to fund capital improvements or acquisitions solely from cash provided from our operating activities because we generally must distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to maintain our REIT tax status. As a result, our ability to fund capital expenditures, or investments through retained earnings, is very limited. Consequently, we will rely upon the availability of debt or equity capital to fund our investments and capital improvements, but these sources of funds may not be available on favorable terms and conditions. Neither our charter nor our bylaws limits the amount of debt that we can incur; however, we may not be able to obtain additional equity or debt financing on favorable terms, if at all.

Before September 11, 2001, hotel owners and operators had begun experiencing declining RevPAR, as a result of the slowing U.S. economy. The terrorist attacks of September 11, 2001 and the after-effects (including the possibility of more terror attacks in the United States and abroad), combined with economic trends and the U.S.-led military action in Afghanistan and Iraq, substantially reduced business and leisure travel and hotel industry RevPAR generally. If the economy once again declines or there is a future terrorist attack in the United States, our business may be materially and adversely affected. We cannot predict the extent to which these factors will directly or indirectly impact your investment in our common stock, the hotel industry or our operating results in the future. Declining RevPAR at hotels that we acquire would reduce our net income and restrict our ability to fund capital improvements at our hotels and our ability to make distributions to stockholders necessary to maintain our status as a REIT. Additional terrorist attacks, acts of war or similar events could have further material adverse effects on the markets on which shares of our common stock will trade, the hotel industry at large and our operations in particular.

Potential future outbreaks of contagious diseases could have a material adverse effect on our revenues and results of operations due to decreased travel, especially in areas significantly affected by the disease.

In 2003, the outbreak of Severe Acute Respiratory Syndrome, or SARS, drastically decreased travel in areas significantly affected by the disease. Potential future outbreaks of SARS or other contagious diseases could adversely impact travel to areas where we have hotel properties, which could have a material adverse effect on our revenues or results of operations.

We place significant reliance on technology.

The hotel industry continues to demand the use of sophisticated technology and systems including technology utilized for property management, procurement, reservation systems, customer loyalty programs, distribution and guest amenities. These technologies can be expected to require refinements and there is the risk that advanced new technologies will be introduced. If various systems and technologies become outdated or new technology is required, we may not be able to replace outdated technology or introduce or achieve expected benefits from new technology as quickly as our competition, within budgeted costs for such technology or at all, which in turn may have an adverse effect on our revenues and results of operations.

We may be adversely affected by increased use of business-related technology which may reduce the need for business-related travel.

The increased use of teleconference and video-conference technology by businesses could result in decreased business travel as companies increase the use of technologies that allow multiple parties from different locations to participate at meetings without traveling to a centralized meeting location. To the extent that such technologies play an increased role in day-to-day business and the necessity for business-related travel decreases, demand for hotel properties may decrease and our profitability may be adversely affected.

Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to our stockholders.

We have acquired and intend to maintain comprehensive insurance on each of our hotel properties, including liability, terrorism, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel property owners. We cannot assure you that such coverage will be available at reasonable rates. Various types of catastrophic losses, like earthquakes and floods and losses from foreign terrorist activities such as those on September 11, 2001 or losses from domestic terrorist activities such as the Oklahoma City bombing may not be insurable or may not be insurable on reasonable economic terms. Future lenders may require such insurance and our failure to obtain such insurance could constitute a default under loan agreements. Depending on our access to capital, liquidity and the value of the properties securing the affected loan in relation to the balance of the loan, a default could have a material adverse effect on our results of operations and ability to obtain future financing.

In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel property, as well as the anticipated future revenue from that particular hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position with regard to the damaged or destroyed property.

Noncompliance with governmental regulations could adversely affect our operating results.

Environmental Matters

Our hotel properties are and will be subject to various federal, state and local environmental laws. Under these laws, courts and government agencies may have the authority to require us, as owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination.

These laws also apply to persons who owned a property at the time it became contaminated. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. Under the environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment. A person that arranges for the disposal or treatment, or transports for disposal or treatment, a hazardous substance at a property owned by another person may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property.

Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos while staying in a hotel may seek to recover damages if he or she suffers injury from the asbestos. Lastly, some of these environmental laws restrict the use of a property or place conditions on various activities. For example, certain laws require a business using chemicals (such as swimming pool chemicals at a hotel property) to manage them carefully and to notify local officials that the chemicals are being used.

We could be responsible for the costs associated with a contaminated property. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could adversely affect the funds available for distribution to our stockholders. We cannot assure you that future laws or regulations will not impose material environmental liabilities or that the current environmental condition of our hotel properties will not be affected by the condition of the properties in the vicinity of our hotel properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.

We may face liability regardless of:

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our knowledge of the contamination;

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the timing of the contamination;

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the cause of the contamination; or

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the party responsible for the contamination of the property.

Although we have taken and will take commercially reasonable steps to assess the condition of our properties, there may be unknown environmental problems associated with our properties. If environmental contamination exists on our properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest. In addition, we are obligated to indemnify our lenders for any liability they may incur in connection with a contaminated property.

The presence of hazardous substances on a property may adversely affect our ability to sell the property and could cause us to incur substantial remediation costs. The discovery of environmental liabilities attached to our properties could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to our stockholders.

Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations

Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or private litigants winning damages. If we are required to make substantial modifications to our hotel properties, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and ability to make distributions to our stockholders could be adversely affected.

General Risks Related to the Real Estate Industry

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties or investments in our portfolio in response to changing economic, financial and investment conditions may be limited. In addition, because all of our hotel management agreements contain restrictions on our ability to dispose of our hotel properties, are typically long-term and do not terminate in the event of a sale, our ability to sell hotel properties may be further limited. The real estate market is affected by many factors that are beyond our control, including:

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adverse changes in international, national, regional and local economic and market conditions;

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changes in interest rates and in the availability, cost and terms of debt financing;

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changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

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the ongoing need for capital improvements, particularly in older structures;

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changes in operating expenses; and

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civil unrest, acts of God, including earthquakes, floods and other natural disasters and acts of war or terrorism, including the consequences of terrorist acts such as those that occurred on September 11, 2001, which may result in uninsured losses.

We may decide to sell our hotel properties in the future. We cannot predict whether we will be able to sell any hotel property or investment for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel property or loan.

We may be required to expend funds to correct defects or to make improvements before a hotel property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a hotel property, we may agree to lock-out provisions that materially restrict us from selling that hotel property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that hotel property. These facts and any others that would impede our ability to respond to adverse changes in the performance of our hotel properties could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to stockholders.

Increases in our property taxes could adversely affect our ability to make distributions to our stockholders.

Each of our hotel properties is subject to real and personal property taxes. These taxes on our hotel properties may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. If property taxes increase, our ability to make distributions to our stockholders could be adversely affected.

Our hotel properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of mold to which our hotel guests or employees could be exposed at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property, which would reduce our cash available for distribution. In addition, exposure to mold by our guests or employees, management company employees or others could expose us to liability if property damage or health concerns arise.

Risks Related to Our Organization and Structure

Our failure to qualify as a REIT under the federal tax laws will result in adverse tax consequences.

The federal income tax laws governing REITs are complex.

We intend to operate in a manner that will qualify us as a REIT under the federal income tax laws beginning January 1, 2005. The REIT qualification requirements are extremely complex, however, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, we cannot be certain that we will be successful in operating so that we can qualify as a REIT. At any time, new laws, interpretations, or court decisions may change the federal tax laws or the federal income tax consequences of our qualification as a REIT. We have not applied for or obtained a ruling from the Internal Revenue Service that we will qualify as a REIT.

Failure to qualify as a REIT would subject us to federal income tax.

If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income. We might need to borrow money or sell assets in order to pay any such tax. If we cease to be a REIT, we no longer would be required to distribute most of our taxable income to our stockholders. Unless we were entitled to relief under certain federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

Failure to make required distributions would subject us to tax.

In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. As a result, for example, of differences between cash flow and the accrual of income and expenses for tax purposes, or of nondeductible expenditures, our REIT taxable income in any given year could exceed our cash available for distribution. In addition, to the extent we may retain earnings of our TRS lessees in those subsidiaries, such amount of cash would not be available for distribution to our stockholders to satisfy the 90% distribution requirement. Accordingly, we may be required to borrow money or sell assets to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the distribution requirement and to avoid federal corporate income tax and the 4% nondeductible excise tax in a particular year.

The formation of our TRS lessees increases our overall tax liability.

Our TRS lessees and any other of our domestic TRSs are subject to federal and state income tax on their taxable income, which in the case of our TRS lessees currently consists and generally will continue to consist of revenues from the hotel properties leased by our TRS lessees plus, in certain cases, key money payments (amounts paid to us by a hotel management company in exchange for the right to manage a hotel property we acquire), net of the operating expenses for such properties and rent payments to us. Accordingly, although our ownership of our TRS lessees allows us to participate in the operating income from our hotel properties in addition to receiving rent, that operating income is fully subject to income tax. Such taxes could be substantial. The after-tax net income of our TRS lessees or other TRSs is available for distribution to us.

We incur a 100% excise tax on transactions with our TRS lessees or other TRSs that are not conducted on an arm’s-length basis. For example, to the extent that the rent paid by one of our TRS lessees exceeds an arm’s-length rental amount, such amount potentially is subject to the excise tax. We intend that all transactions between us and our TRS lessees will continue to be conducted on an arm’s-length basis and, therefore, that the rent paid by our TRS lessees to us will not be subject to the excise tax.

Consequences of our operating as a C corporation for 2004.

As a C corporation, for our first taxable year ended December 31, 2004, we incurred federal and state income taxes of approximately $0.9 million. In addition, because we were a C corporation for our taxable year ended December 31, 2004, we generally will be subject to a corporate-level tax on a taxable disposition of any appreciated asset we hold as of the effective date of our REIT election which is expected to be January 1, 2005, which tax could reduce the amount that we could otherwise distribute to our stockholders. Specifically, if we dispose of a built-in-gain asset in a taxable transaction prior to the tenth anniversary of the effective date of our REIT election, we would be subject to tax at the highest regular corporate rate (currently 35%) on the lesser of the gain recognized and the asset’s built-in-gain.

In addition, to qualify as a REIT, we may not have, at the end of any taxable year, any undistributed earnings and profits accumulated in any non-REIT taxable year. Our non-REIT earnings and profits will include any earnings and profits we accumulated before the effective date of our REIT election. For our first taxable year ended December 31, 2004, we had approximately $2.3 million of non-REIT earnings and profits. We intend to distribute at least $2.3 million before December 31, 2005 to eliminate any 2004 non-REIT earnings and profits, regardless of our 2005 REIT taxable income. Moreover, we intend to distribute (and avoid tax on) our 2005 REIT taxable income.

We could lose our REIT status if Marriott or another hotel management company with which we enter into hotel management agreements fails to qualify as an “eligible independent contractor” under the Code.

The hotel properties leased by our TRS lessees must be operated by an “eligible independent contractor” as defined in the Code in order for the rental income from our TRS lessees to qualify as rents from real property under the applicable REIT income tests. In order to qualify as an eligible independent contractor, a hotel management company must satisfy certain requirements, including that the hotel management company may not own, directly or indirectly, more than 35% of our stock and not more than 35% of the hotel management company may be owned, directly or indirectly, by one or more persons owning 35% or more of our stock. For purposes of determining whether these ownership limits are satisfied, actual ownership as well as constructive ownership under the rules of Section 318 of the Code (with certain modifications) is taken into account. Each of our TRS lessees has hired and we anticipate will continue to hire a hotel management company that we expect to qualify as an eligible independent contractor to manage and operate the hotel properties leased by our TRS lessee, and Marriott intends to qualify as an eligible independent contractor. However, constructive ownership under Section 318 of the Code resulting, for example, from relationships between Marriott or another hotel management company and any of our stockholders could impact Marriott’s or such other hotel management company’s ability to satisfy the applicable ownership limits. Discovery of any such relationship could disqualify Marriott or another hotel management company as an eligible independent contractor, which could in turn cause us to fail to qualify as a REIT. If we fail to qualify for or lose our status as a REIT, we would be subject to federal income tax on our taxable income. See “Federal Income Tax Considerations.” In addition, in such event, the hotel management agreements that we expect to enter into with Marriott may not be terminable, thereby making it impossible to avoid such disqualification. Consistent with hotel management agreements already in place with Marriott, we do not expect that our hotel management agreements with Marriott will provide us with protection from such an occurrence.

Plans should consider ERISA risks of investing in our common stock.

ERISA and Section 4975 of the Code prohibit certain transactions that involve (i) certain pension, profit-sharing, employee benefit, or retirement plans or individual retirement accounts and (ii) any person who is a “party in interest” or “disqualified person” with respect to such plan. Consequently, the fiduciary of a plan contemplating an investment in our common stock should consider whether our company, any other person associated with the issuance of our common stock or any affiliate of the foregoing is or may become a “party in interest” or “disqualified person” with respect to the plan and, if so, whether an exemption from such prohibited transaction rules is applicable. If a fiduciary of a plan engages in certain transactions with a “party in interest” or “disqualified person” for which no prohibited transaction exemption is available, the parties to the transaction could be subject to excise taxes and other penalties. See “ERISA Considerations.”

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

At any time, the federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or our stockholders.

Provisions of our charter may limit the ability of a third party to acquire control of our company.

Our charter provides that no person may beneficially own more than 9.8% of our common stock or of the value of the aggregate outstanding shares of our capital stock, except certain “look-through entities,” such as mutual funds, which may beneficially own up to 15% of our common stock or of the value of the aggregate outstanding shares of our capital stock. Our board of directors has waived this ownership limitation for Marriott Hotel Services, Inc. and certain institutional investors in the past and may waive it again in the future so long as our board of directors determines these waivers should not affect our REIT qualification. These ownership limitations may prevent an acquisition of control of our company by a third party without our board of directors’ approval, even if our stockholders believe the change of control is in their best interests. Our charter authorizes our board of directors to issue up to 100,000,000 shares of common stock and up to 10,000,000 shares of preferred stock, to classify or reclassify any unissued shares of common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares. Furthermore, our board of directors may, without any action by the stockholders, amend our charter from time to time to increase or decrease the aggregate number of shares of stock of any class or series that we have authority to issue. Issuances of additional shares of stock may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best interests.

Certain advance notice provisions of our bylaws may limit the ability of a third party to acquire control of our company.

Our bylaws provide that (a) with respect to an annual meeting of stockholders, nominations of persons for election to the board of directors and the proposal of business to be considered by stockholders may be made only (i) pursuant to our notice of the meeting, (ii) by the board of directors or (iii) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the bylaws and (b) with respect to special meetings of stockholders, only the business specified in our notice of meeting may be brought before the meeting of stockholders and nominations of persons for election to the board of directors may be made only (i) pursuant to our notice of the meeting, (ii) by the board of directors or (iii) provided that the board of directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the bylaws. These advance notice provisions may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best interests.

Provisions of Maryland law may limit the ability of a third party to acquire control of our company.

Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interests, including:

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“business combination” provisions that, subject to certain limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose special appraisal rights and special stockholder voting requirements on these combinations; and

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“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

We have opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL, by resolution of our board of directors and, in the case of the control share provisions of the MGCL, pursuant to a provision in our bylaws. However, our board of directors may by resolution opt in to the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.

Additionally, Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to take certain actions that may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best interests.

Our ownership limitations may restrict or prevent you from engaging in certain transfers of our common stock.

In order to maintain our REIT qualification, among other requirements, no more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal income tax laws to include various kinds of entities) during the last half of any taxable year (other than the first year for which a REIT election is made). In addition, the REIT rules generally prohibit a manager of one of our hotel properties from owning, directly or indirectly, more than 35% of our stock and a person who holds 35% or more of our stock from also holding, directly or indirectly, more than 35% of any such hotel management company. To qualify for and preserve REIT status, our charter contains an aggregate share ownership limit and a common share ownership limit. Generally, any shares of our stock owned by affiliated owners will be added together for purposes of the aggregate share ownership limit, and any shares of common stock owned by affiliated owners will be added together for purposes of the common share ownership limit.

If anyone transfers or owns shares in a way that would violate the aggregate share ownership limit or the common share ownership limit, or prevent us from continuing to qualify as a REIT under the federal income tax laws, those shares instead will be transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed by us or sold to a person whose ownership of the shares will not violate the aggregate share ownership limit or the common share ownership limit. If this transfer to a trust fails to prevent such a violation or our continued qualification as a REIT, then we will consider the initial intended transfer or ownership to be null and void from the outset. The intended transferee or owner of those shares will be deemed never to have owned the shares. Anyone who acquires or owns shares in violation of the aggregate share ownership limit, the common share ownership limit or the other restrictions on transfer or ownership in our charter bears the risk of a financial loss when the shares are redeemed or sold if the market price of our stock falls between the date of purchase and the date of redemption or sale.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, we may be required to forego attractive business or investment opportunities. Thus, compliance with the REIT requirements may hinder our ability to operate solely to maximize profits.

The ability of our board of directors to revoke our REIT status without stockholder approval may cause adverse consequences to our stockholders.

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we would become subject to federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.

Risks Related to this Offering

We cannot assure you that a public market for our common stock will develop.

Prior to this offering, there has not been a public market for our common stock and, even though we intend to apply to list the shares of our common stock on the NYSE, we cannot assure you that an active trading market for the shares of common stock offered hereby will develop or, if developed, that any such market will be sustained. In the absence of an active public trading market, an investor may be unable to liquidate an investment in our common stock. The initial public offering price has been determined by us and the underwriters. We cannot assure you that the price at which the shares of common stock will sell in the public market after the closing of this offering will not be lower than the price at which they are sold by the underwriters.

The market price of our equity securities may vary substantially.

The trading prices of equity securities issued by REITs have historically been affected by changes in market interest rates. One of the factors that may influence the price of our common stock or preferred stock in public trading markets is the annual yield from distributions on our common stock or preferred stock as compared to yields on other financial instruments. An increase in market interest rates, or a decrease in our distributions to stockholders, may lead prospective purchasers of our stock to demand a higher annual yield, which could reduce the market price of our equity securities.

Other factors that could affect the market price of our equity securities include the following:

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actual or anticipated variations in our quarterly results of operations;

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changes in market valuations of companies in the hotel or real estate industries;

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changes in expectations of future financial performance or changes in estimates of securities analysts;

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fluctuations in stock market prices and volumes;

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issuances of common stock or other securities in the future;

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the addition or departure of key personnel; and

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announcements by us or our competitors of acquisitions, investments or strategic alliances.

The number of shares available for future sale could cause our share price to decline.

Upon the completion of this offering, we will have shares of common stock outstanding. We cannot predict whether future issuances of shares of our common stock or the availability of shares for resale in the open market will decrease the market price of our common stock. Sales of substantial numbers of shares of our common stock in the public market, or the perception that such sales might occur, could adversely affect the market price of our common stock. In addition, under registration rights agreements, we have granted holders of the 20,850,000 shares of our common stock issued in our July 2004 private placement, including 3,000,000 shares purchased by Marriott directly from us, the right to have their shares registered for resale under the Securities Act. If any or all of these holders sell a large number of securities in the public market, the sale could reduce the trading price of our common stock and could impede our ability to raise capital in the future. We also

may issue from time to time additional common stock or units of our operating partnership in connection with the acquisition of properties and we may grant additional demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of common stock or the perception that these sales could occur may adversely effect the prevailing market price for our common stock. In addition, the sale of these shares could impair our ability to raise capital through a sale of additional equity securities.

The exercise of the underwriter’s over-allotment option, any future redemption of our operating partnership units for common stock, portfolio or business acquisitions and other issuances of our common stock could have an adverse effect on the market price of our common stock. In addition, future issuances of our common stock may be dilutive to existing stockholders.

Lock-up agreements may not limit the number of shares of common stock sold into the market.

Our executive officers and directors have entered into lock-up agreements that prohibit them from selling, pledging, transferring or otherwise disposing of our common stock or securities convertible into our common stock for a period of 180 days after the date of this prospectus. Subject to specified exceptions, certain of our directors and senior executive officers and Marriott also have entered into lock-up agreements in connection with our July 2004 private placement that prohibit them from selling, pledging, transferring or otherwise disposing of our common stock or securities convertible into our common stock for 180 days after the effective date of the resale shelf registration statement that we are required to file pursuant to the registration rights agreement. In addition, in accordance with the registration rights agreement, subject to specified exceptions, holders of shares of common stock sold in our July 2004 private placement have agreed not to offer, pledge, sell or otherwise dispose of any of shares of our common stock or securities convertible into our common stock that they have acquired prior to the date of this prospectus, and are not selling in this offering, for 60 days following the effective date of the registration statement of which this prospectus is a part. Citigroup Global Markets, Inc. and Friedman, Billings, Ramsey & Co., Inc., on behalf of the underwriters, may, in their discretion, release all or any portion of the common stock subject to the lock-up agreements with our directors and officers at any time without notice or stockholder approval, in which case, our other stockholders would also be released from the restrictions pursuant to the registration rights agreement. If the restrictions under the lock-up agreements and the registration rights agreement are waived or terminated, up to approximately shares of common stock will be available for sale into the market, subject only to applicable securities rules and regulations, which could reduce the market price for our common stock.

Investors in this offering will experience immediate dilution in the book value per share.

The initial public offering price of our common stock is substantially higher than what our net tangible book value per share will be immediately after this offering. Purchasers of our common stock in this offering will incur immediate dilution of approximately $ in net tangible book value per share of our common stock, based on the midpoint of the price range for the shares to be sold in this offering.

We cannot assure you that we will be able to make distributions to our stockholders in the future.

We intend to make annual distributions on a regular quarterly basis in sufficient amounts so as to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our taxable REIT subsidiary and TRS lessees, which are subject to tax at regular corporate rates). This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Code. However, our ability to pay distributions may be adversely affected by the risk factors described in this prospectus. All distributions are made at the discretion of our board of directors and will depend upon our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. We cannot assure you that we will be able to pay distributions in the future. In addition, some of our distributions may include a return of capital.

An increase in market interest rates may have an adverse effect on the market price of our common stock.

One of the factors that investors may consider in deciding whether to buy or sell our common stock is our dividend rate as a percentage of the market price of our common stock, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend or interest rate on our common stock or seek securities paying higher dividends or interest. The market price of our common stock likely will be strongly affected by the earnings and return that we derive from our investments and income with respect to our properties and our related distributions to stockholders, and not from the market value or underlying appraised value of the properties or investments themselves. As a result, interest rate fluctuations and capital market conditions can affect the market price of our common stock. For instance, if interest rates rise without an increase in our dividend rate, the market price of our common stock could decrease because potential investors may require a higher dividend yield on our common stock as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay dividends.

Future offerings of debt securities or preferred stock, which would be senior to our common stock upon liquidation and for the purposes of distributions, may cause the market price of our common stock to decline.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock. We will be able to issue additional shares of common stock or preferred stock without stockholder approval, unless stockholder approval is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Preferred stock and debt, if issued, could have a preference on liquidating distributions or a preference on dividend or interest payments that could limit our ability to make a distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their interest.

FORWARD LOOKING STATEMENTS

We make statements in this prospectus that are forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, our pro forma financial statements and all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “seek,” “approximately,” “intend,” “plan,” “pro forma,” “estimate” or “anticipate” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans, market statistics, or intentions.

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

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the factors discussed in this prospectus, including without limitation those set forth under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business,” “Hotel Industry” and “Our Properties”;

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adverse economic or real estate developments in our markets;

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general economic conditions;

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the degree and nature of our competition;

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increased interest rates and operating costs;

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our failure to obtain necessary outside financing;

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difficulties in identifying properties to acquire and completing acquisitions;

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availability of and our ability to retain qualified personnel;

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our failure to qualify or maintain our status as a REIT;

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changes in our business or investment strategy;

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availability, terms and deployment of capital;

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general volatility of the capital markets and the market price of our common stock;

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environmental uncertainties and risks related to natural disasters;

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changes in foreign currency exchange rates; and

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changes in real estate and zoning laws and increases in real property tax rates.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. You should carefully consider this risk when you make an investment decision concerning our common stock. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could impact our future results, performance or transactions, see the section above entitled “Risk Factors.”

MARKET DATA

Market data and forecasts used in this prospectus have been obtained from independent industry sources as well as from research reports prepared for other purposes, including market information compiled by Smith Travel Research, Inc. which, among other things, provides research reports and forecasts on the performance of the hotel and travel industry. We have not independently verified the data obtained from these sources. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus.

USE OF PROCEEDS

We will issue shares of our common stock if the underwriters’ over-allotment option is not exercised and shares of our common stock if the underwriters’ over-allotment option is exercised in full.

After deducting the underwriting discount and commissions and estimated expenses of this offering, we expect net proceeds from this offering of approximately $ million if the underwriters’ over-allotment option is not exercised, or approximately $ million if the underwriters’ over-allotment option is exercised in full. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders.

We will contribute the net proceeds to our operating partnership. Our operating partnership intends to use the net proceeds received from us as follows:

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approximately $ million to retire or pay down outstanding principal on the following indebtedness at the time this indebtedness becomes prepayable without penalty, with such principal paydowns based upon the outstanding principal as of , 2005;

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approximately $20.0 million of debt that bears interest at LIBOR plus 2.40%, which may be prepayable without penalty in October 2005 and matures in November 2006, incurred in connection with the acquisition of The Lodge at Sonoma Renaissance Resort & Spa;

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approximately $23.0 million of debt that bears interest at LIBOR plus 2.70%, which may be prepayable without penalty in December 2005 and matures in January 2007, incurred in connection with the acquisition of Courtyard Manhattan/Fifth Avenue;

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approximately $44.0 million of senior and subordinated debt that bears interest at LIBOR plus 2.50%, which may be prepayable without penalty prior to July 2005 and matures in January 2007, incurred in connection with the acquisition of Torrance Marriott;

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approximately $4.1 million needed to complete the planned renovations of our initial hotels; and

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approximately $ to fund the purchase and renovation of those acquisition properties currently under contract as of the date of this prospectus that we consider probable acquisitions.

Pending these uses, we intend to invest the net proceeds in interest-bearing, short-term investment grade securities or money-market accounts that are consistent with our intention to qualify as a REIT. Such investments may include, for example, government and government agency certificates, interest-bearing bank deposits and mortgage loan participation.

DIVIDEND POLICY AND DISTRIBUTIONS

We have not declared or paid any dividends on our common stock since our inception in May 2004. We intend to generally distribute to our stockholders each year on a regular quarterly basis sufficient amounts of our REIT taxable income so as to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our taxable REIT subsidiary and TRS lessees, which are all subject to tax at regular corporate rates) and to qualify for the tax benefits afforded to REITs under the Code. In order to qualify as a REIT under the Code, we generally must make distributions to our stockholders each year in an amount equal to at least:

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90% of our REIT taxable income determined without regard to the dividends paid deduction, plus;

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90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code, minus;

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any excess non-cash income.

See “Federal Income Tax Considerations.”

In our first taxable year ended December 31, 2004, we had approximately $2.3 million of non-REIT earnings and profits. In order to qualify as a REIT, we may not have, at the end of any taxable year, any undistributed earnings and profits accumulated in any non-REIT taxable year. We therefore intend to distribute at least $2.3 million before December 31, 2005 to eliminate any 2004 non-REIT earnings and profits, regardless of our 2005 REIT taxable income. Moreover, we intend to distribute (and avoid tax on) our 2005 REIT taxable income.

Additionally, we intend to pay a quarterly distribution of $0. per share to our stockholders commencing with the third quarter of 2005. On an annualized basis, this distribution would be $ per share, or an annualized distribution rate of approximately 6.0% based on the midpoint of the initial public offering price of $ per share. This intended distribution would represent approximately % of our estimated cash available for distribution for the months ending , 2005.

The actual amount, timing and frequency of our distributions will be at the discretion of, and authorized by, our board of directors and will depend on our actual results of operations and a number of other factors, including:

•

the timing of our investment of the net proceeds of this offering;

•

the rent received from our TRS lessees;

•

our debt service requirements;

•

capital expenditure requirements for our hotel properties;

•

unforeseen expenditures at our hotel properties;

•

our taxable income and the taxable income of our TRS lessees;

•

the annual distribution requirement under the REIT provisions of the Code;

•

our operating expenses and the operating expenses of our TRS lessees; and

•

other factors that our board of directors may deem relevant.

In addition, our ability to make distributions to our stockholders will depend, in part, upon the amount of distributions we receive from our operating partnership, DiamondRock Hospitality Limited Partnership, which will depend upon the amount of lease payments received from our TRS lessees, and, in turn, upon the management of our hotel properties by third party hotel management companies, who will be engaged to operate our hotels. There are no legal, operational or other restrictions that currently prevent our TRS lessees from making distributions to our operating partnership and our operating partnership from making a distribution to us.

To the extent not inconsistent with maintaining our REIT status, we may retain earnings of our TRS lessees in those subsidiaries, and such amount of cash would not be available to satisfy the 90% distribution requirement. If our cash available for distribution to our stockholders is less than 90% of our REIT taxable income, we could be required to sell assets or borrow funds to make distributions. Dividend distributions to our stockholders will generally be taxable to our stockholders as ordinary income to the extent of our current or accumulated earnings and profits. Because a significant portion of our investments are equity ownership interests in hotel properties, which results in depreciation and non-cash changes against our income, a portion of our distributions may constitute a tax-free return of capital. Finally, we cannot assure you that we will have cash available for distributions to our stockholders.

The following table sets forth calculations relating to intended initial distributions based on our pro forma financial data, and we cannot assure you that the intended initial distributions will be made or sustained. The calculations are being made solely for the purpose of illustrating the initial distribution and are not necessarily intended to be a basis for determining future distributions. The calculations include the following material assumptions:

•

loss and cash flows from operations for the twelve months ended December 31, 2004 will be substantially the same for the twelve months ending December 31, 2005, with the exception of additional corporate expenses not permitted to be included as a pro forma adjustment for the twelve months ended December 31, 2004 and increases in contractual ground rent for the twelve months ending December 31, 2005

•

cash flows used in investing activities will be the contractually committed and planned amounts for the twelve months ending December 31, 2005; and

•

cash flows used in financing activities will be the contractually committed amounts for the twelve months ending December 31, 2005.

These calculations do not assume any changes to our operations or any acquisitions or dispositions, which would affect our operating results and cash flows, or changes in our outstanding common stock. We cannot assure you that our actual results will be as indicated in the calculations below. All dollar amounts are in thousands.


Pro forma for the twelve months ended December 31, 2004:

Loss from continuing operations	$
Add: Depreciation and amortization
Add: Straight line ground rent expense
Add: Non-cash amortization of restricted stock
Add: Amortization of deferred financing costs
Less: Non-cash key money income
Less: Non-cash tax benefit
Less: Increase in contractual ground rent
Less: Additional corporate expenses not permitted to be included as a pro forma adjustment

Estimated for the twelve months ending December 31, 2005:

Cash flows from operations

Cash flows used in investing activities—required capital expenditures
Cash flows used in financing activities—scheduled principal amortization payments on notes payable

Cash available for distribution	$

Unvested restricted common stock	$

Intended initial distribution	$
Ratio of intended initial distribution to cash available for distribution		%

CAPITALIZATION

The following table sets forth:

•

our actual capitalization as of December 31, 2004; and

•

our pro forma capitalization, as adjusted to give effect to (i) the acquisition of our Torrance Marriott hotel property and the incurrence of debt to finance the acquisition on January 5, 2005; (ii) the acquisition of the properties under contract that we consider probable acquisitions and the incurrence of debt to finance these probable acquisitions; and (iii) the sale of our common stock in this offering, excluding shares of common stock that may be issued by us upon exercise of the underwriters’ over-allotment option at an assumed public offering price of $ per share, and the application of the net proceeds as described in “Use of Proceeds.”


	As of December 31, 2004
	Actual			Pro Forma
Cash	$	76,983,107		$


Secured Revolving Credit Facility(1)		—

Total debt		180,771,810

Stockholders’ equity
Preferred stock, $.01 par value per share, 10,000,000 shares authorized, no shares issued and outstanding		—
Common stock, $.01 par value per share, 100,000,000 shares authorized, 21,020,100 shares issued and outstanding; shares issued and outstanding, as adjusted after this offering(2)		210,201
Additional paid-in capital		197,494,842
Accumulated deficit		(2,117,625	)

Total stockholders’ equity		195,587,418

Total capitalization	$	376,359,228		$

(1)	For a description of our anticipated secured revolving credit facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

(2)	Excludes shares of common stock that may be issued by us upon exercise of the underwriters’ over-allotment option and shares of common stock available for future awards under our equity incentive plan.

DILUTION

Net Tangible Book Value

At December 31, 2004, we had a combined net tangible book value of approximately $195.6 million, or $9.30 per share ($9.00 per share giving effect to the grants of restricted shares). Net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding.

Dilution After This Offering

Purchasers of our common stock will experience an immediate dilution of the net tangible book value of our common stock from the initial public offering price. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of common stock in this offering and the net tangible book value per share of common stock immediately after this offering and the application of the estimated net offering proceeds. After giving effect to the sale of the shares of our common stock offered by us under this prospectus at an assumed initial public offering price of $ per share and the deduction of underwriting discounts and estimated offering expenses, our pro forma net tangible book value at December 31, 2004 would have been $ million, or approximately $ per share of our common stock. This amount represents an immediate increase in net tangible book value of $ per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share from an assumed public offering price of $ per share of our common stock to new investors. The following table illustrates this per share dilution:


Assumed initial public offering price per share		$
Pro forma net tangible book value per share at December 31, 2004(1)
Increase in pro forma net tangible book value per share attributable to this offering(2)
Pro forma net tangible book value per share after this offering(3)		$

Dilution in pro forma net tangible book value per share to new investors(4)		$

(1)	Net tangible book value per share of common stock is determined by dividing net tangible book value at December 31, 2004 by the number of shares of common stock outstanding prior to this offering.

(2)	After deducting underwriting discounts, commissions and other expenses of this offering.

(3)	Based on the pro forma net tangible book value attributable to common stockholders of approximately $ divided by the sum of shares of our common stock to be outstanding after giving effect to this offering.

(4)	Dilution is determined by subtracting (i) pro forma net tangible book value per share of our common stock after giving effect to this offering and the application of the net proceeds from (ii) the initial public offering price per share paid by a new investor in this offering.

Differences Between New and Existing Stockholders in Number of Shares of Common Stock and Amount Paid

The table below summarizes, as of December 31, 2004, on the pro forma basis discussed above, the differences between the number of shares of common stock purchased from us, the total consideration and average price per share paid by existing stockholders and by the new investors purchasing common stock in this offering. We used an assumed initial public offering price of $ per share, and we have not deducted estimated underwriting discounts and commissions and estimated offering expenses in our calculations.


	Shares Issued		Cash/Tangible Book Value
	Number	Percentage	Amount	Percentage	Per Share
Existing stockholders
New investors in this offering

Total

SELECTED FINANCIAL AND OPERATING DATA

We present in this prospectus certain historical and pro forma financial data. We also present certain operational data and non-GAAP financial measures on a historical and pro forma basis.

The selected historical financial information as of December 31, 2004, and the period from May 6, 2004 (inception) to December 31, 2004, has been derived from our historical financial statements audited by KPMG LLP, independent registered public accounting firm, whose report with respect to such financial information is included elsewhere in this prospectus. The selected historical financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements as of December 31, 2004 and for the period from May 6, 2004 (inception) to December 31, 2004, and the related notes.

The unaudited pro forma consolidated balance sheet data is presented as if:

•

the completion of this offering and application of the net proceeds,

•

the acquisition of the Torrance Marriott in January 2005, and

•

the acquisition of those properties currently under contract as of the date of this prospectus that we consider probable acquisitions

had occurred on December 31, 2004.

The unaudited pro forma consolidated statement of operations and other data for the fiscal year ended December 31, 2004, are presented as if:

•

the completion of this offering and application of the net proceeds,

•

the acquisition of our initial seven hotels,

•

the acquisition of those properties currently under contract as of the date of this prospectus that we consider probable acquisitions, and

•

our July 2004 private placement

had occurred on the first day of the period presented.

We present the following two non-GAAP financial measures throughout this prospectus that we believe are useful to investors as key measures of our operating performance: (1) EBITDA; and (2) FFO.

EBITDA represents net income (loss) excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. We also use EBITDA as one measure in determining the value of hotel acquisitions and dispositions.

We compute FFO in accordance with standards established by NAREIT, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding gains (losses) from sales of property, plus depreciation

and amortization and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items, such as real estate depreciation and amortization and gain or loss on sale of assets. We also use FFO as one measure in determining our results after taking into account the impact of our capital structure.

We caution investors that amounts presented in accordance with our definitions of EBITDA and FFO may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP measures in the same manner. EBITDA and FFO should not be considered as an alternative measure of our net income (loss), operating performance, cash flow or liquidity. EBITDA and FFO may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions and other commitments and uncertainties. Although we believe that EBITDA and FFO can enhance your understanding of our results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily better indicators of any trend as compared to GAAP measures such as net income (loss) or cash flow from operations. In addition, you should be aware that adverse economic and market conditions may harm our cash flow. Under “Summary Historical and Pro Forma Financial and Operating Data” and this section, as required, we include a quantitative reconciliation of EBITDA and FFO to the most directly comparable GAAP financial performance measure, which is net income (loss).


	Historical			Pro Forma
	Period from May 6, 2004 to December 31, 2004			Fiscal Year ended December 31, 2004
Statement of operations data:

Revenues:

Rooms	$	5,137,370		$	87,485,090
Food and beverage		1,507,960			30,732,414
Other		428,534			7,133,825

Total revenues		7,073,864			125,351,329


Operating costs and expenses:

Rooms		1,455,380			22,677,655
Food and beverage		1,266,827			22,765,231
Other		3,444,683			56,833,624
Corporate expenses		4,114,165			8,384,457
Depreciation and amortization		1,053,283			17,713,467

Total operating expenses		11,334,338			128,374,434


Operating loss		(4,260,474	)		(3,023,105	)

Interest and other income		(1,333,837	)		(1,333,837	)
Interest expense		773,101			12,337,505

Loss before income taxes		(3,699,738	)		(14,026,772	)

Income tax benefit		1,582,113			2,993,596

Net loss	$	(2,117,625	)	$	(11,033,176	)

FFO(1)	$	(1,064,342	)	$	6,680,291

EBITDA(2)(3)	$	(1,873,354	)	$	16,024,199


	Historical			Pro Forma
	As of December 31, 2004			As of December 31, 2004
Balance sheet data:

Property and equipment, net	$	285,642,439		$	347,796,435
Total assets		391,691,179			439,179,953
Total debt		180,771,810			224,771,810
Total other liabilities		15,331,951			16,903,964
Shareholders’ equity		195,587,418			197,504,179

Statistical data:

Number of hotels		6			7
Number of rooms		1,870			2,357
Occupancy(4)		67.8	%		75.0	%
ADR(4)	$	184.22		$	136.21
RevPAR(4)	$	124.99		$	102.11

(1)

FFO, as defined by NAREIT, is net income (loss) (determined in accordance with GAAP, excluding gains (losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). The calculation of FFO may vary from entity to entity, thus our presentation of FFO may not be comparable to other similarly titled measures of other reporting companies. FFO is not intended to represent cash flows for the period. FFO has not been presented as an alternative to operating income, but as an indicator of operating performance, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.


	Historical			Pro Forma
	Period from May 6, 2004 to December 31, 2004			Fiscal Year ended December 31, 2004
Net loss	$	(2,117,625	)	$	(11,033,176	)
Depreciation and amortization		1,053,283			17,713,467

FFO	$	(1,064,242	)	$	6,680,291

(2)

determined in accordance with GAAP, and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity. The following is a reconciliation between net income (loss) and EBITDA:


	Historical			Pro Forma
	Period from May 6, 2004 to December 31, 2004			Fiscal Year ended December 31, 2004
Net loss	$	(2,117,625	)	$	(11,033,176	)

Interest expense		773,101			12,337,504
Income tax benefit		(1,582,113	)		(2,993,596	)
Depreciation and amortization		1,053,283			17,713,467

EBITDA	$	(1,873,354	)	$	16,024,199

(3)

(4)

Historical amounts relate to the period from hotel acquisition to December 31, 2004. Pro forma amounts relate to the fiscal year ended December 31, 2004.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We were recently formed and did not commence revenue generating operations until July 2004. Please see “Risk Factors—Risks Related to Our Business, Growth Strategy and Investment Sourcing Relationship With Marriott” for a discussion of risks relating to our limited operating history. The following discussion should be read in conjunction with our audited financial statements and the related notes thereto included elsewhere in this prospectus.

Overview

We are a real estate hospitality company that owns, acquires and invests in upper upscale and upscale hotel properties located primarily in North America. To a lesser extent, we may invest, on a selective basis, in limited service and extended stay hotel properties in urban locations. We began operations in July 2004 when we completed a private placement of our common stock to certain institutional and accredited investors in which net proceeds of approximately $196.3 million were raised.

Our principal business objective is to maximize stockholder value through a combination of dividends, growth in funds from operations and increases in net asset value. We believe that we can create long-term value in the hotel properties we acquire by taking advantage of individual market recovery opportunities, aggressive asset management and repositioning. We currently plan to invest approximately $28 million in 2005 and 2006 to renovate our initial hotels, including one hotel that will be re-branded.

Since our July 2004 private placement, we have acquired the following seven hotel properties, comprising 2,357 rooms: Courtyard Manhattan/Midtown East in New York, New York; Torrance Marriott in Los Angeles, California; Salt Lake City Marriott Downtown in Salt Lake City, Utah; Marriott Griffin Gate Resort in Lexington, Kentucky; Bethesda Marriott Suites in Bethesda, Maryland; Courtyard Manhattan/Fifth Avenue in New York, New York; and The Lodge at Sonoma Renaissance Resort & Spa, in Northern California.

We conduct substantially all of our operations through DiamondRock Hospitality Limited Partnership, our operating partnership. We are the sole general partner of our operating partnership and as a result we control the operating partnership. At present, we own 100% of the partnership units either directly or through our wholly-owned subsidiary, DiamondRock Hospitality, LLC, although, in the future, we may issue limited partnership units to third parties in exchange for capital or in exchange for interests in hotel properties from time to time. We also may issue limited partnership units to management as a substitute for restricted stock grants or other equity-based compensation. Sellers of hotel properties that receive limited partnership units of our operating partnership in exchange for their ownership interest in those properties may be able to defer recognition of any taxable gain that would be recognized in a cash sale until such time as their limited partnership units are redeemed or we sell the contributed properties. Upon a limited partner’s election to have us redeem its units, we may redeem them, at our election, either for cash or shares of our common stock on a one-for-one basis, subject to any lock-up or other restrictions that may exist. Whenever we issue stock, we will be obligated to contribute any net proceeds we receive from such issuance to our operating partnership and our operating partnership will, in turn, be obligated to issue an equivalent number of limited partnership units to us. Our operating partnership will distribute the income it generates from its operations to us to the extent not payable to other limited partners. In turn, we expect to distribute a substantial majority of the amounts we receive from our operating partnership to our stockholders in the form of quarterly cash distributions.

We intend to elect to be treated as a self-advised REIT, effective January 1, 2005. For us to qualify as a REIT, we cannot operate our hotel properties. Therefore, our operating partnership and its subsidiaries lease our hotel properties to our TRS lessees, who in turn must engage one or more eligible independent contractors to manage our hotel properties. The leases generally provide for a fixed annual base rent plus percentage rent and

certain other additional charges. We have entered into hotel management agreements with Marriott for all of our current seven hotel properties. Our TRS lessees are consolidated into our financial statements for accounting purposes. However, because both our operating partnership and our TRS lessees are controlled by us, our principal source of funds on a consolidated basis come from the operations of our hotels properties. The earnings of our TRS lessees are subject to federal and state income tax similar to the tax assessed on other C corporations; such tax reduces our funds from operations and the cash available for distribution to our stockholders.

The discussion below relates to the results of operations of the hotel properties that we currently own. The historical financial statements presented herein were prepared in accordance with GAAP. Following the completion of this offering, we expect to use the proceeds of this offering as described in “Use of Proceeds.” Therefore, the discussion below should not be read as being indicative of any future operating results of our company.

Industry Trends and Outlook

We believe the hotel industry, as a whole, is continuing to recover from a pronounced downturn that occurred over the three-year period from 2001-2003. This recovery has been, and we expect it to continue to be, primarily driven by increased demand for hotel rooms as compared to increases in hotel room supply. According to Smith Travel Research, Inc., demand for hotel rooms, measured by total rooms sold, increased by 0.3% in 2002, 1.5% in 2003 and 4.7% in 2004 and is projected to increase by 4.0% in 2005. By comparison, hotel room supply grew by 1.6% in 2002, 1.2% in 2003 and 1.0% in 2004 and is projected to increase by 1.2% in 2005 as compared to its past 15-year historical annual average of 2.1%. As a result, we expect that sustained growth in demand and lower growth in supply will result in continued improvement of hotel industry fundamentals. Specifically, according to Smith Travel Research, Inc.:

•

occupancy increased 3.7% in 2004 and is projected to increase by 2.8% in 2005;

•

average daily rate, or ADR, increased by 4% in 2004 and is projected to increase by 4.2% in 2005; and

•

RevPAR increased by 7.8% in 2004 and is projected to increase by 7.1% in 2005.

While we believe the trends in room demand and growth supply will result in continued improvement in hotel industry fundamentals, we cannot assure you that these trends will continue. The trends discussed above may not continue for any number of reasons, including an economic slowdown and world events outside of our control, such as terrorism. In the past, these events have adversely affected the hotel industry and if these events reoccur, they may adversely affect the industry in the future.

Key Indicators of Financial Condition and Operating Performance

We use a variety of operating and other information to evaluate the financial condition and operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP, as well as other financial information that is not prepared in accordance with GAAP. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual hotel properties, groups of hotel properties and/or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide information. These key indicators include:

•

occupancy percentage;

•

ADR;

•

RevPAR;

•

EBITDA; and

•

FFO.

Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. ADR and RevPAR include only room revenue. Room revenue comprised approximately 73% of our total revenues for the fiscal year ended December 31, 2004, and is dictated by demand, as measured by

occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms. RevPAR, which is calculated as the product of ADR and occupancy percentage, is another important statistic for monitoring operating performance at the individual hotel level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and regional basis.

Our ADR, occupancy percentage and RevPAR performance may be impacted by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, new hotel construction and the pricing strategies of competitors. In addition, our ADR, occupancy percentage and RevPAR performance is dependent on the continued success of Marriott and its brands.

We also use EBITDA and FFO as measures of the financial performance of our business. EBITDA and FFO are supplemental financial measures, and are not defined by GAAP. EBITDA and FFO, as calculated by us, may not be comparable to EBITDA and FFO reported by other companies that do not define EBITDA and FFO exactly as we define those terms. EBITDA and FFO do not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as alternatives to operating income or net income determined in accordance with GAAP, as indicators of performance or as alternatives to cash flows from operating activities as indicators of liquidity. See “Selected Financial and Operating Data” for further discussion of our use of EBITDA and FFO and reconciliations to net income.

Critical Accounting Policies and Estimates

Our consolidated financial statements include the accounts of DiamondRock Hospitality Company and all consolidated subsidiaries. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. We evaluate our estimates and judgments, including those related to the impairment of long-lived assets, on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies are disclosed in the notes to our consolidated financial statements. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates:

Investment in Hotel Properties. Investments in hotel properties are stated at acquisition cost and allocated to land, property and equipment and identifiable intangible assets at fair value in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Property and equipment are recorded at fair value based on analyses, including current replacement cost for similar capacity and allocated to buildings, improvements, furniture, fixtures and equipment based on analysis performed by management and appraisals received from independent third parties. Property and equipment are depreciated using the straight-line method over an estimated useful life of 15 to 40 years for buildings and land improvements and one to ten years for furniture and equipment. Identifiable intangible assets are typically related to contracts, including ground lease agreements and hotel management agreements, which are recorded at fair value. Above-market and below-market contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts acquired and our estimate of the fair market contract rates for corresponding contracts. Contracts acquired that are at market do not have significant value. We typically enter into a new hotel management agreement based on market terms at the time of acquisition. Intangible assets are amortized using the straight-line method over the remaining non-cancelable term of the related agreements. In making estimates of fair values for purposes of allocating purchase price, we may utilize a number of sources that may be obtained in connection with the acquisition or financing of a property and other market data. Management also considers information obtained about each property as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired.

We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the investments in hotel properties may not be recoverable. Events or circumstances that may cause us to perform a review include, but are not limited to, adverse changes in the demand for lodging at our properties due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of an investment in a hotel property exceed the hotel’s carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying value to the estimated fair market value is recorded and an impairment loss recognized.

Revenue Recognition. Hotel revenues, including room, golf, food and beverage, and other hotel revenues, are recognized as the related services are provided.

Stock-based Compensation. We account for stock-based employee compensation using the fair value based method of accounting described in Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation, as amended. For restricted stock awards, we record unearned compensation equal to the number of shares awarded multiplied by the average price of our common stock on the date of the award. Unearned compensation is amortized using the straight-line method over the period in which the restrictions lapse (i.e., vesting period). For unrestricted stock awards, we record compensation expense on the date of the award equal to the number of shares awarded multiplied by the average price of our common stock on the date of the award, less the purchase price for the stock, if any.

Accounting for Key Money. Marriott has contributed to us certain amounts, which we refer to as key money, in exchange for the right to manage certain of our hotel properties. We defer key money received from a hotel manager in conjunction with entering into a long-term hotel management agreement and amortize the amount received against management fees over the term of the management agreement.

Other Recent Accounting Pronouncement

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, or “SFAS 123(R).” SFAS 123(R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The FASB has concluded that companies could adopt the new standard in one of two ways: either the modified prospective transition method or the modified retrospective transition method. Using the modified prospective transition method, a company would recognize share-based employee compensation cost from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date. Using the modified retrospective method, a company would recognize employee compensation cost for periods presented prior to the adoption of the proposed standard in accordance with the original provisions of SFAS No. 123; that is, an entity would recognize employee compensation cost in the amounts reported in the pro forma disclosures provided in accordance with SFAS No. 123. For periods after the date of adoption of the standard, the modified prospective transition method described above would be applied. SFAS 123(R) becomes effective for public companies with their first interim or annual reporting period that begins after June 15, 2005. For non-public companies, the standard becomes effective for their first fiscal year beginning after December 15, 2005. We currently utilize the fair value approach for accounting for stock compensation, and therefore expect that the impact on our financial condition and results of operations of adopting SFAS 123(R) is expected to be minimal.

Results of Operations

We were formed on May 6, 2004, began operations in July 2004 and acquired our first hotel property in October 2004. We completed our private placement of common stock in July 2004 and received proceeds, net of offering costs and fees, of approximately $196.3 million. Stockholders’ equity at December 31, 2004 was approximately $195.6 million. Our loss before income taxes, for the period from inception through December 31, 2004 was $3,699,738.

Revenue. We had total revenues of $7,073,864 for the period from May 6, 2004 to December 31, 2004. Revenue consists primarily of the room, food and beverage and other revenues from The Lodge at Sonoma and the Courtyard Midtown East for the period subsequent to our acquisition dates of October 27, 2004 and November 19, 2004, respectively. Revenues are also included for the post acquisition period for our other four acquisitions, completed during the last two weeks of 2004. The average occupancy of our hotels was 67.8% for the periods subsequent to acquisition. The hotels collectively achieved an ADR of $184.22 and RevPAR of $124.99, respectively, for the periods subsequent to acquisition. On a pro forma basis for 2004, revenues were $125,351,329 and RevPAR was $102.11.

Hotel operating expenses. Our hotel operating expenses totaled $6,166,890 for the period from May 6, 2004 to December 31, 2004. Hotel operating expenses consist primarily of operating expenses of The Lodge at Sonoma and the Courtyard Midtown East for the period subsequent to our acquisition dates of October 27, 2004 and November 19, 2004 respectively. Operating expenses are also included for the post acquisition period of our other four 2004 acquisitions, which were completed during the last two weeks of 2004. Our 2004 pro forma hotel operating expenses, assuming we acquired the initial seven hotels on January 1, 2004, are $102,276,510. Our 2004 pro forma hotel operating expenses include annual straight-line ground rent relating to two of our initial hotels of $8,371,609 which consists of $7,180,412 of non-cash ground rent expense and $1,191,197 of annual contractual ground rent.

Depreciation and amortization expense. Our depreciation and amortization expense totaled $1,053,283 for the period from May 6, 2004 to December 31, 2004. Depreciation and amortization is recorded on our hotels for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced. The furniture, fixtures and equipment depreciable lives are less than one year for the Courtyard Midtown East, the Courtyard Fifth Avenue and the Bethesda Marriott Suites since these hotels will undergo significant renovations in 2006. Our pro forma depreciation expense, assuming we acquired the initial seven hotels on January 1, 2004, is $17,713,467, which reflects the use of actual depreciation lives assigned to the assets in purchase accounting.

Corporate expenses. Our corporate expenses totaled $4,114,165 for the period from May 6, 2004 to December 31, 2004. Corporate expenses principally consist of employee related costs, including base payroll, bonus and restricted stock. Corporate expenses also include organizational costs, professional fees and directors’ fees. Our pro forma corporate expenses are $8,384,457. The pro forma 2004 corporate expenses exclude adjustment for costs which are not permitted under the pro forma rules, but which may be incurred subsequent to completion of this offering. Our budgeted 2005 corporate expenses are approximately $13.1 million, which is comprised of approximately $6.3 million of cash corporate expenses and approximately $6.9 million of restricted stock expense. The $6.9 million of restricted stock expense includes a $4.4 million charge relating to share grants that will be awarded to our executive officers in connection with this offering.

Interest expense. Our interest expense totaled $773,101 for the period from May 6, 2004 to December 31, 2004. Interest expense relates to the mortgage debt incurred in connection with our acquisitions. Our mortgage debt on two of our hotels bears interest at variable rates based on LIBOR. The interest rates as of December 31, 2004 on these two mortgage loans were 4.74% and 5.04%, respectively. The mortgage debt on our other four hotels bears interest at fixed rates ranging from 5.11% to 7.69% per year. Our 2004 pro forma interest expense, assuming we acquired the initial seven hotels on January 1, 2004, is $12,337,504.

Income taxes. We recorded an income tax benefit of $1,582,113 for the period from May 6, 2004 to December 31, 2004 . The 2004 current tax liability of $879,717 is the result of temporary differences primarily resulting from deferred key money, capitalized pre-opening costs, restricted stock expense, straight-line ground rent, depreciation and other items that will result in 2004 taxable income. A significant portion of the deferred tax assets recorded in 2004 will be expensed in the first quarter of 2005 in connection with our REIT election.

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to fund future distributions to our stockholders to maintain our REIT status as well as to pay for operating expenses and other expenditures directly associated with our hotel properties, including:

•

recurring maintenance and capital expenditures necessary to maintain our hotel properties properly; and

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interest expense and scheduled principal payments on outstanding indebtedness.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our anticipated secured revolving credit facility.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotel properties, renovations, expansions and other non-recurring capital expenditures that need to be made periodically to our hotel properties, scheduled debt payments and making distributions to our stockholders. We expect to meet our long-term liquidity requirements through various sources of capital including the cash we will have available upon completion of this offering, cash provided by operations, and borrowings, as well as through the issuances of additional equity or debt securities. Our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise funds through the issuance of debt and equity securities is dependent upon, among other things, general market conditions for REITs and market perceptions about us. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but the capital markets may not be consistently available to us on terms that are attractive, or at all. We believe that our existing cash and cash equivalents, together with the net proceeds from this offering, cash flow from operations and borrowings, will be sufficient to acquire the hotel properties that we consider to be probable acquisitions as described in this prospectus, to fund the $28 million of renovation costs in 2005 and 2006 for our initial hotels and to fund our cash requirements during the next twelve months.

In addition, we intend to utilize various types of debt to finance a portion of the costs of acquiring additional hotel properties. We expect this debt will include long-term, fixed-rate, mortgage loans, variable-rate term loans, and secured revolving lines of credit.

We are currently in negotiations with a number of financial institutions to enter into a secured revolving credit facility. We expect that:

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the credit facility may be guaranteed by certain of our subsidiaries whose governance agreements and loan documents do not otherwise prohibit such guarantees; and

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the credit facility will have a term of at least two years, and our borrowings under the credit facility are expected to bear interest at a floating interest rate of .

We expect that the credit facility will require that we satisfy certain financial covenants, as well as other non-financial covenants. If we do not satisfy these covenants, we would be in default under this anticipated credit facility, and the lender could require us to immediately repay all outstanding indebtedness under the credit facility. We expect the credit facility to be available for general corporate purposes, including the following:

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funding of investments;

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funding of hotel renovations and improvements;

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payment of distributions to stockholders;

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working capital needs; or

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any other payments deemed necessary or desirable by management and approved by the lender.

As we have not yet entered into a definitive agreement with respect to the credit facility, the final terms may materially differ from those described in this prospectus.

Any indebtedness we incur will likely be subject to continuing covenants, and we will likely be required to make continuing representations and warranties in connection with that debt. Moreover, some or all of our debt may be secured by some or all of our assets. If we default in the payment of interest or principal on any of our debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, the lender may accelerate the maturity of the debt, requiring us to immediately repay all outstanding principal and accrued interest. If we are unable to make the payment, our lender could foreclose on any assets that are pledged as collateral to the lender. The lender could also sue us or force us into bankruptcy. Any of these events would likely have a material adverse effect on the value of an investment in our common stock.

In order to qualify as a REIT and to avoid corporate-level tax on the income we distribute to our stockholders, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, on an annual basis. Therefore, once the total net proceeds of this offering and our July 2004 private placement are substantially fully invested, we intend to raise additional capital in order to grow our business and invest in additional hotel properties. However, there is no assurance that we will be able to borrow funds or raise additional equity capital on terms acceptable to us, if at all. For additional information regarding our distribution policies and requirements, see “Dividend Policy and Distributions.”

Off-Balance Sheet Arrangements

We lease the land underlying the Bethesda Marriott Suites and the Courtyard Manhattan/Fifth Avenue pursuant to ground leases that provide for ground lease rental payments that are stipulated in the ground leases and increase in pre-established amounts over the remaining terms of the leases. We lease the land underlying the Salt Lake City Marriott Downtown pursuant to a ground lease that provides for ground lease payments that are calculated based on a percentage of gross revenues. We record the future minimum ground rent payments on the Bethesda Marriott Suites and the Courtyard Manhattan/Fifth Avenue on a straight-line basis as required by accounting principles generally accepted in the United States. We also lease the ground under the Marriott Griffin Gate Resort golf course and the ground under a portion of the Salt Lake City Marriott Downtown ballroom not covered by the main ground lease underlying the hotel.

Outstanding Debt

After application of a portion of the net proceeds from this offering to repay approximately $ million of mortgage debt as described in “Use of Proceeds,” we expect to have approximately $ million of outstanding debt. The following table sets forth as of December 31, 2004, after giving effect to our acquisition of the Torrance Marriott hotel in January 2005, our debt obligations on our hotel properties.

Property

Principal
Balance

Prepayment
Penalties

Interest Rate

Maturity
Date

Amortization
Provisions

Courtyard Manhattan/Midtown East

45,000,000

No(1)

5.195%

12/09

25 years

Torrance Marriott

44,000,000

(2)

No(3)

LIBOR(11)
+ 2.50%

1/07(8)

Interest Only

Salt Lake City Marriott Downtown

39,000,000

Yes(1)

5.50%

12/14

20 years(10)

Marriott Griffin Gate Resort

31,000,000

Yes(4)

5.11%

1/10

25 years

Bethesda Marriott Suites

19,827,573

Yes(5)

7.69%

2/23

25 years

Courtyard Manhattan/Fifth Avenue

23,000,000

No(6)

LIBOR(11)
+ 2.70%

1/07(8)

Interest Only

The Lodge at Sonoma Renaissance

Resort & Spa

20,000,000

No(7)

LIBOR(11)
+ 2.40%

11/06(9)

Interest Only

Total:

221,827,573

(1)

The debt may not be prepaid until three months prior to the maturity date of the mortgage loan (the “Prepayment Release Date”). For Salt Lake City Marriott Downtown, we may prepay the loan on or after the Prepayment Release Date without payment of fees. However, we must pay to the lender, simultaneously with such prepayment, the interest that would have accrued on the outstanding principal balance of the loan at the regular interest rate through the end of the interest period in which such prepayment occurs.

(2)	Includes $35,000,000 senior debt secured by a first mortgage and $9,000,000 subordinated debt.

(3)	The debt may be prepaid at par at any time except during the period from July 13, 2005 to January 13, 2006. We intend to repay the debt with the proceeds of this offering.

(4)

We may not prepay the loan without the express written consent of the lender, and we have no right to prepay the debt until October 2009. Notwithstanding the foregoing, if the lender accepts prepayment of the debt prior to October 2009, we must pay a penalty equal to the greater of (i) 1% of the outstanding principal and (ii) the present value, as of the prepayment calculation date, of a series of monthly payments over the remaining term of the loan, each equal to the amount of interest that would be due on the portion of the loan being prepaid, assuming an annual interest rate of 5.11% over the discounted reinvestment yield, as such term is defined in the agreement.

(5)	The debt may be prepaid. If it is prepaid prior to August 2012, it is subject to a prepayment fee equal to the greater of i) one percent of the outstanding principal amount or ii) a yield maintenance premium determined as set forth in the Deed of Trust.

(6)	The debt may be prepaid at par as of December 2005. We intend to repay the debt with the proceeds of this offering.

(7)	The debt may be prepaid at par at any time except during certain days each month as specified in the applicable loan agreement. We intend to repay the debt with the proceeds of this offering.

(8)	The debt allows for three one-year extensions provided that certain conditions are met.

(9)	The debt allows for one 12-month extension provided that certain conditions are met.

(10)	There is an accelerated amortization provision based on a predetermined formula of available cash flow.

(11)	We have entered into an interest rate cap agreement on this debt. Breakage fees may be payable if the debt is repaid.

Financing Strategy

We currently maintain a policy that limits our total debt level to no more than 60% of our aggregate property investment and repositioning costs. Our board of directors, however, may change or eliminate this debt limit, and/or the policy itself, at any time, without the approval of our stockholders. Upon completion of this offering, we will have a debt ratio of approximately % of our pro forma property investment and repositioning costs as of December 31, 2004.

Going forward, we will consider a number of factors when evaluating our level of indebtedness and making financial decisions, including, among others, the following:

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the interest rate of the proposed financing;

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prepayment penalties and restrictions on refinancing;

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the purchase price of properties we acquire with debt financing;

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our long-term objectives with respect to the financing;

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our target investment returns;

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the ability of particular properties, and our company as a whole, to generate cash flow sufficient to cover expected debt service payments;

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overall level of consolidated indebtedness;

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timing of debt and lease maturities;

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provisions that require recourse and cross-collateralization;

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corporate credit ratios, including debt service coverage, debt to total market capitalization and debt to undepreciated assets; and

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the overall ratio of fixed and variable-rate debt.

Beyond our anticipated secured revolving credit facility, we intend to use other financing methods as necessary, including obtaining from banks, institutional investors or other lenders, financings through property mortgages, bridge loans, letters of credit, and other arrangements, any of which may be unsecured or may be secured by mortgages or other interests in our investments. In addition, we may issue publicly or privately placed debt instruments. When possible and desirable, we will seek to replace short-term sources of capital with long-term financing.

Our indebtedness may be recourse, non-recourse or cross-collateralized and may be fixed rate or variable rate. If the indebtedness is non-recourse, the collateral will be limited to the particular properties to which the

indebtedness relates. In addition, we may invest in properties subject to existing loans secured by mortgages or similar liens on the properties, or may refinance properties acquired on a leveraged basis. We may use the proceeds from any borrowings to refinance existing indebtedness, to refinance investments, for general working capital or for other purposes when we deem it advisable.

Contractual Obligations

The following table outlines the timing of payment requirements related to our consolidated mortgage debt and other commitments as of December 31, 2004.


	Payments due by period
	Total		Less than 1 year		1 to 3 years		4 to 5 years		After 5 years
Long-Term Debt Obligations	$	177,827,573	$	3,113,034	$	49,699,211	$	47,579,899	$	77,435,429
Operating Lease Obligations—Ground Leases	$	633,281,744	$	1,205,541	$	2,505,723	$	2,790,597	$	626,779,883
Office Space	$	87,000	$	87,000	$	—	$	—	$	—

Cash Distribution Policy

We operated as a taxable C Corporation during our first taxable year ended December 31, 2004. We will elect to be taxed as a REIT under the Code for the taxable year ending on December 31, 2005 and subsequent taxable years. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we generally distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, to our stockholders. It is our current intention to comply with these requirements, elect REIT status and maintain such status going forward. As a REIT, we generally will not be subject to corporate federal, state or local income taxes on taxable income we distribute to our stockholders (although the taxable income of our TRS lessees and other TRSs generally will be subject to regular corporate tax). If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local income taxes at regular corporate rates and we may not be able to qualify as a REIT for four subsequent tax years. Even if we qualify for federal taxation as a REIT, we may be subject to certain state and local taxes on our income and property and to federal income and excise taxes on our undistributed taxable income. See “Dividend Policy and Distributions.”

Inflation

Operators of hotel properties, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our hotel management companies to raise room rates.

Seasonality

The operations of hotel properties historically have been seasonal depending on location and, accordingly, we expect some seasonality in our business.

Geographic Concentration

Our hotel properties are located in the following markets: New York City (2 hotels), Washington D.C., Los Angeles, Salt Lake City, Northern California and Lexington, Kentucky.

Tax and Depreciation

The following table reflects certain real estate tax information for our initial properties:


Property	Federal Tax Basis (In thousands)		Property Tax Rate 2004 Estimate(1)		Real Estate Tax 2004 Estimate (In thousands)		Depreciation Method	Tax Depreciation Life (Years)	Annual Depreciation Percent (%)
Courtyard Manhattan/Midtown East	$	71,144	1.5	%	$	1,052	Straight-Line	39	2.564	%

Torrance Marriott		51,504	1.4			711	Straight-Line	39	2.564

Salt Lake City Marriott Downtown		45,292	1.4			645	Straight-Line	39	2.564

Marriott Griffin Gate Resort		41,297	0.8			325	Straight-Line	39	2.564

Bethesda Marriott Suites		46,271	1.1			517	Straight-Line	39	2.564

Courtyard Manhattan/Fifth Avenue		33,779	2.4			798	Straight-Line	39	2.564

The Lodge at Sonoma Renaissance Resort & Spa		27,410	1.2			335	Straight-Line	39	2.564

(1)	Per $1,000 of assessed value.

Qualitative Disclosures about Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business strategies, the primary market risk to which we are currently exposed, and which we expect to be exposed to in the future, is interest rate risk. Some of our outstanding debt has a variable interest rate. We use interest rate caps to manage our interest rate risks relating to our variable rate debt. We had $180.8 million in debt outstanding at December 31, 2004 and incurred an additional $44.0 million of debt in connection with our acquisition of the Torrance Marriott hotel. Including debt incurred in connection with the acquisition of the Torrance Marriott hotel, our total outstanding debt at December 31, 2004 was approximately $224.8 million, of which approximately $87 million or 38.7% was variable rate debt. If market rates of interest on our variable debt, including debt related to the Torrance Marriott, were to increase by 1.0%, or approximately 100 basis points, the increase in interest expense on our variable debt would decrease future earnings and cash flows by approximately $870,000 annually. On the other hand, if market rates of interest on our variable rate were to decrease by 1.0%, or approximately 100 basis points, the decrease in interest expense on our variable rate debt would increase future earnings and cash flow by approximately $870,000. As of December 31, 2004, the fair value of the fixed rate debt is equal to the book value.

HOTEL INDUSTRY

Hotel Industry Recovery. We believe that the U.S. hotel industry is continuing to recover from the severe effects of an economic slowdown and reduction in travel following the terrorist attacks of September 11, 2001, which led to declines in room rates as hotels competed more aggressively for fewer guests. As a result, hotel industry RevPAR and operating performance declined substantially in the period 2001 to 2003.

General economic and local market conditions affect the levels of business and leisure travel, which in turn affect hotel demand and, therefore, operating performance. Along with hotel demand, new hotel room supply is another important factor affecting the hotel industry’s performance. Room rates, occupancy and RevPAR typically increase when demand growth exceeds supply growth. According to Smith Travel Research, Inc., demand for hotel rooms recently increased while growth in the supply of new hotel rooms slowed and is expected to remain at historically low levels for the next several years.

Attractive Environment for Acquisitions. We believe that the current environment presents the opportunity to acquire hotel properties at an attractive time in the hotel industry cycle and participate in improved hotel industry fundamentals. As economic conditions continue to improve, we expect a number of hotel properties with attractive values will be sold over the near-term. Unlike the last industry downturn in the early 1990’s, current hotel owners generally have not been compelled to sell their hotels at distressed prices. In the most recent downturn, hotel properties generally were more conservatively leveraged and hotel owners therefore were able to comply with their debt service obligations despite the cash flow reductions caused by the economic and industry slowdown. While the hotel industry is now recovering from the general economic decline of the previous few years, we believe that a significant number of hotel owners are motivated to sell their hotel properties for a number of reasons. Some owners are restructuring their portfolios by selling some hotels in order to restore service levels and accelerate maintenance and capital expenditures to capitalize on recovering demand levels and increase potential revenue streams at their remaining hotels. Other owners have been forced to hold their assets longer than planned during the market downturn and are seeking to sell into the first rising market in several years.

Because the market appears to accept the notion of broad hotel market recovery, sellers are demanding and receiving relatively high multiples of trailing earnings for their hotels. We believe that, even at such relatively high valuations, hotel industry performance indicators will generally continue to improve, providing the opportunity for future increases in revenues and profits.

Favorable Long-Term Demand Fundamentals. As shown in the chart below, hotel room demand has historically been highly correlated with GDP growth. From 1988 to 2000, demand for hotel rooms grew at an average annual rate of approximately 2.6%, in line with the 3.3% average annual growth rate in GDP during the same period. However, a declining economy and the terrorist attacks of September 11, 2001 led to sharp declines in travel activities in 2001. Beginning in 2002, hotel room demand and GDP showed signs of improvement. Hotel room demand increased by 0.3% in 2002 and 1.5% in 2003, while GDP increased by 1.9% in 2002 and 3.0% in 2003. In 2004, the general economic and hotel room demand recovery continued, as hotel room demand increased by 4.7% and GDP increased by 4.4%. It is projected that hotel room demand will grow by 4.0% in 2005.

LOGO

We expect that sustained growth in demand will result in continued improvement of hotel industry fundamentals. According to Smith Travel Research:

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occupancy increased by 3.7% in 2004 and is projected to increase by 2.8% in 2005; and

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ADR increased by 4.0% in 2004 and is projected to increase by 4.2% in 2005.

Favorable Supply Fundamentals. Historically, periods of weak hotel industry performance have been followed by a decrease in the growth of new hotel supply as availability of new development capital declines. Although improving operating fundamentals encourage new construction, development may require up to several years to complete. As a result, supply growth typically lags behind a hotel industry recovery. As shown in the graph below, new hotel room supply growth averaged 2.6% annually from 1988 to 2000, which is an average growth rate that is approximately equal to the average growth rate for demand over the same period of time, but since 2001, hotel room supply increased by only 1.6% in 2002, 1.2% in 2003 and 1.0% in 2004. New hotel room supply is projected to grow by 1.2% in 2005, as compared to its past 15-year historical annual average of 2.1%. We expect that if new supply remains constrained in 2005 and beyond, even moderate increases in demand should translate into further increases in hotel revenues and profitability.

LOGO

Improving RevPAR. RevPAR is generally higher in periods when room demand exceeds new supply growth. In 2001 and 2002, hotel room demand declined significantly below new room supply, resulting in RevPAR declines of 6.9% in 2001 and 2.7% in 2002. The aggregate percentage decline over this two-year period substantially surpassed the aggregate percentage decline for the 1990-91 period, previously considered one of the worst periods in the modern history of the U.S. hotel industry. We believe the industry is recovering in a pattern similar to that following the post-1991 decline. In 2003, hotel room demand stabilized and RevPAR increased 0.4%. In 2004, hotel demand increased significantly, leading to a significant increase in RevPAR of 7.8%, and RevPAR growth of 7.1% is projected for 2005.

LOGO

Improving Margins. The hotel industry has operated more efficiently over the past decade, notwithstanding the significant industry downturn of 2001-2003. Periods of strong RevPAR growth tend to be characterized by increases in gross operating margin, or GOP margins, while periods of slower RevPAR growth or periods of RevPAR decline tend to be characterized by GOP margin decreases. For example, from 2000 through 2003, GOP margins declined from 39.1% to 35.0% as RevPAR declined by an average of 3.1% annually. We believe that as economic conditions continue to improve, our hotel occupancy rates will increase, making it possible for us to increase daily rates and thereby increase our RevPAR and operating margins.

LOGO

OUR BUSINESS

Our Company

We began operations in July 2004 when we completed a private placement of our common stock.

Our Competitive Strengths

We believe we distinguish ourselves from other owners, acquirors and investors in hotel properties through our competitive strengths, which provide us with a competitive advantage over our competitors in implementing our strategies. Our competitive strengths include:

Experienced Management Team. We believe the extensive hotel industry experience of our senior management team will enable us to effectively implement our business strategies. Our senior management team of William W. McCarten, John L. Williams, Mark W. Brugger, Michael D. Schecter and Sean M. Mahoney has extensive experience in lodging, real estate and related service industries, including hotel asset management, acquisitions, mergers, dispositions, development, redevelopment and financing. Collectively, they have been involved in hotel transactions aggregating several billion dollars and over 100,000 hotel rooms. In particular, our senior executive officers have the following experience:

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Mr. McCarten had over twenty-five years experience with the Marriott organization. Over the course of his career with Marriott and its related entities, he served in a variety of positions, including non-executive Chairman, President and Chief Executive Officer of HMSHost Corporation (formerly Host Marriott Services Corporation) and Executive Vice President and Operating Group President of Host Marriott Corporation, each a publicly traded company. Mr. McCarten oversaw the spin-off of HMSHost Corporation through its merger with Autogrill S.P.A. Several weeks before the announcement of the spin-off in 1995, the common stock of HMSHost Corporation traded at $6.25 per share and HMSHost Corporation was subsequently purchased by Autogrill, S.P.A. in 1999 for $15.75 per share (a 252% return). Mr. McCarten serves as our Chairman and Chief Executive Officer.

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Mr. Williams had over twenty-five years experience with Marriott and recently served as Executive Vice President of North American Hotel Development for Marriott, where he had primary responsibility for the acquisition and development of full-service hotel projects involving Marriott Hotels & Resorts, Renaissance Hotels & Resorts and The Ritz-Carlton. He has extensive experience in acquiring, repositioning, developing and redeveloping hotels. Mr. Williams serves as our President and Chief Operating Officer.

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Mr. Brugger has over a decade of experience in real estate and finance. He recently served as the Vice President Project Finance with Marriott as well as Chief Executive Officer of a non-lodging Marriott subsidiary with over $300 million in annual revenues. His experience includes structured finance transactions totaling in excess of $2 billion as well as the acquisition, disposition and financing of investment properties. Mr. Brugger serves as our Executive Vice President and Chief Financial Officer.

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Mr. Schecter has fifteen years experience practicing law, including six years with Marriott. He has led and successfully completed a wide array of transactions in the hotel industry, including mergers and acquisitions, dispositions, joint ventures, and financings. Mr. Schecter serves as our General Counsel.

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Mr. Mahoney has over eleven years experience as a certified public accountant. He most recently served as a senior manager with Ernst & Young LLP. He has extensive experience with clients in the real estate and hotel industries. Mr. Mahoney serves as our Chief Accounting Officer and Corporate Controller.

Marriott Investment Sourcing Relationship. Our investment sourcing relationship with Marriott provides us, subject to certain limitations, with a “first look” at hotel property acquisition and investment opportunities known to Marriott. As a result of Marriott’s extensive network, relationships and knowledge of hotel property investment opportunities, we believe we have preferred access to a unique source of hotel property investment opportunities, many of which may not be available to other hospitality companies.

We regularly explore with Marriott how to further our investment sourcing relationship in order to maximize the value of the relationship to both parties. To date, both companies have worked proactively to convert appropriate opportunities into hotel property investments made by us and managed by Marriott. Our senior management team currently meets with senior representatives of Marriott approximately every two weeks to discuss, among other things, potential hotel property investment opportunities known to Marriott that are consistent with our stated business strategy.

Since our formation in 2004, Marriott has provided us with access to more than $1.9 billion of off-market acquisition opportunities. Marriott has contributed to us certain amounts in exchange for the right to manage hotel properties we have acquired. We refer to these amounts as “key money.” Marriott has provided us with key money of approximately $6.5 million in the aggregate in connection with our acquisitions of the Courtyard Manhattan/Midtown East ($2.5 million), the Courtyard Manhattan/Fifth Avenue ($1.0 million) and the Torrance Marriott ($3.0 million). In connection with our acquisition of the Courtyard Manhattan/Midtown East, Marriott also contributed $800,000 to the hotel’s furniture, fixtures and equipment reserve. The $1.0 million in key money payments received from Marriott in connection with our acquisition of the Courtyard Manhattan/Fifth Avenue is recoverable in the event that we have not completed certain renovations by January 22, 2006 and Marriott terminates the management agreement in accordance with certain provisions of the management agreement. The $3.0 million in key money contributed by Marriott in connection with our acquisition of the Torrance Marriott is recoverable in the event that the management agreement with Marriott terminates within 10 years and such termination is not a result of a default by Marriott. Our relationship with Marriott has facilitated the acquisition of four of our initial seven hotel properties, including the Marriott Griffin Gate Resort and the Lodge at Sonoma Renaissance Resort & Spa, each of which we acquired directly from Marriott. We believe that we will continue to benefit from this relationship.

Except where contractually or ethically prohibited, or where Marriott believes it would be damaging to existing Marriott relationships, Marriott provides us a “first look” at hotel property investment opportunities known to it that are consistent with our stated business strategy. These hotel property investment opportunities are those upon which Marriott believes that it may have a significant influence on a potential sale. We believe we are Marriott’s preferred purchaser of full-service as well as urban select-service and urban extended-stay hotels in the United States, Canada and Mexico. We believe that Marriott currently views “first look” as meaning Marriott will approach us first and give us an opportunity to work with Marriott in connection with an investment. Whether the “first look” opportunity develops further will depend upon the circumstances of each investment. In order to continue to develop this relationship, except where contractually or ethically prohibited, we intend to provide Marriott with a “first look” at all hotel management opportunities that become known to us.

While we and Marriott currently intend to develop and strengthen our investment sourcing relationship, neither of us has entered into a binding agreement or commitment setting forth the terms of this relationship. Our investment sourcing relationship may be modified or terminated at any time by either party. We retain the right to utilize any property brand and any hotel management company. We believe that should we pursue any such opportunity, it will not affect our investment sourcing relationship with Marriott, so long as such an opportunity does not interfere with Marriott’s objectives for our investment sourcing relationship. On the other hand, Marriott has numerous longstanding relationships with other potential property owners and we understand that Marriott may work with other owners on any potential transaction.

Marriott’s only binding commitment with regard to this investment sourcing relationship is that until June 30, 2006, it will not enter into any written agreement or series of written agreements granting any third party the right to receive information from Marriott concerning opportunities to purchase full-service, urban

select-service or urban extended-stay hotels in the United States, or in any region thereof, prior to such opportunities being presented to us. Our only binding commitment with regard to this relationship is that until June 30, 2006, we will not enter into a written agreement or series of written agreements granting any third party the right to receive information from us concerning potential opportunities to provide hotel management services for full-service, urban select-service or urban extended-stay hotels in the United States, or in any region thereof, prior to such opportunity being presented to Marriott. However, for any particular hotel, we are under no obligation to use Marriott as our hotel management company and we may invest in hotel properties that do not operate under one of Marriott’s brands.

Pursuant to this investment sourcing relationship, we have pursued, and intend to continue to pursue, hotel property investment opportunities referred to us by Marriott and we intend to continue to utilize Marriott as our preferred hotel management company. We believe that this strategy will benefit our stockholders because we believe that Marriott’s strong brands and excellent hotel management services have an extensive track record of providing its owners with a RevPAR premium over competitive brands.

The chart below shows RevPAR indices for selected Marriott brands for 2004 as of September 2004. The RevPAR index for any given hotel measures the level of RevPAR achieved by that hotel relative to its competitors in a specific market. For example, a hotel with a RevPAR index of 105 indicates that, on average, that hotel achieves 5% higher RevPAR than its competitors in that specific market.

The chart below is based on data provided by Smith Travel Research, Inc., based on specifications set by Marriott. For each market where there is a Marriott branded hotel, Marriott applies its knowledge of the market to determine a set of competitors. Marriott considers a variety of factors, some of which are subjective, to determine the competitors. Marriott then instructs Smith Travel Research, Inc. to provide Marriott with the RevPAR data for the specified competitive set. The RevPAR index for an entire brand is calculated by comparing the aggregate RevPAR for all hotels in the brand versus the aggregate RevPAR for all hotels in that brand’s competitive sets.

LOGO

Proven Acquisition Capability. Our senior management team has established a broad network of hotel industry contacts and relationships, including relationships with hotel owners, financiers, operators, commercial real estate brokers and other key industry participants. These industry relationships have provided us with a valuable source of potential hotel property investment opportunities. Since our July 2004 private placement, we have acquired the following seven hotel properties, comprising 2,357 rooms:

•

Courtyard Manhattan/Midtown East in New York, New York, acquired in November 2004 for approximately $75.4 million (sourced by Marriott and purchased from a private partnership);

•

Torrance Marriott in Los Angeles, California, acquired in January 2005 for approximately $62.0 million (sourced by a broker and purchased from a public REIT);

•

Salt Lake City Marriott Downtown in Salt Lake City, Utah, acquired in December 2004 for approximately $49.6 million (sourced by a broker and purchased from a public REIT);

•

Marriott Griffin Gate Resort in Lexington, Kentucky, acquired in December 2004 for approximately $46.9 million (sourced by and purchased from Marriott);

•

Bethesda Marriott Suites in Bethesda, Maryland, acquired in December 2004 for approximately $41.1 million (sourced by a broker and purchased from a private partnership);

•

Courtyard Manhattan/Fifth Avenue in New York, New York, acquired in December 2004 for approximately $35.6 million (sourced by a broker and purchased from an institutional investment fund); and

•

The Lodge at Sonoma Renaissance Resort & Spa in Northern California, acquired in October 2004 for approximately $32.3 million (sourced by and purchased from Marriott).

We believe that our ability to quickly identify, negotiate, finance and consummate acquisitions has positioned us as a preferred buyer of hotel properties.

Growth-Oriented Capital Structure. Upon completion of, and application of the net proceeds from, this offering, we will have $ million in secured financing, representing an initial leverage ratio of approximately % of our pro forma total investments as of December 31, 2004, including projected capital improvements, and approximately $ million in net proceeds from this offering to fund future hotel property investments and working capital. In addition, we currently are negotiating with a number of financial institutions to obtain a line of credit to fund additional acquisitions and renovations and for general working capital and other corporate purposes.

Our Business Objective and Strategies

Our principal business objective is to maximize stockholder value through a combination of dividends, growth in funds from operations and increases in net asset value. In order to achieve this objective, our key strategies are as follows:

•

disciplined acquisition of hotel properties;

•

aggressive asset management; and

•

opportunistic hotel repositioning.

Disciplined Acquisition of Hotel Properties. We will seek to create value by acquiring upper upscale and upscale hotel properties in geographically diverse locations, and to a lesser extent, premium limited service and extended stay hotels in urban locations, in accordance with our disciplined acquisition strategy. Our focus is on acquiring undermanaged or undercapitalized hotel properties at prices below replacement cost and that are located in markets where we expect demand growth will outpace new supply.

Aggressive Asset Management. We intend to aggressively manage our hotel properties by continuing to employ value-added strategies (such as re-branding, renovating, or changing management) designed to increase the operating results and value of our hotel property investments. We will conduct improvements to certain of our initial properties designed to enhance the overall experience of hotel guests and increase RevPAR and asset value. For example, in certain hotels, we are planning the addition of new furniture and bedding, installation of granite vanities in bathrooms, and introduction of new concepts for food and beverage outlets, such as the conversion of a gift shop to a Starbuck’s outlet. We currently plan to invest approximately $28 million in 2005 and 2006 to renovate our initial hotels, including $23.9 million in capital that has been pre-funded into various escrow accounts.

We do not operate our hotel properties, but we have structured, and intend to continue to structure, our hotel management agreements to allow us to closely monitor the performance of our hotels and to ensure, among other things, that our third-party managers: (i) implement an approved business and marketing plan, (ii) implement a disciplined capital expenditure program and (iii) establish and prudently spend appropriate furniture, fixtures and equipment reserves.

Capitalizing on Repositioning Opportunities. We intend to seek opportunities to acquire hotel properties that will benefit from repositioning, including re-branding, renovating or changing management to increase the operating results and value of our hotel property investments. In this regard, we believe our investment sourcing relationship with Marriott will yield many of these opportunities.

Hotel Industry Segments

Smith Travel Research, Inc. classifies the hotel industry into the following chain scales, as determined by each brand’s average system-wide daily rates: luxury, upper upscale, upscale, midscale with food and beverage, midscale without food and beverage, and economy. The category of “upper upscale” includes hotels such as Doubletree, Embassy Suites Hotels, Hilton, Hyatt, Marriott and Sheraton; the category of “upscale” includes hotels such as Courtyard by Marriott, Crowne Plaza, Hawthorn Suites, Hilton Garden Inn, Radisson, Residence Inn by Marriott and Wyndham; and the category of “midscale” includes hotels such as Four Points—Sheraton, Holiday Inn, Holiday Inn Express and Holiday Inn Select.

“Extended-stay” hotels are hotels generally designed to accommodate guests staying more than six nights and typically provide rooms with fully equipped kitchens, entertainment systems, office spaces with computer and telephone lines, access to fitness centers and other amenities. “Limited-service” hotels target budget-conscious travelers and therefore have fewer amenities, such as in-house food and beverage facility.

Environmental Matters

Under various federal, state and local environmental laws and regulations, a current or previous owner, operator or tenant of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases or threats of releases at such property and may be held liable to a government entity or to third parties for property damage and for investigation, clean-up and monitoring costs incurred by such parties in connection with the actual or threatened contamination. These laws typically impose clean-up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the presence of the contamination. The liability under these laws may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may obtain contributions from other identified, solvent, responsible parties of their fair share toward these costs. These costs may be substantial and can exceed the value of the property. The presence of contamination, or the failure to properly remediate contamination, on a property may adversely affect the ability of the owner, operator or tenant to sell or rent that property or to borrow funds using such property as collateral and may adversely impact our investment in that property.

Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials and potential asbestos-containing materials in their building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potential asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potential asbestos-containing materials as a result of these regulations. The regulations may affect the value of a building containing asbestos-containing materials and potential asbestos-containing materials in which we have invested. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and disposal of asbestos-containing materials and potential asbestos-containing materials when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and potentially asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners or operators of real estate facilities for personal injury or improper work exposure associated with asbestos-containing materials and potential asbestos-containing materials.

Prior to closing any property acquisition, we obtain Phase I environmental assessments in order to attempt to identify potential environmental concerns at the properties. These assessments are carried out in accordance with an appropriate level of due diligence and will generally include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historic aerial photographs and other information on past uses of the property. We may also conduct limited subsurface investigations and test for substances of concern where the results of the Phase I environmental assessments or other information indicates possible contamination or where our consultants recommend such procedures. We cannot assure you that these assessments will discover every environmental condition that may be present on a property.

Competition

We encounter strong competition for investments in hotel properties. The hotel industry is highly competitive and our hotel properties are subject to competition from other hotels for guests. Competition is based on a number of factors, including convenience of location, brand affiliation, price, range of services, guest amenities, and quality of customer service. Competition is specific to the individual markets in which our properties are located and will include competition from existing and new hotels operated under brands in the full-service, select-service and extended-stay segments. We believe that properties flagged with a Marriott brand will enjoy the competitive advantages associated with their operations under such brand. Marriott’s centralized reservation systems and national advertising, marketing and promotional services combined with the strong management expertise they provide should enable our properties to perform favorably in terms of both occupancy and room rates. We also believe that Marriott Rewards^® will generate repeat guest business that might otherwise go to competing hotels. Increased competition would have a material adverse effect on occupancy, ADR and RevPAR or may require us to make capital improvements that we otherwise would not undertake, which may result in decreases in the profitability of our hotel properties.

We face competition for the acquisition of and investment in hotel properties from institutional pension funds, private equity investors, REITs, hotel companies and others who are engaged in the acquisition of hotels. Some of these entities have substantially greater financial and operational resources than we have and may have greater knowledge of the markets in which we seek to invest. This competition may reduce the number of suitable investment opportunities offered to us and increase the cost of acquiring our targeted hotel property investments. Although we expect that our investment sourcing relationship with Marriott will continue to provide us with a continuing source of investment opportunities, Marriott is under no binding commitment to provide us with any such opportunities, as described under “Our Business—Our Investment Sourcing Relationship With Marriott.”

Employees

We currently employ nine full-time employees. We anticipate hiring a number of additional full-time employees following the completion of this offering. We believe that our relations with our employees are good. None of our employees is a member of any union; however, the employees of Marriott working at our Courtyard Manhattan/Fifth Avenue hotel are currently represented by a labor union and are subject to a collective bargaining agreement.

Legal Proceedings

We are not involved in any material litigation nor, to our knowledge, is any material litigation pending or threatened against us, other than routine litigation arising out of the ordinary course of business or which is expected to be covered by insurance and not expected to harm our business, financial condition or results of operations.

Regulation

Our properties must comply with Title III of the Americans with Disabilities Act, or ADA, to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.

Insurance

We carry comprehensive liability, fire, extended coverage, earthquake, business interruption and rental loss insurance covering all of the properties in our portfolio under a blanket policy. We do not carry insurance for generally uninsured losses such as loss from riots, war or acts of God. In addition, we carry earthquake and terrorism insurance on our properties in an amount and with deductibles which we believe are commercially reasonable. Certain of the properties in our portfolio are located in areas known to be seismically active. See “Risk Factors—Risks Related to the Hotel Industry—Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to our stockholders.”

OUR PROPERTIES

Our Initial Hotel Properties

We own seven hotel properties. All of these hotel properties are currently managed by Marriott. We believe that each of these properties is adequately covered by insurance. The following table sets forth certain operating information for each of our initial hotels. This information includes periods prior to our acquisition of these hotels:


Property	Location	Month Acquired	Number of Rooms(1)	Average Occupancy(2)		ADR(2)		RevPAR(2)
Courtyard Manhattan/ Midtown East	New York, New York	11/04	307	89.2	%	$	199.43	$	177.85
Torrance Marriott	Los Angeles County, California	1/05	487	77.4			99.63		77.16
Salt Lake City Marriott Downtown	Salt Lake City, Utah	12/04	510	67.9			115.51		78.49
Marriott Griffin Gate Resort	Lexington, Kentucky	12/04	408	68.0			110.11		74.90
Bethesda Marriott Suites	Bethesda, Maryland	12/04	274	74.6			153.73		114.73
Courtyard Manhattan/ Fifth Avenue	New York, New York	12/04	189	89.3			140.96		125.88
The Lodge at Sonoma Renaissance Resort & Spa	Sonoma, California	10/04	182	65.1			187.34		122.03

TOTALS/WEIGHTED AVERAGES			2,357	75.0	%	$	136.21	$	102.11

(1)	As of December 31, 2004.

(2)	For the fiscal year ended December 31, 2004.

The following table sets forth information regarding our investment in each of our initial hotels:


Property	Location	Year Opened	Month Acquired	Number of Rooms(1)	Purchase Price(2)		Pre-Funded Capital Improvements(3)		Post-Acquisition Funded Capital Improvements(4)		Total Projected Investment(5)		Total Projected Investment Per Room
Courtyard Manhattan/ Midtown East	New York, New York	1998	11/04	307	$	75,357,000	$	3,500,000	$	—	$	78,857,000	$	256,863
Torrance Marriott	Los Angeles County, California	1985	1/05	487		62,002,000		10,000,000		—		72,002,000		147,848
Salt Lake City Marriott Downtown	Salt Lake City, Utah	1981	12/04	510		49,584,000		3,761,000		939,000		54,284,000		106,439
Marriott Griffin Gate Resort	Lexington, Kentucky	1981	12/04	408		46,887,000		3,000,000		—		49,887,000		122,272
Bethesda Marriott Suites	Bethesda, Maryland	1990	12/04	274		41,062,000		830,000		3,170,000		45,062,000		164,460
Courtyard Manhattan/ Fifth Avenue	New York, New York	1990	12/04	189		35,640,000		4,100,000		—		39,740,000		210,265
The Lodge at Sonoma Renaissance Resort & Spa	Sonoma, California	2001	10/04	182		32,345,000		—		—		32,345,000		177,720

TOTALS/WEIGHTED AVERAGES				2,357	$	342,877,000	$	25,191,000	$	4,109,000	$	372,177,000	$	157,903

(1)	As of December 31, 2004.

(2)

Purchase price includes, for each hotel property, all amounts paid to the seller, assumed debt and amounts paid for working capital plus costs paid to third-party professional fees in connection with our purchase, but does not include costs related to mortgage debt used by us to finance the purchase of the hotel property or escrow accounts established for the pre-funded capital improvements.

(3)	Pre-funded capital improvements are capital improvements projected to occur in 2005 and 2006 which reflect amounts already funded into various escrow accounts and include furniture, fixtures and equipment reserves and lender-required reserves.

(4)	Represents projected capital improvements for 2005 and 2006 that have not been pre-funded into an escrow account.

(5)	Total projected investment, for each hotel property, is the sum of the purchase price, pre-funded capital improvements and projected capital improvements.

Courtyard Manhattan/Midtown East

Location and Demand Generators: The Courtyard Manhattan/Midtown East is located in Manhattan’s East Side, on Third Avenue between 52^nd and 53^rd Streets. Demand for the hotel is generated by nearby financial services and other firms located in Midtown Manhattan.

The Property: We hold a fee simple interest in a commercial condominium unit, which includes a 47.725% undivided interest in the common elements in the 866 Third Avenue Condominium; the rest of the condominium is owned predominately (48.2%) by the building’s other major occupant, Memorial Sloan-Kettering. The hotel contains 307 guestrooms and occupies the lobby area on the 1^st floor, all of the 12^th-30^th floors and its pro rata share of the condominium’s common elements. The hotel was converted from office use and had its grand opening in 1998 as a Courtyard by Marriott.

In 1998, the prior owners entered into a long-term management agreement with Marriott to have the hotel managed and operated as a Courtyard. Following the post-9/11 downturn in the New York City hotel market, the prior owners filed a Chapter 11 bankruptcy case in October 2003 with the intention of rejecting the Marriott hotel management agreement and converting the hotel into residential condominium units. After substantial litigation with Marriott, the owners and Marriott agreed to resolve their disputes by selling the hotel to Marriott. In November 2004, the bankruptcy court confirmed the proposed plan, which provided, among other things, for the sale of the hotel to Marriott for $75 million. During this time and prior to signing the purchase and sale agreement, Marriott worked exclusively with us to determine our level of interest in acquiring the hotel. As a result of these discussions, on the day of the real estate closing, Marriott assigned the purchase and sale agreement to us and we took title to the hotel directly from the prior owners. In addition, Marriott also contributed to us $2.5 million of non-recoverable key money in return for our agreement to enter into a new, long-term management agreement.

We believe that the hotel will benefit from continued improvement in the New York City hotel market.

We have budgeted $3.5 million for a complete guestroom and public space renovation in 2005, or $11,401 per room. We intend to target the higher end of the market as a result of many of these improvements, which also include installing granite vanities in the bathrooms and upgrading the shower surround with ceramic tile. We believe that the improving hotel market in New York City and the planned capital improvements will position this hotel to take advantage of its location and continuing improvement in the hotel industry.

Additional property highlights include:

Guestrooms:

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307 guestrooms, including 8 suites, 182 king rooms and 117 double/double rooms. The guestrooms average 366 square feet in size.

Meeting Space:

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3 meeting rooms; 1,500 square feet of total meeting space.

Food and Beverage:

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East Side Café, with 82 seats.

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East Side Lounge, with 22 seats.

Other Amenities:

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Fitness Center.

Competition: Competitor hotels include The Metropolitan, The Crowne Plaza at the United Nations, The Roosevelt and Radisson. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition.

Operating and Occupancy Information


	Fiscal Year
	2000			2001			2002			2003			2004
Room Revenue	$	20,742,000		$	16,513,000		$	16,099,000		$	14,898,000		$	19,874,000
ADR	$	204.37		$	176.31		$	168.79		$	161.66		$	199.43
Occupancy %		91.0	%		83.8	%		83.7	%		82.5	%		89.2	%
RevPAR	$	185.98		$	147.77		$	141.35		$	133.32		$	177.85

Torrance Marriott

Location and Demand Generators: The Torrance Marriott is located adjacent to the Del Amo Fashion Center mall, one of the largest malls in America, ten miles from Los Angeles International Airport and less than two miles from the Pacific Ocean in the South Bay area of Los Angeles County. The hotel benefits from the fact that hotel room supply growth in Los Angeles has remained at relatively low levels, averaging only 0.62 percent per year between 1992 and 2003, lower than New York City over the same period of time.

Torrance is a major automotive center. Three major Japanese automobile manufacturers, Honda, Nissan and Toyota, have their U.S. headquarters in the Torrance area and generate significant demand for the hotel. The hotel is also expected to benefit from the extensive renovation and expansion of the Del Amo Fashion Center mall, which was purchased by the Mills Corporation in 2003.

The Property: We own a fee simple interest in the hotel. The hotel was completed in 1985 and includes 487 guestrooms, including 11 suites, within a 17-story building. The property includes over 700 parking spaces in a three-story parking deck adjacent to the hotel.

At the time of our acquisition, the hotel was managed by Marriott and owned by Host Marriott Corporation, or Host, which had the right to sell the hotel subject to a Marriott franchise agreement and terminate the Marriott management agreement. Marriott provided us with $3 million in key money as an inducement to enter into a long-term management agreement. We successfully negotiated with Host to purchase both the Salt Lake City Marriott Downtown and the Torrance Marriott for a combined purchase price. We believe the Marriott key money was essential in our ability to win the bid for the two hotels because it allowed us to increase our bid for the properties.

We have developed an intensive capital improvement and repositioning plan for this hotel and plan to spend $10 million in 2005 and 2006, or almost $20,534 per room, to replace the guestroom softgoods, renovate the lobby, food and beverage outlets and meeting space, and convert the gift shop to a Starbuck’s outlet. We also see an opportunity to introduce new concepts for two of the property’s food and beverage outlets. We believe that our repositioning plan will allow this hotel to improve guest satisfaction, entice more group business, improve local catering sales and command higher rates.

Additional property highlights include:

Guestrooms:

•

487 guestrooms, including 11 suites, 260 king rooms and 216 double/double rooms.

Meeting Space:

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Approximately 23,000 total square feet of indoor and outdoor meeting space;

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10,080 square foot Grand Ballroom and 19 meeting rooms; and

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7,000 square foot outdoor meeting pavilion.

Food and Beverage:

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Garden Court Restaurant;

•

Pitcher’s Sports Bar; and

•

Lobby Lounge.

Other Amenities:

•

Indoor/Outdoor Pool;

•

Children’s Pool;

•

Fitness Center;

•

Jacuzzi;

•

Car Rental Desk; and

•

Barber/Beauty Shop.

Competition: Competitor hotels include The Crowne Plaza Redondo Beach, Hilton Torrance, Hilton Carson Civic Plaza and Marriott Manhattan Beach. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition.

Operating and Occupancy Information


	Fiscal Year
	2000			2001			2002			2003			2004
Room Revenue	$	16,469,000		$	15,837,000		$	13,691,000		$	13,171,000		$	13,678,000
ADR	$	107.49		$	107.71		$	91.69		$	90.76		$	99.63
Occupancy %		86.4	%		82.9	%		82.6	%		81.9	%		77.4	%
RevPAR	$	92.91		$	89.34		$	75.78		$	74.30		$	77.16

Salt Lake City Marriott Downtown

Location and Demand Generators: The Salt Lake City Marriott Downtown is located in downtown Salt Lake City across from the Salt Palace Convention Center near Temple Square, 15 minutes from Salt Lake City Airport.

Demand for the hotel is generated primarily by the Convention Center, the Church of Jesus Christ of Latter-Day Saints, the University of Utah, government offices and nearby ski destinations. The hotel is connected to Crossroads Plaza Mall, which is expected to undergo a major reconstruction as part of a redevelopment that is expected to include the construction of up to 900 residential units. Moreover, the Crossroads Plaza Mall has recently signed Nordstrom’s to a new lease. We believe the hotel will also benefit from the planned establishment by the Church of Jesus Christ of Latter-Day Saints of a major university, with enrollment of up to 10,000 students, near the hotel.

The Property: We hold ground lease interests in the hotel and the extension that connects the hotel to Crossroads Plaza Mall. The term of the ground lease for the hotel runs through 2056, inclusive of five ten-year renewal options. The term of the ground lease for the extension of the hotel (containing approximately 1,078 square feet) runs through 2017, inclusive of the one remaining ten-year renewal option. The Salt Lake City Marriott Downtown hotel was completed in 1981 and includes 510 guestrooms. In 2004, Host engaged real estate brokers to sell the Salt Lake City Marriott Downtown and Torrance Marriott. We negotiated with Host to purchase both hotels (which were originally marketed separately) for a combined purchase price. We assumed the existing hotel management agreement with Marriott in connection with the acquisition of this hotel.

Between 2000 and 2002, the hotel made approximately $9.4 million in capital expenditures, including the replacement of softgoods in the guestrooms and a refurbishment of the lobby, ballroom and public space, incurred in connection with the 2002 Olympic games.

Additional property highlights include:

Guestrooms:

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510 guestrooms, including 6 suites, 231 king rooms and 278 double/double rooms.

Meeting Space:

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Approximately 22,300 total square feet of meeting space; and

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A 14,000 square foot Grand Ballroom.

Food and Beverage:

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Elevations Restaurant, with 132 seats;

•

Pitcher’s Sports Bar, with 22 seats; and

•

Destinations Coffee Shop.

Other Amenities:

•

Indoor/Outdoor Pool;

•

Fitness Center;

•

Sauna; and

•

Car Rental Desk.

Competition: Competitor hotels include Hilton, Marriott City Center, Little America, Hotel Monaco, Sheraton and Grand America. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition.

Operating and Occupancy Information


	Fiscal Year
	2000			2001			2002			2003			2004
Room Revenue	$	16,363,000		$	13,917,000		$	18,099,000		$	14,504,000		$	14,570,000
ADR	$	121.76		$	116.79		$	130.82		$	118.55		$	115.51
Occupancy %		72.4	%		64.2	%		73.1	%		65.9	%		67.9	%
RevPAR	$	88.14		$	74.97		$	95.66		$	78.13		$	78.49

Marriott Griffin Gate Resort

Location and Demand Generators: Marriott Griffin Gate Resort is located north of downtown Lexington, Kentucky. The hotel is near all the area’s major corporate office parks and regional facilities of a number of major companies such as IBM, Toyota, Lexel Corporation and Lexmark International. The hotel also is located in proximity to downtown Lexington, the University of Kentucky, the historic Keeneland Horse Track and the Kentucky Horse Park.

The Property. The hotel is a 163-acre regional resort that contains three distinct components: the seven story main hotel and public areas, the Griffin Gate Golf Club, with the Rees Jones-designed 18-hole golf course, and The Mansion (which was originally constructed in 1854 and was Lexington’s first AAA 4-diamond restaurant). We own the fee interest in the hotel, The Mansion, and the Griffin Gate Golf Club generally; however, there is a ground lease interest under approximately 54 acres of the golf course. The ground lease runs through 2033 (inclusive of four five-year renewal options), and contains a buyout right beginning at the end of the term in 2013 and at the end of each five-year renewal term thereafter. We are the sub-sublessee under another minor ground lease of land adjacent to the golf course, with a term expiring in 2020. Rent for the entire term was $1.00 and has been paid in full.

The hotel was originally opened in 1981. The original developer of the resort sold it to the hotel’s interim owner, which recapitalized the hotel in the 1990s and Marriott provided a guarantee on the first mortgage debt at

that time. The interim owner did not invest sufficient capital in the hotel during its ownership period and the hotel’s operating results began to decline at the end of the 1990s. The deterioration in the hotel product and operating performance continued into the early part of this decade, with the hotel generating cash flows insufficient to support its debt service. In 2003, Marriott acquired the first mortgage. Later that same year, it negotiated with the interim owner and took title to the resort for nominal consideration. In 2003, Marriott initiated a major renovation and repositioning of the resort, with an approximate $10 million capital improvement plan. The renovation included a complete guestroom and guestroom corridor renovation, including an extensive renovation of the suites to more effectively yield higher priced business, as well as a renovation of the exterior facade. In addition, to better accommodate group business, Marriott built a permanent climate controlled meeting pavilion and upgraded the elevators in order to move groups more efficiently.

Prior to our formation, Marriott engaged a real estate broker to market the hotel on its behalf. After our formation, Marriott agreed to withdraw the resort from the market and negotiate with us on an exclusive basis. We purchased the hotel from Marriott in December 2004.

We plan to complete the renovation plan in 2005 with an additional investment of approximately $3 million, or $7,753 per room. The final phase of the renovation will focus on the public space at the hotel, including renovating the interior of The Mansion, replacing the softgoods in the ballroom as well as renovating, repainting or refreshing the lobby, the atrium and the lounge. The renovation and repositioning plan are designed to allow the resort to once again gain its leading market position, improve the guest experience and attract more group meeting planners.

Additional property highlights include:

Guestrooms:

•

387 guestrooms and 21 suites, including Presidential Suites. All guestrooms provide modern, high-end services, including high speed internet.

Meeting Space:

•

13,000 square feet of meeting space.

Food and Beverage:

•

19th Hole, a fast-food restaurant;

•

JW Steakhouse;

•

Griffin Gate Gardens, which provides casual American meals;

•

Mansion at Griffin Gate, which provides upscale American cuisine;

•

Pegasus Lounge;

•

Top Deck Poolside Bar; and

•

Starbucks.

Other Amenities

•

Fitness Center;

•

Spa;

•

Indoor/Outdoor pool;

•

Tennis Courts;

•

Playground;

•

Car Rental Desk; and

•

Gift Shop/Newsstand.

Competition: Competitor hotels include Sheraton Suites, The Crowne Plaza, Embassy Suites of Lexington, Hilton Suites of Lexington Green, Hyatt Regency and Radisson Plaza Hotel. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition.

Operating and Occupancy Information


	Fiscal Year
	2000			2001			2002			2003			2004
Room Revenue	$	11,092,000		$	9,806,000		$	10,551,000		$	10,667,000		$	11,151,000
ADR	$	107.76		$	103.66		$	99.91		$	103.53		$	110.11
Occupancy %		69.3	%		63.7	%		69.8	%		69.4	%		68.0	%
RevPAR		74.69		$	66.03		$	69.70		$	71.83		$	74.90

Bethesda Marriott Suites

Location and Demand Generators: Bethesda Marriott Suites is located in the Rock Spring Corporate Office Park near downtown Bethesda, Maryland, with convenient access to Interstates 270 and 495 (the Beltway) and the I-270 Technology Corridor. Rock Spring Corporate Office Park contains several million feet of office space and includes companies such as Marriott, Host and Lockheed Martin Corp., as well as the National Institute of Health.

The Property: We hold a ground lease interest in the property. The current term of the ground lease will expire in 2087. The hotel was completed in 1990 and includes 274 guestrooms, all of which are suites. The property includes a connected parking garage with 321 spaces. The property was acquired through the acquisition of all the partnership interests in the ground lessee.

The hotel previously was operated under a lease arrangement between the owner and Marriott that created negative tax implications for any purchaser that had elected to be treated as a REIT. During our due diligence period, we worked with Marriott to change the lease into a hotel management agreement consistent with our intention to qualify as a REIT. Although the economics of the lease generally were preserved, the new management agreement provides us with certain additional rights over personnel decisions, capital expenditures and budget approvals. As an inducement for Marriott to restructure its contractual relationship with the hotel, we agreed to advance the timing of the next guestroom renovation from 2006 to 2005.

We expect to spend approximately $4 million in capital expenditures in 2005, or $14,599 per room, for the refurbishment of guestrooms, to reposition the hotel property for higher-rated business.

Additional property highlights include:

Guestrooms:

•

274 guestrooms, all of which are suites.

Meeting Space:

•

Approximately 4,300 square feet of total meeting space.

Food and Beverage:

•

Democracy Grille; and

•

Lobby Lounge.

Other Amenities:

•

Indoor/Outdoor Pool;

•

Fitness Center; and

•

Gift Shop.

Competition: Competitor hotels include Hyatt Regency Bethesda, Embassy Suites, Doubletree Hotel, Holiday Inn Bethesda, Sheraton Four Points, Bethesda Marriott and Bethesda North Marriott. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition.

Operating and Occupancy Information


	Fiscal Year
	2000			2001			2002			2003			2004
Room Revenue	$	12,223,000		$	10,713,000		$	10,031,000		$	10,918,000		$	11,443,000
ADR	$	149.66		$	153.76		$	138.89		$	144.65		$	153.73
Occupancy %		81.9	%		69.9	%		71.0	%		75.7	%		74.6	%
RevPAR	$	122.56		$	107.41		$	98.68		$	109.47		$	114.73

Courtyard Manhattan/Fifth Avenue

Location and Demand Generators: The Courtyard Manhattan/Fifth Avenue is located on 40^th Street, just off of Fifth Avenue in Midtown Manhattan, across the street from the New York Public Library. The hotel is situated in a convenient tourist and business location. It is within walking distance from Times Square, Broadway theaters, Grand Central Station, Rockefeller Center and the Empire State Building.

The Property. We hold a ground lease interest in the hotel. The term of the ground lease expires in 2085, inclusive of one 49-year extension. The hotel opened in 1990 as a Journey’s End-branded hotel and has since changed brands a number of times. The hotel includes 189 guestrooms.

The prior owner of the hotel invested $3.7 million in 1999 to refurbish the hotel and convert it to a Clarion brand pursuant to a five-year agreement. Upon the end of that agreement, the hotel operated under the name Hotel 5A, a non-franchised brand. The hotel’s lack of strong brand affiliation adversely impacted operating results. In 2004, the previous owner engaged a national brokerage firm to market the hotel for sale and, through our management team’s relationship with the broker, we learned about the opportunity to purchase this hotel before it was broadly marketed.

Between the time we learned of the opportunity to purchase the hotel and the bid date, we informed Marriott of this opportunity, and Marriott agreed to work with us on an exclusive basis to determine if the hotel was physically suitable to be converted to a Courtyard by Marriott hotel brand. The hotel was operating at a significant discount to the comparably located Courtyard Manhattan/Midtown East, located at 366 Third Avenue. The ADR at the hotel in 2004 was $58 lower than that of the Courtyard Manhattan/Midtown East in 2004. Prior to the bid date, we worked with Marriott to develop a $4.0 million rebranding, renovation and repositioning plan to convert the hotel to a Courtyard by Marriott and take advantage of the hotel’s excellent location and the strength of the Marriott brand. Marriott provided $1 million of key money to enter into a long-term hotel management agreement with Marriott. We submitted a bid, won the bid process and acquired the hotel in December 2004, and the hotel was re-branded as a Courtyard by Marriott in January 2005.

We expect to spend $4.1 million for capital improvements in 2005, or $21,693 per room, in connection with the re-branding, renovation and repositioning plan. The capital improvement plan includes purchasing new furniture and bedding for the guestrooms, renovation of the bathrooms with granite vanity tops, installation of a new exercise facility, construction of a boardroom meeting space and modifications to make the hotel more accommodating to persons with disabilities.

Additional property highlights include:

Guestrooms:

•

189 guestrooms, averaging 184 square feet in size.

•

In connection with the renovation, eight of the rooms will be combined into four suites, approximately 300 square feet in size, bringing the new room count to 185.

Meeting Space:

•

A board room on the second level of the hotel will be added in 2005.

Food and Beverage:

•

Salmon River Restaurant and Lounge, with access to the hotel lobby, is leased to an independent operator subject to a 10-year lease that expires in 2011, with a five-year renewal option thereafter. The tenant pays base rent and a percentage rent based on gross receipts.

Other Amenities:

•

Fitness Center will be added in 2005; and

•

Business library.

Competition: Competitor hotels include The Mansfield, The Algonquin, Sheraton Russell, Jolly Hotel Madison and The Crowne Plaza. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition.

Operating and Occupancy Information


	Fiscal Year
	2000			2001			2002			2003			2004
Room Revenue	$	10,609,000		$	7,625,000		$	7,842,000		$	7,134,000		$	8,684,000
ADR	$	189.21		$	155.44		$	139.14		$	129.11		$	140.96
Occupancy %		81.3	%		71.1	%		81.5	%		80.1	%		89.3	%
RevPAR	$	153.83		$	110.53		$	113.37		$	103.41		$	125.88

The Lodge at Sonoma Renaissance Resort & Spa

Location and Demand Generators: The Lodge at Sonoma Renaissance Resort and Spa is located in the heart of the Sonoma Valley wine country, 45 miles from San Francisco, in the town of Sonoma, California. Numerous wineries are located within a short driving distance from the resort. The area is served by the Sacramento, Oakland and San Francisco airports. The resort is readily accessible by a variety of local, county, and state highways, including Highway 101. Leisure demand is generated by Sonoma Valley and Napa Valley wine country attractions. Group and business demand is primarily generated from companies located in San Francisco and the surrounding Bay Area, and some ancillary demand is generated from the local wine industry.

The Property: We own a fee simple interest in the hotel, which is comprised of the main two-story Lodge building, including 76 guestrooms and 18 separate cottage buildings, containing the remaining 102 guestrooms and 4 suites. The Raindance Spa is located in a separate two-story building at the rear of the cottages.

The hotel was constructed for a total cost of approximately $53 million and opened in early 2001. The opening coincided with the decline in the hotel market in the San Francisco Bay Area market that began with the technology industry downturn and was exacerbated by the terrorist events of September 11, 2001. In connection with the initial construction of the resort, Marriott issued a mezzanine loan with a lower priority of repayment to a senior loan. The original owners were unable to make any debt service payments on either the senior loan or the mezzanine loan. In addition to its interest as hotel manager, Marriott dedicated significant resources to work with the senior lender and owners of this resort to protect its financial interest as subordinate lender.

In 2004, Marriott negotiated and purchased the senior loan at a discount. Subsequently, Marriott purchased all of the outstanding equity from the original owners. We negotiated exclusively with Marriott to purchase the resort. In October 2004, we acquired the resort from Marriott for 60% of original construction cost. As the resort is still relatively new, no major capital expenditures are expected in the short term.

We plan to aggressively asset manage the resort. We expect that the resort will benefit from the recovering hotel market in the San Francisco Bay Area. We have met with Marriott’s property management team and collectively agreed to modify the marketing of the resort to attract small group business during the traditionally slow mid-week period. We believe this strategy will have a positive result on future operating results.

Additional property highlights include:

Guestrooms:

•

182 guestrooms, including four suites, averaging 385 square feet in size. Most guestrooms have either a balcony or patio.

•

King rooms and suites feature gas fireplaces.

Meeting Space:

•

Approximately 22,000 square feet of total meeting and banquet space, including a 3,080 square-foot ballroom with a seating capacity of 290 and the separate Stone Building offering 2,304 square feet of additional banquet space.

Food and Beverage:

•

Restaurant Carneros; and

•

Fireside Coffee Bar & Gallery Lounge.

Spa:

•

Raindance Spa, a 10,525 square foot full-service spa with 15 treatment rooms;

•

Outdoor area featuring therapy pools and treatment cabanas; and

•

Spa gift shop.

Other Amenities:

•

Outdoor Swimming Pool & Whirlpool;

•

Health Club;

•

Gift Shop; and

•

Business Center.

Competition: Competitor hotels include the Santa Rosa Hilton, Hyatt Vineyard Creek, Embassy Suites Napa, Sonoma Mission Inn, MacArthur Place and Doubletree Sonoma County. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition.

Operating and Occupancy Information


	Fiscal Year
	2001(1)			2002			2003			2004
Room Revenue	$	5,031,000		$	7,117,000		$	7,626,000		$	8,084,000
ADR	$	168.03		$	180.00		$	190.74		$	187.34
Occupancy %		48.9	%		58.6	%		60.4	%		65.1	%
RevPAR	$	82.11		$	105.41		$	115.12		$	122.03

(1)	The hotel opened on January 27, 2001.

Mortgage Debt

The following table sets forth as of December 31, 2004, after giving effect to our acquisition of the Torrance Marriott Hotel in January 2005, our debt obligations on our hotel properties:

Property

Principal
Balance

Prepayment
Penalties

Interest Rate

Maturity
Date

Amortization
Provisions

Courtyard Manhattan/Midtown East

45,000,000

No(1)

5.195%

12/09

25 years

Torrance Marriott

44,000,000

(2)

No(3)

LIBOR(11)
+ 2.50%

1/07(8)

Interest Only

Salt Lake City Marriott Downtown

39,000,000

Yes(1)

5.50%

12/14

20 years(10)

Marriott Griffin Gate Resort

31,000,000

Yes(4)

5.11%

1/10

25 years

Bethesda Marriott Suites

19,827,573

Yes(5)

7.69%

2/23

25 years

Courtyard Manhattan/Fifth Avenue

23,000,000

No(6)

LIBOR(11)
+ 2.70%

1/07(8)

Interest Only

The Lodge at Sonoma Renaissance
Resort & Spa

20,000,000

No(7)

LIBOR(11)
+ 2.40%

11/06(9)

Interest Only

Total:

221,827,573

(1)

(2)	Includes $35,000,000 senior debt secured by a first mortgage and $9,000,000 subordinated debt.

(3)	The debt may be prepaid at any time except during the period from July 13, 2005 to January 13, 2006. We intend to repay the debt with the proceeds of this offering.

(4)

(5)	The debt may be prepaid. If it is prepaid prior to August 2012, it is subject to a prepayment fee equal to the greater of i) one percent of the outstanding principal amount or ii) a yield maintenance premium determined as set forth in the Deed of Trust.

(6)	The debt may be prepaid at par as of December 2005. We intend to repay the debt with the proceeds of this offering.

(7)	The debt may be prepaid at par at any time except during certain days each month as specified in the applicable loan agreement. We intend to repay the debt with the proceeds of this offering.

(8)	The debt allows for three one-year extensions provided that certain conditions are met.

(9)	The debt allows for one 12-month extension provided that certain conditions are met.

(10)	There is an accelerated amortization provision based on a predetermined formula of available cash flow.

(11)	We have entered into an interest rate cap on this debt. Breakage fees may be payable if the debt is repaid

Taxes on Proposed Capital Improvements

The following table sets forth the realty tax rate, annual realty taxes and estimated taxes on planned capital improvements to our hotel properties:


Property	Proposed Capital Improvements(1)		Annual Realty Taxes		Realty Tax Rate		Estimated Taxes on Proposed Capital Improvement(2)
Courtyard Manhattan/Midtown East	$	3,500,000	$	1,052,0000	1.48	%	$	52,000
Torrance Marriott		10,000,000		711,000	1.38			138,000
Salt Lake City Marriott Downtown		4,700,000		645,000	1.42			67,000
Marriott Griffin Gate Resort		1,700,000		325,000	0.79			13,000
Bethesda Marriott Suites		4,000,000		517,000	1.12			45,000
Courtyard Manhattan/Fifth Avenue		4,100,000		798,000	2.36			97,000

(1)	Proposed capital improvements are capital improvements expected to occur in 2005 and 2006.

(2)	Assumes that the property taxes will be applied to the proposed capital improvements using the current realty tax rate for the entire property.

Our Acquisition Properties

Proposed Acquisitions Under Contract. We intend to use a portion of the net proceeds from this offering to expand our initial portfolio by acquiring and investing in additional hotel properties. As of the date of this prospectus, we have properties under contract that we consider to be “probable” acquisitions. The following table sets forth information regarding those properties:

Property

Location

Year
Opened

Number of
Rooms

Average
Occupancy

ADR

RevPAR

Property

Location

Year
Opened

Number
of
Rooms

Purchase
Price

Pre-Funded
Capital
Improvements

Projected
Capital
Improvements

Total
Projected
Investment
Per Room

OUR PRINCIPAL AGREEMENTS

The following summary of the terms of our principal agreements does not purport to be complete and is subject to and qualified in its entirety by reference to the actual agreements, copies of which are exhibits to the registration statement of which this prospectus is a part. See “Where You Can Find More Information.”

The Information Acquisition Agreement

The Information Acquisition Agreement, dated July 6, 2004, between Marriott and our company, provides for an investment sourcing relationship in which Marriott provides to our company certain information relating to opportunities to purchase full service, urban select service or urban extended stay hotels in the United States.

Term

The term of the Information Acquisition Agreement commenced on July 1, 2004 and continues through June 30, 2006.

Obligations

We and Marriott have agreed not to enter into certain strategic agreements with other third parties for a two-year period.

Default

If either party breaches the Information Acquisition Agreement, the non-breaching party’s sole remedies are to seek injunctive relief or specific performance or to terminate the Information Acquisition Agreement.

Our Hotel Management Agreements

Our TRS lessees have entered into hotel management agreements with an affiliate of Marriott to manage the hotels as the property manager for each of our hotel properties.

Term

Our management agreements typically provide for an initial term that expires upon the end of the twentieth, thirtieth or fortieth full fiscal year after the effective date of the hotel management agreement. The term of the hotel management agreement is generally automatically renewed for a negotiated number of consecutive 10-year periods upon the expiration of the initial term unless the property manager gives notice to our TRS lessee of its election not to renew the hotel management agreement at least 300 days prior to the expiration of the then-current term.

The following table sets forth the effective date, initial term and number of renewal terms under the respective hotel management agreements for each of our initial properties:


	Date of Hotel Management Agreement	Initial Term	Number of Renewal Terms
Courtyard Manhattan/Midtown East	11/04	30 years	Two 10-year periods

Torrance Marriott	1/05	40 years	None

Salt Lake City Marriott Downtown	12/01	30 years	Three 15-year periods

Marriott Griffin Gate Resort	12/04	20 years	One 10-year period

Bethesda Marriott Suites	12/04	21 years	Two 10-year periods

Courtyard Manhattan/Fifth Avenue	1/05	30 years	None

The Lodge at Sonoma Renaissance Resort & Spa	10/04	20 years	One 10-year period

Amounts Payable under our Hotel Management Agreements

Under our hotel management agreements, the Marriott affiliate receives a base management fee and, if certain financial thresholds are met or exceeded, an incentive management fee. The base management fee is generally payable as a percentage of gross hotel revenues for each fiscal year. The incentive management fee is generally based on hotel operating profits and is typically equal to between 20% and 25% of hotel property operating profits but the fee only applies to that portion of hotel operating profits above a negotiated return on our invested capital. We refer to this excess of operating profits over a return on our invested capital as “available cash flow.”

The following table sets forth the base management fee and incentive management fee, generally due and payable each fiscal year, for each of our initial properties.


	Base Management Fee(1)		Incentive Management Fee(2)
Courtyard Manhattan/Midtown East	5	%	25%(3)
Torrance Marriott	3	%	20%(4)
Salt Lake City Marriott Downtown	3	%	Not more than 20%(5)
Marriott Griffin Gate Resort	3	%	20%(6)
Bethesda Marriott Suites	3	%	50%(7)
Courtyard Manhattan/Fifth Avenue	5	%(8)	25%(9)
The Lodge at Sonoma Renaissance Resort & Spa	3	%	20%(10)

(1)	As a percentage of gross revenues.

(2)	Based on a percentage of hotel operating profits above a negotiated return on our invested capital, as more fully described in the following footnotes.

(3)	Calculated as a percentage of operating profits in excess of 10.75% of the sum of (i) $73.7 million and (ii) the amount of certain capital expenditures.

(4)	Calculated as a percentage of operating profits in excess of the sum of (i) $7.5 million and (ii) 10.75% of certain capital expenditures.

(5)

The incentive management fee is equal to the available cash flow for each fiscal year, subject to a cap of 20% of operating profit for such fiscal year. Commencing with the fiscal year 2002, the operating profit with respect to each fiscal year is reduced by an amount equal to 10.75% of all material capital expenditures funded by the TRS lessee; provided that the material capital expenditures are included in the calculation of the incentive management fee with respect to the fiscal year or fiscal years during which such expenditures occurred (on a pro rata basis).

(6)	Calculated as a percentage of operating profits in excess of the sum of (i) $5.5 million and (ii) 10.75% of certain capital expenditures.

(7)

Calculated as a percentage of operating profits in excess of the sum of (i) the payment of certain loan procurement costs, (ii) 10.75% of certain capital expenditures, (iii) an agreed-upon return on certain expenditures and (iv) the value of certain amounts paid into a reserve account established for the replacement, renewal and addition of certain hotel goods.

(8)

The base management fee will be equal to 5.5% of gross revenues for fiscal years 2010 through 2014 and 6% for fiscal year 2015 and thereafter until the expiration of the agreement. Also, beginning in 2007, the base management fee may increase to 5.5% at the beginning of the next fiscal year if operating profits equal or exceed $4.7 million, and beginning in 2011, the base management fee may increase to 6.0% at the beginning of the next fiscal year if operating profits equal or exceed $5.0 million.

(9)	Calculated as a percentage of operating profits in excess of 12% of the sum of (i) $38.8 million and (ii) the amount of certain capital expenditures, less 5% of the total real estate tax bill (for as long as the hotel is leased to a party other than the manager).

(10)	Calculated as a percentage of operating profits in excess of the sum of (i) $3.6 million and (ii) 10.75% of capital expenditures.

Termination Events

Subject to the following exceptions, the hotel management agreements are generally non-terminable by our TRS lessee or the property manager.

•

Early Termination for Cause. Subject to certain qualifications, including based on materiality, the hotel management agreements are generally terminable upon (i) casualty or condemnation of the hotel or (ii) the occurrence of certain events of default. Events of default under the hotel management agreements generally include:

•

the filing by either party of a voluntary petition in bankruptcy or insolvency or a petition for reorganization under any bankruptcy law, or the admission by either party that it is unable to pay its debts as they become due;

•

the consent to an involuntary petition in bankruptcy or the failure to vacate, within 90 days from the date of entry thereof, any order approving an involuntary petition by either party;

•

the entering of an order, judgment or decree by any court, upon the application of a creditor, adjudicating either party as bankrupt or insolvent or approving a petition seeking reorganization or appointing a receiver, trustee, or liquidator of all or a substantial part of either party’s assets, that remains in effect for an aggregate of 60 days;

•

the failure of either party to make any payment required to be made under the hotel management agreement, as of the due date as specified in the agreement, and not cured within 10 days after receipt of notice from the non-defaulting party;

•

our TRS lessee or any of its affiliates being or becoming a specially designated national or blocked person; or

•

the failure of either party to perform, keep or fulfill any of its other covenants, undertakings, obligations or conditions set forth in the hotel management agreement, subject to a 30 day cure period.

If an event of default occurs and continues beyond the grace period set forth in the hotel management agreement, the non-defaulting party generally has, among other remedies, the option of terminating the applicable hotel management agreement, upon 30 days’ notice to the other party, unless the defaulting party is the property manager, in which case 75 days’ notice is required.

Performance Termination. The hotel management agreements are generally terminable by our TRS lessee earlier than the stated term, subject to certain limitations, as a result of the failure of the hotel to meet certain market and financial performance thresholds over a period of two consecutive years. In the event a performance termination is issued, the property manger may avoid termination of the agreement by making a cure payment to our TRS lessee. In the case of The Lodge at Sonoma Renaissance Resort and Spa, Courtyard Manhattan/Midtown East and Marriott Griffin Gate Resort, the applicable TRS lessee cannot terminate the hotel management agreement based on performance until 2009. In the case of Courtyard Manhattan/Fifth Avenue and Torrance Marriott, the applicable TRS lessee cannot terminate the hotel management agreement based on performance until 2011. The hotel management agreement for Marriott Salt Lake City Downtown does not provide for performance-based termination by our TRS lessee.

Sale or Lease of a Hotel

Under the hotel management agreements, we generally may not sell or lease the hotel to any person or entity that the property manager determines in its reasonable judgment:

•

does not meet certain financial and liquidity requirements;

•

is known in the community as being of bad moral character or has been convicted, or is under the control of a person or entity that has been convicted, of a felony;

•

has an ownership interest in at least 10 full-service hotels or 25 select-service hotels that are competitors with Marriott or any Marriott affiliate; or

•

is a “specially designated national or blocked person,” as that term is defined by the U.S. Department of Treasury’s Office of Foreign Assets Control.

Prior to offering the hotel for sale or negotiating with any third party, we generally must give the property manager notice of a possible sale or lease of the hotel. Upon receipt of a notice of sale or lease, we have generally agreed, for a period of 20 days, to negotiate with the property manager to reach a mutually satisfactory agreement for the purchase of the hotel by the property manager. If such agreement is not reached within the 20-day negotiation period or if such sale would jeopardize our REIT status, we may offer the hotel for sale or lease to a third party. We generally then must provide the property manager with a notice of proposed sale stating the name of the proposed purchaser, price or rental terms and terms and conditions of such sale or lease. Within 20 days of receipt of such notice, the property manager may either (1) elect to consent to the sale or lease and the assignment to the purchaser or tenant of the applicable hotel management agreement or (2) not consent to such sale or lease based on the purchaser or tenant not meeting the requirements listed above.

Under the hotel management agreement for Marriott Salt Lake City Downtown, we generally may not sell the hotel to any person or entity that the property manager determines:

•

does not have sufficient financial resources and liquidity to fulfill the obligations of the hotel owner under the hotel management agreement;

•

is itself, or is in control of or is controlled by, a person or entity that has been convicted of a felony involving moral turpitude; or

•

is an operator (or a person or entity that controls an operator) of a branded full-service hotel chain with more than 10,000 rooms, or a branded select-service or extended-stay hotel chain with more than 25,000 rooms that is a competitor with Marriott or any Marriott affiliate.

Assuming we comply with all of the requirements to sell the hotel, including the above requirements regarding the identity of the buyer, the hotel management agreement for Marriott Salt Lake City Downtown does not require the property manager’s consent for the sale of the hotel.

TRS Lessee Obligations

The hotel management agreements generally require our TRS lessee to fund working capital needs, fixed asset supplies, capital expenditures and any operating losses. Furthermore, the TRS lessee’s financing of each hotel property cannot exceed certain debt service coverage ratios. The hotel management agreements generally also require that the hotel property meet the property manager’s system standards regarding physical, operational and technological components of the applicable hotel property.

Property Manager Obligations

The hotel management agreements generally provide that, subject to certain limited owner approval rights, the property manager has control of all operational aspects of the hotel property, including employee-related matters, and is reimbursed for all direct and indirect operating expenses. The property manager also generally

provides, among other things, centralized reservation systems, national advertising, marketing and promotional services and receives a service fee in the form of a deduction from gross revenues in exchange for such services. Furthermore, the property manager must generally maintain each hotel in good repair and condition and make such routine maintenance, repairs and minor alterations as it deems reasonably necessary. We generally initiate a reserve account to cover the cost of such maintenance and repair. The property manager also is generally responsible for paying on our behalf real estate or property taxes, with such payment to come from our hotel’s cash flow.

Insurance

The hotel management agreements generally provide that our TRS lessee is responsible for obtaining and maintaining property insurance, business interruption insurance, flood insurance, earthquake insurance (if the hotel property is located in an “earthquake prone zone” as determined by the U.S. Geological Survey) and other customary types of insurance related to hotel properties.

Assignment

The hotel management agreements generally provide that neither the property manager nor our TRS lessee may assign their interest in the agreement without the other party’s prior consent. However, the property managers of our properties, which are all Marriott affiliates, may generally assign its interests in the agreement without consent to Marriott or another Marriott affiliate or pursuant to a merger or sale of either Marriott or itself. Our TRS lessee may generally assign its interests in the agreement as security for a mortgage encumbering the hotel in accordance with the agreement and in connection with a sale of a hotel complying with the provisions of the agreement. In general, no assignment will release our TRS lessee from any of its obligations under its hotel management agreement.

Damage to Hotels

The hotel management agreements generally provide that if the hotel property suffers a “minor casualty,” which is defined as repair or replacement cost in excess of 10% of the hotel’s insured value, the property manager is required to proceed with necessary insurance claims and repair any such minor damage. In the event of a “total casualty,” the agreement is generally terminable at the option of either party upon 90 days written notice to the other party. For any damage events that are more severe than minor but not a “total casualty,” our TRS lessee is generally required at its cost and expense, and with all reasonable diligence, to repair and/or replace the damaged portion of the property to the same condition as it had existed previously. A “total casualty” is generally defined as any fire or other casualty that results in damage to the hotel property and its contents to the extent that the total cost of repairing and/or replacing the damaged portion of the hotel property to the same condition as it had existed previously would be 40% or more of the then-total replacement cost of the hotel property.

The hotel management agreement for Marriott Salt Lake City Downtown provides that our TRS lessee is required to repair or replace any damaged portion of the hotel. If damage or destruction of the Marriott Salt Lake City Downtown hotel adversely affects the operation of the hotel and our TRS lessee fails to timely commence and complete the repairing, rebuilding or replacement of the hotel so that it is in substantially the same condition as it was prior to such damage or destruction, the property manager may, at its option, elect to terminate the agreement upon 120 days prior written notice.

Condemnation of a Property

The hotel management agreements generally provide that if all or substantially all of the hotel property is taken (or a portion of the hotel property is taken, but the result is that it is unreasonable to continue to operate the hotel property) in any eminent domain, condemnation, compulsory acquisition, or similar proceeding, the agreement will terminate and each party will have the right to initiate proceedings to recover compensation for such taking.

Indemnity Provisions

The hotel management agreements generally provide that the property manager will indemnify our TRS lessee for any liabilities stemming from the general corporate matters of the property manager or its majority-owned affiliates, to the extent such matters are not directly and primarily related to the hotel property, and infringement and other claims relating to trademarks related to the property manager with respect to the applicable hotel property, among other things. In addition to the liabilities above, the hotel management agreement for Marriott Salt Lake City Downtown also provides that the property manager will indemnify our TRS lessee for any liabilities stemming from a failure to maintain adequate insurance coverage and the bad faith or willful misconduct of the property manager’s agents or employees, in both cases, to the extent such liability exceeds the insurance proceeds available to pay such claims.

Our TRS lessee is generally responsible for indemnifying the property manager against liabilities arising from:

•

a failure to procure and maintain insurance that the TRS lessee is required to procure and maintain under the hotel management agreements;

•

a failure to make mortgage payments; and

•

the presence of hazardous materials on the site of the hotel property, except where such hazardous materials are the result of the gross negligence or willful misconduct of a member of the property manager’s executive team for that particular hotel property, in which case the property manager will indemnify our TRS lessee against any liabilities arising from the presence of hazardous materials on the site of the hotel property.

In the case of the hotel management agreement for Marriott Salt Lake City Downtown, (i) the property manager is responsible for indemnifying our TRS lessee against liabilities arising from the placing, discharge, leakage, use or storage of hazardous materials, in violation of applicable environmental laws, at the hotel property by the property manager’s employees, representatives or agents and (ii) to the extent hazardous material is not the responsibility of the property manager, our TRS lessee is responsible for removing such hazardous material from the hotel property and indemnifying the property manager against liabilities arising from the presence of such hazardous material at the hotel property.

Our TRS Leases

In order for us to qualify as a REIT, neither our company, the operating partnership nor any subsidiary can operate our hotels. Our operating partnership, or subsidiaries of our operating partnership, as lessors, lease our hotels to our TRS lessee and our TRS lessee enters into hotel management agreements with a third-party manager to manage the hotels. We have engaged a Marriott affiliate as the property manager for each of our seven hotel properties. The leases for our hotel properties contain the provisions described below.

Lease Terms

Each lease has an initial term of approximately five years, except for the lease relating to the Marriott Griffin Gate Resort, which has an initial term of approximately six years, and is subject to early termination upon the occurrence of certain events of default and/or other contingencies described in the lease (including the provisions described below under “—Damage to Hotels,” and “—Condemnation of Hotels”).

Amounts Payable Under the Leases

During the term of each lease, our TRS lessee will be obligated to pay a fixed annual base rent plus a percentage rent and certain other additional charges. Base rent is paid monthly. Percentage rent is calculated by multiplying fixed percentages by gross room revenues in excess of certain threshold amounts. Percentage rent is paid either monthly or annually.

Other than real estate taxes, property taxes, certain insurance obligations and capital improvements, which are obligations of the lessor, the leases require our TRS lessee to pay rent, all costs and expenses and all utility and other charges incurred in the operation of the hotels it leases. The leases also provide for rent reductions and abatements in the event of damage to, or destruction or a partial taking of, any hotel as described under “—Damage to Hotels” and “—Condemnation of Hotels.”

Maintenance and Modifications

Under each lease, the lessor is required to maintain the structural elements of the improvements and the roof of the property. Except for capital improvements and maintenance of structural elements, our TRS lessee is required, at its expense, to maintain the hotels in good order and repair, except for ordinary wear and tear, and to make non-structural repairs that may be necessary and appropriate to keep the property in good order and repair and that are least equivalent in quality to the original work. Our TRS lessee shall also maintain the property in the character as provided by Lessor and as required by the lease, and, if applicable, in compliance with the standards of the applicable hotel management agreement.

Insurance and Property Taxes

Under each lease, the lessor is responsible for paying real estate and personal property taxes with respect to our hotel properties. Additionally, the lessor is obligated to maintain and cover the costs of (i) obtaining insurance covering the building of which the leased premises is a part, fixtures and certain personal property on an “all risk,” broad form basis, against such risks as are customarily covered by such insurance (including boiler and machinery insurance and damage resulting from flood) and (ii) business interruption insurance. The TRS lessee is required to pay for all liability insurance on the hotels, including commercial general liability, workers’ compensation, employment practices general liability, crime, auto, liquor liability, innkeepers legal liability, insurance covering such other hazards (such as plate glass or other common risks) and other insurance appropriate and customary for properties similar to their respective hotels and naming us, where applicable, as an additional named insured.

Assignment, Subleasing and Change of Control

Our TRS lessee is not permitted to sublet all or any part of a property or to assign its interest under the lease without our prior written consent. In case of either an assignment or subletting made during the term of the Lease, the TRS lessee shall remain primarily liable, as principal rather than as surety, for the prompt payment of rent and for the performance and observance of all of the covenants and conditions to be performed by it.

Damage to Hotels

In the event the hotel property is totally or partially damaged and rendered unsuitable or uneconomic for its primary use, the lease shall terminate and neither party shall have further liability, except for liabilities that arose prior to, or which survive, such termination. If the hotel property is partially destroyed by a risk covered by insurance and the property is not rendered unsuitable or uneconomic for its primary use, we, or, at our election the TRS lessee, shall restore the property to substantially the same condition as existed immediately prior to such damage or destruction and the lease shall not terminate. If any repair to the hotel exceeds the coverage of such insurance, we must contribute any excess amounts needed to restore the property prior to requiring the TRS lessee to commence any repairs.

Condemnation of Hotels

In the event of a total condemnation of a hotel property, the relevant lease will terminate with respect to such hotel as of the date of such condemnation. In the event of a partial taking that renders the property unsuitable or uneconomic for its primary intended use, then either party shall have the right to terminate the lease. In either of the above two situations, each party will be entitled to its share of any condemnation award in

accordance with the provisions of the lease. In the event of a partial taking that does not render the property unsuitable for the lessee’s use, we, or at our election the TRS lessee, shall restore the untaken portion of the property to a complete architectural unit of the same general character and condition as existed immediately prior to the condemnation, subject to the receipt of sufficient condemnation awards.

Events of Default

Events of default under the leases include, among others, the following:

•

the failure by our TRS lessee to pay base rent, percentage rent or additional charges within 10 days after receipt by lessee of a notice of default;

•

the failure by our TRS lessee to observe or perform any other term, covenant or condition of a lease and the continuation of such failure for a period of 30 days after receipt by our TRS lessee of notice from us thereof, unless such failure cannot with due diligence be cured within such period and our TRS lessee commences appropriate action to cure such failure and diligently completes the curing thereof, but in no event shall the cure period extend beyond 120 days after notice;

•

if our TRS lessee files a petition in bankruptcy or reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law, or is adjudicated a bankrupt or makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due, or if a petition or answer proposing the adjudication of our TRS lessee as a bankrupt or its reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law is filed in any court and our TRS lessee is adjudicated a bankrupt and such adjudication is not vacated or set aside or stayed within 60 days after the entry of an order in respect thereof, or if a receiver of our TRS lessee or of all or substantially all of the assets of our TRS lessee is appointed in any proceeding brought by our TRS lessee or if any such receiver, trustee or liquidator is appointed in any proceeding brought against our TRS lessee and such appointment is not vacated or set aside or stayed within 60 days after such appointment; or

•

if our TRS lessee voluntarily discontinues operations on the leased property, except as a result of damage, destruction, unavoidable delay or a partial or complete condemnation.

If an event of default occurs and continues beyond any curative period, we will have the option of reclaiming the leased property. We intend that leases with respect to our hotels acquired in the future will contain substantially similar provisions, although we may, in our discretion, alter any of these provisions with respect to any particular lease.

Termination of Leases on Disposition of the Hotels

We have the right to terminate the lease by paying our TRS lessee a termination fee to be governed by the terms and conditions of the lease.

Our Ground Lease Agreements

Four of our hotels are subject to ground lease agreements that cover either all or portions of land underlying the respective hotel property:

•

The Salt Lake City Marriott Downtown is subject to two ground leases: one ground lease covers the land under the hotel and the other ground lease covers the portion of the hotel that extends into the Crossroads Plaza Mall. The term of the ground lease covering the land under the hotel runs through 2056, inclusive of our renewal options, and the term of the ground lease covering the extension runs through 2017, inclusive of the remaining ten-year renewal option.

•

The golf course which is part of the Marriott Griffin Gate Resort is subject to a ground lease covering approximately 54 acres. The ground lease runs through 2033, inclusive of our renewal options. We have the right, beginning in 2013 and upon the expiration of any 5-year renewal term, to purchase the property covered by such ground lease for an amount ranging from $27,500 to $37,500 per acre, depending on which renewal term has expired. The ground lease also grants us the right to purchase the

leased property upon a third party offer to purchase such property on the same terms and conditions as the third party offer. We are also the sub-sublessee under another minor ground lease of land adjacent to the golf course, with a term expiring in 2020. Rent for the entire term was $1 and has been paid in full.

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The Bethesda Marriott Suites hotel is subject to a ground lease that runs until 2087. There are no renewal options.

•

The Courtyard Manhattan/Fifth Avenue is subject to a ground lease that runs until 2085, inclusive of one 49-year renewal option.

These ground leases generally require us to make rental payments (including a percentage of gross receipts as percentage rent with respect to the Courtyard Manhattan/Fifth Avenue ground lease) and payments for all, or in the case of the ground leases covering the Salt Lake City Marriott Downtown extension and a portion of the Griffin Marriott Griffin Gate Resort golf course, our tenant’s share of, charges, costs, expenses, assessments and liabilities, including real property taxes and utilities. Furthermore, these ground leases generally require us to obtain and maintain insurance covering the subject property.

The following table reflects the annual base rents of our ground leases:


Property	Term(1)	Annual Rent
Salt Lake City Marriott
(Ground Lease for Hotel)	Through 12/56	Greater of $132,000 or 2.6% of annual gross room sales

(Ground Lease for Extension)	Through 12/07	$9,343
	1/08-12/12	10,277
	1/13-12/17	11,305

Marriott Griffin Gate Resort	9/03-8/08	90,750
	9/08-8/13	99,825
	9/13-8/18	109,800
	9/18-8/23	120,750
	9/23-8/28	132,750
	9/28-8/33	147,000

Bethesda Marriott Suites	Through 10/87	374,125(2)

Courtyard Manhattan/Fifth Avenue(3)	10/97-9/07	800,000
	10/07-9/17	906,000
	10/17-9/27	1,132,812
	10/27-9/37	1,416,015
	10/37-9/47	1,770,019
	10/47-9/57	2,212,524
	10/57-9/67	2,765,655
	10/67-9/77	3,457,069
	10/77-9/85	4,321,336

(1)

These terms assume our exercise of all renewal options.

(2)

Represents rent for the year commencing on November 2004 and ending on October 2005. Rent will increase annually by 5.5%

(3)

The ground lease term is 49 years. We have the right to renew the ground lease for an additional 49 year term on the same terms then applicable to the ground lease.

Subject to certain limitations, an assignment of the ground leases covering the Courtyard Manhattan/Fifth Avenue and a portion of the Marriott Griffin Gate Resort golf course do not require the consent of the ground lessor. With respect to the ground leases covering the Salt Lake City Marriott Downtown hotel and extension and Bethesda Marriott Suites, any proposed assignment of our leasehold interest as ground lessee under the ground lease requires the consent of the applicable ground lessor. As a result, we may not be able to sell, assign, transfer or convey our ground lessee’s interest in any such property in the future absent the consent of the ground lessor, even if such transaction may be in the best interests of our stockholders.

MANAGEMENT

Our Directors and Senior Executive Officers

Our board of directors consists of six directors, four of whom are independent directors in accordance with the listing standards established by the New York Stock Exchange. Our directors serve for one-year terms and until their successors are duly elected and qualified. There is no cumulative voting in the election of directors. Consequently, at each annual meeting the successors to each of our six directors will be elected by a plurality of the votes cast at that meeting. Each of our officers has served as such since our inception in May 2004, except for Sean M. Mahoney, who has served as an officer since August 2004. Each of our directors has served as such since completion of our July 2004 private placement, except for Messrs. McCarten and Williams, who have served as directors since May 2004 and June 2004, respectively. Certain information regarding our directors and senior executive officers is set forth below.


Name	Age	Position
William W. McCarten	56	Chairman of the Board, Chief Executive Officer and Director
John L. Williams	53	President, Chief Operating Officer and Director
Daniel J. Altobello*(1)(2)(3)	64	Director
W. Robert Grafton*(1)(2)(4)	64	Director
Gilbert T. Ray*(2)(3)	60	Director
Maureen L. McAvey*(1)(3)	59	Director
Mark W. Brugger	35	Executive Vice President, Chief Financial Officer and Treasurer
Michael D. Schecter	40	General Counsel and Secretary
Sean M. Mahoney	34	Chief Accounting Officer and Corporate Controller

*	Independent Director

(1)	Member of our Audit Committee.

(2)	Member of our Compensation Committee.

(3)	Member of our Nominating and Corporate Governance Committee.

(4)	Mr. Grafton serves as our Lead Director.

The following is a summary of certain biographical information concerning our directors and our senior executive officers.

William W. McCarten is our Chairman of the Board, Chief Executive Officer and a member of our board of directors. Mr. McCarten worked for the Marriott Corporation, or Marriott International, Inc., and its related entities for over twenty-five years and retired from Marriott in January 2004. From 2001 to 2003, Mr. McCarten served as President of the Marriott Services Group within Marriott International, Inc. From 1995 to 2000, Mr. McCarten served as the President and Chief Executive Officer of HMSHost Corporation, formerly Host Marriott Services Corporation, a publicly held developer and operator of restaurant and retail concessions in travel and entertainment venues listed on the New York Stock Exchange. In addition, Mr. McCarten served as non-executive Chairman of HMSHost Corporation from 2000 to 2001. As Chief Executive Officer of HMSHost Corporation, Mr. McCarten oversaw the spin-off of that company from Host Marriott Corporation through its merger with Autogrill, S.P.A. Several weeks before the announcement of the spin-off in 1995, the common stock of HMSHost Corporation traded at $6.25 per share and HMSHost Corporation was subsequently purchased by Autogrill, S.P.A. in 1999 for $15.75 per share (a 252% return). From 1993 to 1995, Mr. McCarten was Executive Vice President and Operating Group President of Host Marriott Corporation. Mr. McCarten was President—Host and Travel Plazas for the Marriott Corporation from 1992 to 1993 and served as Executive Vice President—Host and Travel Plazas from 1991 to 1992. From 1986 to 1991, Mr. McCarten was Senior Vice President, Finance and Corporate Controller of Marriott Corporation. From 1979 to 1986, Mr. McCarten served in various executive positions at Marriott. Prior to joining Marriott, Mr. McCarten was an accountant with Arthur Andersen & Co. from 1970 to 1979. Mr. McCarten received his B.S. in Accounting from the McIntire School of Commerce at the University of Virginia in 1970, and he served on the Advisory Board of the McIntire School from 1981 to 1996.

John L. Williams serves as our President and Chief Operating Officer and is a member of our board of directors. Mr. Williams worked for the Marriott Corporation, or Marriott International, Inc., and its related entities for over twenty-five years. Mr. Williams most recently served as Executive Vice President of North American Hotel Development for Marriott International. From 1993 to 2004, Mr. Williams served as Senior and Executive Vice President of Development. From 1991 to 1992, Mr. Williams, while on a leave of absence from Marriott, served as the Chief Acquisition Executive for Lodging Opportunities, the initial lodging fund sponsored by the Thayer organization. From 1982 to 1990, Mr. Williams was Vice President of Hotel Development, where he was responsible for the development of Marriott hotels in the western United States (1982-1985) and the northeastern United States (1984-1990). Mr. Williams was a Director of Feasibility from 1980 to 1982. Prior to joining the Marriott Corporation in 1980, Mr. Williams was a senior consultant with Laventhal and Horwath. Mr. Williams received a BS/BA from Denver University with a major in Hotel and Restaurant Management and B.A. in American Studies from Denver University in 1973. In addition, Mr. Williams performed graduate coursework at the University of Missouri at Kansas City with a concentration in finance.

Daniel J. Altobello is a member of our board of directors. Mr. Altobello has been Chairman of Altobello Family LP since 1991. Mr. Altobello also served as Chairman of the Board of Directors of Onex Food Services, Inc., the parent corporation of Caterair International, Inc. and LSG/SKY Chefs from 1995 to 2001. From 1989 to 1995, Mr. Altobello was the Chairman, Chief Executive Officer and President of Caterair International Corporation. He currently serves on the board of directors of JER Investors Trust, Inc., MESA Air Group, World Airways, Inc. and Friedman, Billings, Ramsey Group, Inc., the parent of Friedman, Billings, Ramsey & Co., Inc. (which is serving as a lead managing underwriter in this offering). In addition, Mr. Altobello serves on the Advisory Board of Thayer Capital Partners and on the boards of two non-reporting companies, Associated Asphalt and Mercury Air Group.

W. Robert Grafton is a member of our board of directors and serves as our Lead Director. Mr. Grafton is a retired certified public accountant. He retired from Andersen Worldwide S.C. in 2000. Andersen Worldwide provided global professional auditing and consulting services through its two service entities, Arthur Andersen and Andersen Consulting. Mr. Grafton joined Arthur Andersen in 1963 and was elected a member of the Board of Partners of Andersen Worldwide in 1991. Mr. Grafton was elected Chairman of the Board of Partners in 1994 and served as Managing Partner—Chief Executive from 1997 through 2000. Mr. Grafton serves on the board of directors of Carmax Inc., a publicly traded company listed on the New York Stock Exchange, where he also serves as Chairman of the Audit Committee.

Maureen L. McAvey is a member of our board of directors. Ms. McAvey has been a Senior Resident Fellow and ULI/Klingbeil Family Chair for Urban Development at the Urban Land Institute (“ULI”) in Washington, DC since 2001. ULI is a premier research and education organization within the real estate and land use industry. Ms. McAvey was a member of the board of trustees of ULI from 1995 to 2001. Prior to joining ULI, from 1998 to 2001, Ms. McAvey was Director, Business Development, for Federal Realty Investment Trust, an owner and manager of retail developments and mixed-use developments and a publicly traded company listed on the New York Stock Exchange. Ms. McAvey also has served as the Director of Development for the City of St. Louis, a cabinet level position in the Mayor’s office and she was Executive Director of the St. Louis Development Corporation. Prior to working for the city of St. Louis, Ms. McAvey led the real estate consulting practices in Boston for Deloitte & Touche and Coopers & Lybrand. Ms. McAvey directed the west coast operations of Carley Capital Group, a national development firm and also has experience as a private developer. Ms. McAvey holds two master’s degrees, one from the University of Minnesota and one from the Kennedy School of Government, Harvard University.

Gilbert T. Ray is a member of our board of directors. Mr. Ray was a partner in the law firm of O’Melveny & Myers LLP until his retirement in 2000. He practiced corporate law for almost three decades, and has extensive experience with corporate and tax exempt transactions, as well as international finance. Mr. Ray is a member of the board of directors of Advance Auto Parts, Inc., Watson Wyatt & Company Holdings and IHOP Corp., each a publicly traded company listed on the New York Stock Exchange. In addition, Mr. Ray is a

member of the board of directors of Automobile Club of Southern California and Sierra Monolithics, Inc. Mr. Ray is also a trustee of SunAmerica Series Trust, Seasons Series Fund, The John Randolph Haynes and Dora Haynes Foundation, and St. John’s Health Center Foundation.

Mark W. Brugger serves as our Executive Vice President and Chief Financial Officer. Previously, Mr. Brugger served as Vice President—Project Finance for Marriott International, Inc., from 2000 to 2004. From 2001 to 2004, Mr. Brugger also served as Chief Executive Officer of Synthetic Fuel Enterprises, a wholly-owned subsidiary of Marriott International, Inc. with annual revenues in excess of $300 million. From 1997 to 2000, Mr. Brugger served as Vice President—Investment Sales of Transwestern Commercial Services, formerly the Carey Winston Company. From 1995 to 1997, Mr. Brugger was the Land Development Director for Coscan Washington, Inc. Mr. Brugger received a Juris Doctorate from American University School of Law in 1995 and a B.A. from the University of Maryland at College Park in 1992.

Michael D. Schecter serves as our General Counsel. Previously, Mr. Schecter served as Senior Counsel of Marriott International, Inc., from 1998 to 2004. From 1991 to 1998, Mr. Schecter was an associate at Sullivan & Cromwell in their Washington, D.C. and Melbourne, Australia offices. From 1990 to 1991, Mr. Schecter served as a law clerk to the Honorable Frank M. Johnson, Jr. of the United States Court of Appeals for the Eleventh Circuit. Mr. Schecter received a Juris Doctorate from Cornell Law School in 1990 and a B.A. from Bates College in 1986.

Sean M. Mahoney serves as our Chief Accounting Officer and Corporate Controller. Previously, Mr. Mahoney served as a senior manager with Ernst & Young LLP in McLean Virginia. During 2002 and 2003 Mr. Mahoney served as a Director in the Dublin, Ireland audit practice of KPMG. From 1993 to 2001, Mr. Mahoney worked in the audit practice of Arthur Andersen LLP. Mr. Mahoney is a member of the American Institute of Certified Public Accountants and is a Virginia C.P.A. Mr. Mahoney received a B.S. from Syracuse University in 1993.

Corporate Governance Profile

We believe that we have organized our corporate structure and governance to align our interests with those of our stockholders. For example:

•

our board of directors consists of six directors, four of whom are “independent directors” with independence being determined in accordance with the listing standards established by the New York Stock Exchange, and our board of directors will make an affirmative determination of the independence of each of our directors on an annual basis;

•

a majority of our independent directors designate a Lead Director, whose responsibilities include:

•

assisting the board in complying with our corporate governance guidelines;

•

coordinating the agenda and moderating sessions of our board’s independent directors; and

•

acting as chief liaison between the independent directors and our president and chief operating officer;

•

our directors are re-elected annually by a plurality of our stockholders;

•

we have adopted a Code of Business Conduct and Ethics, which addresses, among other things, corporate opportunity and conflicts of interest issues relevant to our directors, officers and employees;

•

we do not have a stockholder rights plan;

•

we have opted out of the Maryland business combination and control share acquisition statutes; and

•

we have adopted corporate governance guidelines, which among other things, specify that our directors should develop a significant ownership stake in our company over time in order to align their interests with those of our stockholders.

Board of Directors and Committees

Our business and affairs are managed under the direction of our board of directors. Currently our board of directors consists of six directors, with two management directors and four “independent” directors with independence being determined in accordance with the listing standards established by the New York Stock Exchange.

Our board of directors has established an Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee and has adopted written charters for each committee.

Audit Committee

Our Audit Committee is comprised of three independent directors, Daniel J. Altobello, W. Robert Grafton and Maureen L. McAvey. Mr. Grafton serves as the chairperson and the audit committee financial expert, as that term is defined by the SEC, of the Audit Committee. Our Audit Committee, pursuant to its written charter, assists our board of directors in its oversight of (i) our accounting and financial reporting processes; (ii) the integrity and audits of our financial statements; (iii) our compliance with legal and regulatory requirements; (iv) the qualifications, independence and performance of our independent auditors; and (v) the performance of our internal audit function. The Audit Committee, among other things, also:

•

is responsible for the appointment, retention and termination of our independent auditors and determines the compensation of our independent auditors;

•

annually evaluates the independent auditors’ qualifications, performance and independence;

•

has sole authority to approve in advance all audit, internal control-related and non-audit services by our independent auditors, the scope and terms thereof, and the fees therefor;

•

sets policies with respect to the potential hiring of current or former employees of the independent auditor;

•

meets at least quarterly with our senior executive officers, internal auditors and our independent auditors in separate executive sessions;

•

annually reviews and assesses the adequacy of the Audit Committee charter and recommends to our board of directors any amendments or modifications to the Audit Committee charter that the Audit Committee deems appropriate; and

•

annually evaluates the performance of the Audit Committee and reports the results of such an evaluation to our board of directors.

Nominating and Corporate Governance Committee

Our Nominating and Corporate Governance Committee is comprised of three independent directors, Daniel J. Altobello, Maureen L. McAvey and Gilbert T. Ray. Mr. Ray serves as the chairperson of our Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee, pursuant to its written charter, is responsible for, among other things:

•

identifying and recommending qualified individuals to become members of our board of directors;

•

recommending to our board of directors criteria for membership on our board of directors and committee membership, including any specific minimum qualifications;

•

recommending to our board of directors the directors for appointment to committees of our board of directors;

•

developing and recommending to our board of directors a set of corporate governance guidelines and policies and a code of ethics, and periodically reviewing and recommending any changes to such guidelines and code;

•

overseeing the annual performance evaluation of our board of directors;

•

establishing policies for the identification and consideration of director candidates recommended by stockholders or securityholders;

•

reviewing and assessing the Nominating Committee Charter and submitting proposed changes to our board of directors; and

•

performing an annual performance evaluation of the Nominating Committee and reporting the results to our board of directors.

Compensation Committee

Our Compensation Committee is comprised of three independent directors, Daniel J. Altobello, W. Robert Grafton and Gilbert T. Ray. Mr. Altobello serves as the chairperson of our Compensation Committee. The Compensation Committee, pursuant to its written charter, among other things:

•

reviews and approves or makes recommendations to our board of directors with respect to the compensation for our executive officers and non-employee directors;

•

reviews and approves or makes recommendations to the board of directors with respect to our incentive-based and equity-based plans; and

•

reviews and assesses the adequacy of the Compensation Committee charter and submits proposed changes to our board of directors;

The Compensation Committee also reviews and approves corporate goals and objectives relevant to chief executive officer compensation, evaluates the chief executive officer’s performance in light of those goals and objectives, and determines and approves the chief executive officer’s compensation levels based on its evaluation. Our Compensation Committee has the authority to retain and terminate any compensation consultant to be used to assist in the evaluation of chief executive officer or other executive officer compensation.

Compensation Committee Interlocks and Insider Participation

There are no Compensation Committee interlocks and none of our employees participates on the Compensation Committee.

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics, or our Code of Ethics, relating to the conduct of our business by our employees, officers and directors. Day-to-day responsibility for administering and interpreting our Code of Ethics has been delegated by our board of directors to Mr. Schecter, the compliance officer and our general counsel. Our Code of Ethics generally provides, among other things, that our directors, officers and employees must:

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not engage in any unlawful activity in conducting our business;

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protect our assets that are entrusted to them and take steps to ensure that our assets are used only for legitimate business purposes;

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not divert corporate opportunities that are discovered through the use of our property or information to himself or herself unless that opportunity has first been presented to, and rejected by, us;

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not use our property or information for his or her improper personal gain;

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not compete with us;

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not disclose or distribute our confidential information, except when such disclosure is authorized by us or required by law; and

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deal ethically and lawfully with our customers, suppliers, competitors and employees;

Our Code of Ethics also contains compliance procedures, allows for the anonymous reporting of a suspected violation of our Code of Ethics and specifically forbids retaliation against any officer or employee who reports suspected misconduct in good faith. The provisions of our Code of Ethics may only be waived or amended by our board of directors or, if permitted, a committee of our board of directors. Such waivers of amendments must be promptly disclosed to our stockholders.

Conflicts of Interest

Our Code of Ethics also contains a conflicts of interest policy to reduce potential conflicts of interest. Our conflicts of interest policy provides that any material transaction or relationship that reasonably could be expected to give rise to a conflict of interest should be reported promptly to the compliance officer, who must then notify our board of directors or a committee of the board of directors. Actual or potential conflicts of interest involving a director, officer or the compliance officer should be disclosed directly to our chairman of the board of directors and the chairperson of our Nominating and Corporate Governance Committee. A “conflict of interest” occurs when a director’s, officer’s or employee’s personal interest interferes with our interests. In general, this means that our directors, officers and employees must avoid situations that present a potential or actual conflict between their personal interests and our interests. However, we cannot assure you that this policy will be successful in eliminating the influence of these potential conflicts.

Maryland law provides that a contract or other transaction between a corporation and any of the corporation’s directors or any other entity in which that director is also a director or has a material financial interest is not void or voidable solely on the grounds of the common directorship or interest, the fact that the director was present at the meeting at which the contract or transaction is approved or the fact that the director’s vote was counted in favor of the contract or transaction, if:

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the fact of the common directorship or interest is disclosed to the board or a committee of the board, and the board or that committee authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even if the disinterested directors constitute less than a quorum;

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the fact of the common directorship or interest is disclosed to stockholders entitled to vote on the contract or transaction, and the contract or transaction is approved by a majority of the votes cast by the stockholders entitled to vote on the matter, other than votes of stock owned of record or beneficially by the interested director, corporation, firm or other entity; or

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the contract or transaction is fair and reasonable to the corporation.

Vacancies on our Board of Directors

Our charter provides that, when we have three independent directors and our common stock is registered under the Exchange Act, we elect to be subject to certain provisions of the MGCL regarding the filling of vacancies on the board of directors. Accordingly, at such time, any and all vacancies on our board of directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy shall serve for the remainder of the full term of the directorship in which such vacancy occurred and until a successor is elected and qualified. Any director may resign at any time and may be removed with or without cause by our stockholders upon the affirmative vote of at least two-thirds of all the votes entitled to be cast for the election of directors.

Compensation of Directors

As compensation for serving on our board of directors, each of our non-employee directors receives an annual fee of $20,000 and an additional fee of $1,500 for each board of directors meeting or committee meeting attended ($750 for telephonic meetings). Committee chairpersons receive an additional $5,000 with the Audit Committee chairperson receiving an additional $15,000 per year. Our Lead Director receives an additional $10,000 per year. In addition, we reimburse our directors for their reasonable out-of-pocket expenses incurred in

attending board of directors and committee meetings. Directors who are also employees are not separately compensated for services as a director other than through our equity incentive plan. Each of our non-employee directors received a grant of 5,000 unrestricted shares of common stock in connection with the completion of our July 2004 private placement. In addition, each of our non-employee directors will receive 1,000 unrestricted shares of common stock on the date of the meeting of the board of directors immediately following each annual meeting of our stockholders.

Executive Compensation

The following table sets forth the compensation paid or earned by our chief executive officer and our other executive officers for 2004:


	Annual Compensation				Long-Term Compensation
Name and Position	Salary(1)		Bonus(1)		Restricted Stock Awards(2)		Securities Underlying Options	All Other Compensation
William W. McCarten, Chairman of the Board, Chief Executive Officer and Director	$	250,000	$	293,750	$	2,250,000	—		—
John L. Williams, President, Chief Operating Officer and Director	$	200,000	$	188,000	$	2,100,000	—		—
Mark W. Brugger, Executive Vice President, Chief Financial Officer and Treasurer	$	117,500	$	82,838	$	1,650,000	—		—
Michael D. Schecter, General Counsel and Secretary	$	107,500	$	80,625	$	750,000	—		—
Sean M. Mahoney, Chief Accounting Officer and Corporate Controller	$	58,333	$	19,602	$	150,000	—	$	30,000	(3)

(1)

The amounts for salary and bonus are for the partial year from our inception in May 2004 until December 31, 2004, except for the amounts for Mr. Mahoney, which are for the partial year from August 1, 2004 until December 31, 2004. The employment agreement for each of Messrs. McCarten, Williams, Brugger and Schecter, and the letter of employment for Mr. Mahoney, do not provide for a minimum or target bonus, and any bonus paid is at the sole discretion of our Compensation Committee. For a listing of the maximum amounts payable to each named executive officer pursuant to his employment agreement, or in the case of Mr. Mahoney, his letter of employment, with us, see “—Employment Agreements” below.

(2)	Restricted stock awards vest pursuant to the following schedule: two-thirds of the granted restricted stock vest on August 1, 2006 and the remaining one-third vest on July 7, 2007. Any dividends will be paid to the holders of restricted stock awards.

(3)	This amount represents a bonus paid to Mr. Mahoney in connection with the commencement of his employment.

Section 162(m) of the Code disallows a tax deduction to public companies for compensation paid in excess of $1,000,000 for any fiscal year to the company’s chief executive officer and the four other most highly compensated executive officers. To qualify for deductibility under Section 162(m), compensation in excess of the $1,000,000 annual maximum paid to these executive officers must be “performance-based” compensation, as determined under Section 162(m). For these purposes, compensation generally includes base salary, annual bonuses, stock option exercises, compensation attributable to restricted shares vesting and nonqualified benefits. While it is our intention to structure compensation so that it satisfies the “performance-based” compensation requirements under Section 162(m) to the fullest extent possible, if we become subject to the provisions of Section 162(m), our Compensation Committee will balance the costs and burdens involved in doing so against the value to us and our stockholders of the tax benefits to be obtained by us. Accordingly, we reserve the right, should Section 162(m) apply, to design compensation programs that recognize a full range of performance criteria important to our success, even where the compensation paid under such programs may not be deductible as a result of the application of Section 162(m).

Employment Agreements

We have entered into employment agreements with Messrs. McCarten, Williams, Brugger and Schecter, and Mr. Mahoney has executed a letter of employment, that provide for an annual salary of $500,000, $400,000, $235,000, $210,000 and $140,000, respectively, as well as customary incentive compensation and benefits. Upon the closing of our July 2004 private placement, each of Messrs. McCarten, Williams, Brugger and Schecter were granted a restricted stock award and, in connection with his acceptance of employment with us in July 2004, Mr. Mahoney was also granted a restricted stock award. Each of these restricted stock awards were subsequently amended to provide that two-thirds of the restricted stock awards will vest on August 1, 2006 and the remaining one-third will vest on July 7, 2007. In addition, the employment agreements and Mr. Mahoney’s letter of employment provide each executive officer with severance benefits if his employment ends under certain circumstances. We believe that the agreements and Mr. Mahoney’s letter of employment will benefit us by helping to retain the executives and by allowing them to focus on their duties without the distraction of the concern for their personal situations in the event of a possible change in control of our company.

The agreements with Messrs. McCarten, Williams, Brugger and Schecter have an initial term of three years, with respect to Mr. McCarten, and two years, with respect to Messrs. Williams, Brugger and Schecter. Thereafter, the term of the agreements with Messrs. McCarten, Williams, Brugger and Schecter will be extended for an additional 12 months on the anniversary of the effective date of each agreement, unless either party gives six months’ notice before such date that the term will not be extended. Mr. Mahoney is an at-will employee.

Each of Messrs. McCarten, Williams, Brugger and Schecter will be entitled to receive severance benefits under their agreements if we terminate such executive’s employment without cause or such executive resigns with good reason or if there is a change in control of our company during the term of their agreements and, within 12 months after the change in control, we terminate such executive’s employment without cause or such executive resigns with good reason, or if during the 90 day period commencing on the three-month anniversary of the date of the change in control, such executive resigns for any reason. Mr. Mahoney will be entitled to receive severance benefits under his letter of employment if there is a change in control of our company during his employment with us and, within 12 months after the change in control, we terminate Mr. Mahoney’s employment without cause, or if during the 90 day period commencing on the six-month anniversary of the date of the change in control, Mr. Mahoney resigns for any reason. Under each of these scenarios, each of the executives is entitled to receive a lump sum payment equal to two times, with respect to Mr. McCarten, 1.5 times, with respect to Mr. Williams, and one time, with respect to Messrs. Brugger, Schecter and Mahoney, the sum of (x) their respective then current base salary and (y) the greater of (A) the average of the executive’s bonuses with respect to the preceding three fiscal years (or the period of the executive’s employment if shorter), (B) the executive’s bonus with respect to the preceding fiscal year and (C) if termination of employment occurs during the first year of the executive’s employment, the executive’s annualized projected bonus for such year. In addition, each executive will be entitled to continued life, health and disability insurance coverage for himself, his spouse and dependents for two years, in the case of Mr. McCarten, eighteen months, in the case of Mr. Williams, and one year, in the case of Messrs. Brugger, Schecter and Mahoney. Any unvested portion of any stock option, restricted stock award and incentive award previously issued to the executive shall vest on the date of such termination. These severance benefits may not be deductible by us.

In the event that the severance benefits described above are paid in connection with a change in control of our company, each of Messrs. McCarten, Williams, Brugger and Schecter will be eligible to receive payments to compensate the executive for the additional taxes, if any, imposed on the executive under Section 4999 of the Code by reason of the receipt of excess parachute payments.

The employment agreements for each of Messrs. McCarten, Williams, Brugger and Schecter contain customary non-competition covenants that apply during the term and in most instances for 12 months, or six months in the event of a change in control of our company, after the expiration or termination of such executive’s employment with our company.

Annual Incentive Bonus Policy

Our senior executive officers who are entitled to receive cash bonuses under their employment agreements will receive no more than 125%, with respect to Mr. McCarten, 100%, with respect to Mr. Williams, 75%, with respect to Messrs. Brugger and Schecter, and 35%, with respect to Mr. Mahoney, of their base salaries under the policy. Our compensation committee will re-evaluate the annual incentive bonus policy for our executive officers on an annual basis, subject to the maximum limitations previously described. The employment agreements for each executive do not provide for a minimum or target bonus, and any bonus paid is at the sole discretion of the Compensation Committee. In addition, our Compensation Committee may approve any additional bonus awards to any executive officer.

401(k) Plan

We maintain a retirement savings plan under section 401(k) of the Code to cover our eligible employees. The Code allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) plan.

Equity Incentive Plan

Our 2004 Stock Option and Incentive Plan was adopted by our board of directors and approved by our then sole stockholder in June 2004. We have established this plan for the purpose of attracting and retaining directors, officers and other key employees of the company. This equity plan permits us to make grants of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, unrestricted stock awards, dividend equivalent rights and other share-based awards. We have reserved 1,107,500 shares of our common stock for the issuance of awards under the equity plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. In addition, our equity plan provides that one year after the completion of our July 2004 private placement and without further action or approval of our stockholders, 5% of the total net increase in the number of outstanding shares of our common stock since the completion of our July 2004 private placement will be added to the number of shares reserved for issuance under the plan, up to a maximum limit of 2,000,000 shares of common stock that may be reserved for the issuance of awards under the plan. Generally, shares that are forfeited or canceled from awards under the equity plan also will be available for future awards. We have committed to issue shares of restricted common stock concurrently with the closing of this offering.

The equity plan is administered by either a committee of at least two non-employee directors appointed by the board of directors, or by our full board of directors. The administrator of the equity plan has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of the equity plan. The administrator may generally delegate to our chief executive officer the authority to grant certain awards under the equity plan to our employees.

All full-time and part-time officers, employees, non-employee directors and other key persons are eligible to participate in the equity plan, subject to the discretion of the administrator. There are certain limits on the number of awards that may be granted under the equity plan. For example, no more than 500,000 shares of stock may be granted in the form of stock options or stock appreciation rights to any one individual during any one-calendar-year period.

The exercise price of stock options awarded under the equity plan may not be less than the fair market value of the common stock on the date of the option grant in most instances and the term of each option may not exceed fifteen years from the date of grant for non-qualified options and ten years from the date of grant for incentive options. The administrator will determine at what time or times each option may be exercised and, subject to the provisions of the equity plan, the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised.

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To qualify as incentive options, stock options must meet additional federal tax requirements, including a $100,000 limit on the value of shares subject to incentive options that first become exercisable in any one calendar year, and a shorter term and higher minimum exercise price in the case of certain large shareholders.

Each non-employee director who is serving as a director of the company on the date of the meeting of the board of directors immediately following each annual meeting of stockholders will automatically be granted on such date 1,000 unrestricted shares of common stock. In addition, each of our non-employee directors received a grant of 5,000 unrestricted shares of common stock in connection with the completion of our July 2004 private placement. The administrator also may make discretionary grants of non-qualified options to non-employee directors.

In the event of a merger, sale or dissolution of the Company, or a similar “sale event,” all stock options and stock appreciation rights granted under the equity plan will automatically become fully exercisable and all other awards granted under the equity plan will become fully vested and non-forfeitable. In addition, upon the effective time of any such sale event, the equity plan and all awards will terminate unless the parties to the transaction, in their discretion, provide for appropriate substitutions or adjustments of outstanding awards.

No awards may be granted under the equity plan after June 4, 2014. In addition, our board of directors may amend or discontinue the equity plan at any time and the administrator may amend or cancel any outstanding award for the purpose of satisfying changes in law or for any other lawful purpose. No such amendment may adversely affect the rights under any outstanding award without the holder’s consent. Other than in the event of a necessary adjustment in connection with a change in the company’s stock or a merger or similar transaction, the administrator may not “reprice” or otherwise reduce the exercise price of outstanding stock options. Further, amendments to the equity plan will be subject to approval by our stockholders if the amendment (i) increases the number of shares available for issuance under the equity plan; (ii) expands the types of awards available under, the eligibility to participate in, or the duration of, the plan; (iii) materially changes the method of determining fair market value for purposes of the equity plan; or (iv) requires stockholder approval under the applicable rules of the New York Stock Exchange or by the Code to ensure the tax qualification of incentive options.

Liability, Exculpation and Indemnification

The MGCL permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our charter contains such a provision which eliminates such liability to the maximum extent permitted by the MGCL.

Our charter authorizes us, to the maximum extent permitted by Maryland law, to obligate our company to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer or (b) any individual who, while a director or officer and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her serving in any of the foregoing capacities. Our bylaws obligate our company, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer who is made, or is threatened to be made, a party to the proceeding by reason of his service in that capacity or (b) any individual who, while a director or officer of our company and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made, or threatened to be made, a party to the proceeding

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by reason of his service in that capacity. Our charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of our company in any of the capacities described above and to our employees or agents and any employee or agent of our predecessor.

The MGCL requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made, or threatened to be made, a party by reason of his service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made, or threatened to be made, a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of (a) a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or on his behalf to repay the amount paid or reimbursed by the corporation if it shall ultimately be determined that the standard of conduct was not met.

Insofar as the foregoing provisions permit indemnification of directors, officers or persons controlling us for liability arising under the Securities Act, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

We maintain a director and officer insurance policy with a limit of $15 million per claim as well as in the aggregate.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with Marriott

Investment Sourcing Relationship with Marriott. Marriott and our company have an investment sourcing relationship pursuant to which Marriott has agreed to provide us, subject to certain limitations, with a “first look” at hotel property acquisition and investment opportunities known to it. For a description of our investment sourcing relationship with Marriott, see “Our Business—Our Competitive Strengths—Marriott Investment Sourcing Relationship.”

In connection with this investment sourcing relationship, Marriott assigned to us its interests as purchaser under the purchase and sale contract pursuant to which we acquired the Courtyard Manhattan/Midtown East hotel. The purchase price for the hotel was approximately $75.4 million. Marriott provided us $3.3 million in connection with the acquisition, including $2.5 million in key money and $800,000 as a contribution to the hotel’s furniture, fixtures and equipment account. We also acquired, directly from Marriott, the Marriott Griffin Gate Resort for approximately $46.9 million and the Lodge at Sonoma Renaissance Resort & Spa for approximately $32.3 million, which were purchased by Marriott within two years of our acquisition. Marriott’s cost basis in the Marriott Griffin Gate Resort and the Lodge at Sonoma Renaissance Resort & Spa was approximately $43.8 million and approximately $31.8 million, respectively.

In determining the purchase prices that we paid for the hotel properties we acquired from Marriott, our senior management team collectively employed the same disciplined methodology that it generally uses to determine the purchase price of all the hotel properties that we acquire. Our senior management team initially creates a projection of future cash flows for each potential acquisition primarily based on:

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historical cash flows provided to us by the seller and the hotel manager; and

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our senior management team’s belief as to futures rates of occupancy and growth in ADR, as well as our senior management team’s expectation of future increases in operating expenses, in a hotel properties’ given market.

Our senior management team’s belief as to future cash flows and expenses is based on their extensive experience in the hotel industry, which includes their ability to evaluate the reasonableness of the projections provided to us by the seller and the hotel manager. Our senior management team then applies a multiple to those projected cash flows. This multiple reflects our senior management team’s knowledge of recent sale prices for hotel properties in similar markets. Although our entire senior management team participates in the determination of a recommended purchase price, Mr. Williams, our President and Chief Operating Officer, is ultimately responsible for presenting our senior management team’s recommendation of the purchase price for a potential acquisition to our board of directors, which makes the final determination.

Marriott has provided us with key money of approximately $6.5 million in the aggregate in connection with our acquisitions of the Courtyard Manhattan/Midtown East ($2.5 million), the Courtyard Manhattan/Fifth Avenue ($1.0 million) and the Torrance Marriott ($3.0 million). Marriott purchased directly from us 3,000,000 shares of our outstanding common stock in connection with our July 2004 private placement for an aggregate price of $30,000,000. The value of these shares, based on the midpoint of the price range for the shares to be sold in this offering, is $ .

Marriott’s only binding commitment with regard to this investment sourcing relationship is that, for a two-year period ending July 1, 2006, it has agreed not to enter into any written agreement or series of written agreements granting any third party the right to receive information from Marriott concerning opportunities to purchase full-service, urban select-service or urban extended-stay hotels in the United States, or in any region thereof, prior to such opportunities being presented to us. Marriott has specifically retained the right to enter into written agreements affecting less than 10% of the United States by population and also any non-written agreements with other potential capital sources. Our only binding commitment with regard to this relationship is

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that we have agreed, for a two-year period ending July 1, 2006, not to enter into a written agreement or series of written agreements granting any third party the right to receive information from us concerning potential opportunities to provide hotel management services for full-service, urban select-service or urban extended-stay hotels throughout the United States, or in any region thereof prior to such opportunity being presented to Marriott. We have specifically retained the right to enter into agreements affecting less than 10% of the United States and also any non-written agreements with other brand or hotel management companies. However, for any given investment, we are under no obligation to use Marriott as the hotel management company and we may invest in hotel properties that do not operate under one of Marriott’s brands.

Management Agreements. In order to qualify as a REIT, we cannot operate our hotel properties or participate in the decisions affecting the daily operations of our hotels. Thus far, although we are free to enter into hotel management agreements with any third party, with respect to all the properties that we currently own, we have entered into management agreements with Marriott, and we intend that most management agreements that we enter into in the near future will be with Marriott, or one or more of its affiliates. Our management agreements with Marriott typically provide for an initial term that expires upon the end of the twentieth, thirtieth or fortieth full fiscal year after the effective date of the hotel management agreement. The term of the hotel management agreement is generally automatically renewed for a negotiated number of consecutive 10-year periods upon the expiration of the initial term unless the property manager gives notice to our TRS lessee of its election not to renew the hotel management agreement at least 300 days prior to the expiration of the then-current term.

The following table sets forth the effective date, initial term and number of renewal terms under the respective hotel management agreements entered into with Marriott for each of our initial properties:


	Date of Hotel Management Agreement	Initial Term	Number of Renewal Terms
Courtyard Manhattan/Midtown East	11/04	30 years	Two 10-year periods
Torrance Marriott	1/05	40 years	None
Salt Lake City Marriott Downtown	12/01	30 years	Three 15-year periods
Marriott Griffin Gate Resort	12/04	20 years	One 10-year period
Bethesda Marriott Suites	12/04	21 years	Two 10-year periods
Courtyard Manhattan/Fifth Avenue	01/05	30 years	None
The Lodge at Sonoma Renaissance Resort & Spa	10/04	20 years	One 10-year period

Amounts Payable under our Hotel Management Agreements

Under our hotel management agreements, Marriott receives a base management fee and, if certain financial thresholds are met or exceeded, an incentive management fee. The base management fee is generally payable as a percentage of gross hotel revenues for each fiscal year. The incentive management fee is generally based on hotel operating profits and is typically equal to between 20% and 25% of hotel property operating profits, but the fee only applies to that portion of hotel operating profits above a negotiated return on our invested capital. We refer to this excess of operating profits over a return on our invested capital as “available cash flow.”

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The following table sets forth the base management fee and incentive management fee, generally due and payable each fiscal year, for each of our initial properties.


	Base Management Fee(1)		Incentive Management Fee(2)
Courtyard Manhattan/Midtown East	5	%	25%(3)
Torrance Marriott	3	%	20%(4)
Salt Lake City Marriott Downtown	3	%	Not more than 20%(5)
Marriott Griffin Gate Resort	3	%	20%(6)
Bethesda Marriott Suites	3	%	50%(7)
Courtyard Manhattan/Fifth Avenue	5	%(8)	25%(9)
The Lodge at Sonoma Renaissance	3	%	20%(10)

(1)	As a percentage of gross revenues.

(2)	Based on a percentage of hotel operating profits above a negotiated return on our invested capital, as more fully described in the following footnotes.

(3)	Calculated as a percentage of operating profits in excess of 10.75% of the sum of (i) $73.7 million and (ii) the amount of certain capital expenditures.

(4)	Calculated as a percentage of operating profits in excess of the sum of (i) $7.5 million and (ii) 10.75% of certain capital expenditures.

(5)

(6)	Calculated as a percentage of operating profits in excess of the sum of (i) $5.5 million and (ii) 10.75% of certain capital expenditures.

(7)

(8)

(9)	Calculated as a percentage of operating profits in excess of 12% of the sum of (i) $38.8 million and (ii) the amount of certain capital expenditures, less 5% of the total real estate tax bill (for as long as the hotel is leased to a party other than the manager).

(10)	Calculated as a percentage of operating profits in excess of the sum of (i) $3.6 million and (ii) 10.75% of capital expenditures.

Administrative Services Agreement and Sub-lease. On July 1, 2004, we entered into an administrative services agreement with Marriott International Administrative Services, Inc., or MIAS, an affiliate of Marriott, pursuant to which MIAS provides us with certain information technology and telephone and Internet systems as long as we lease our corporate offices from Marriott. The service fees we pay to Marriott are equal in amount to the fees that Marriott charges its internal and external customers for such services as of the effective date of the administrative services agreement. We lease approximately 4,000 square feet for our corporate office space from Marriott at $43.50 per square foot, which amount is equal to the amount charged by Marriott to its internal departments as of the effective date of the lease.

Arrangements with our Senior Executive Officers and Certain Directors

Messrs. McCarten, Williams, Brugger and Schecter are all former officers and employees of Marriott and have many professional relationships with current senior executives at Marriott.

Messrs. McCarten and Williams may have ongoing conflicts between our interests and the interests of Marriott because each has a significant financial interest in Marriott as a percentage of his individual net worth. These interests include shares of Marriott’s common stock, options to acquire shares of Marriott’s common stock and an executive deferred compensation arrangement which is an unfunded obligation of Marriott. In the case of Mr. McCarten, his financial interest in Marriott represents a material percentage (but not a majority) of his individual net worth and, in the case of Mr. Williams, his financial interest in Marriott represents a majority of his individual net worth. In each case, these interests represent several millions of dollars and, depending upon the performance of Marriott relative to our performance and the amount of equity incentive compensation paid by us to Messrs. McCarten and Williams, their financial interest in Marriott may continue to be greater than their financial interest in us. Accordingly, Messrs. McCarten and Williams may have a conflict of interest when evaluating hotel property investment opportunities sourced to us by Marriott or when negotiating the terms of hotel management agreements with Marriott because of their financial interest in Marriott.

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INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

The following is a discussion of our investment policies and our policies with respect to certain other activities, including financing matters and conflicts of interest. These policies may be amended or revised from time to time at the discretion of our board of directors, without a vote of our stockholders. Any change to any of these policies by our board, however, would be made only after a thorough review and analysis of that change, in light of then-existing business and other circumstances, and then only if, in the exercise of its business judgment, our board of directors believes that a change is in our and our stockholders’ best interests. We cannot assure you that our investment objectives will be attained.

Investments in Real Estate or Interests in Real Estate

We intend to conduct our investment activities through our operating partnership and its subsidiaries. We seek to invest in assets primarily for current income generation. In general, our primary investment objectives are to:

•

enhance stockholder value over time by generating strong risk-adjusted returns on invested capital;

•

consistently pay attractive distributions to our stockholders; and

•

achieve long-term appreciation in the value of our hotel property investments.

There are no limitations on the amount or percentage of our total assets that may be invested in any one hotel property. Additionally, no limits have been set on the concentration of investments in any one location or by brand, type of market or other limits.

Additional criteria with respect to our hotel property investments is described in “Our Business.”

Investments in Mortgages, Structured Financings and Other Lending Policies

We have no current intention of investing in loans secured by properties or making loans to persons. However, we do not have a policy limiting our ability to invest in loans secured by properties or to make loans to other persons. In the future, we may acquire first mortgages on hotel properties and invest in other mortgage-related instruments such as subordinated or mezzanine loans to hotel owners and operators. In addition, we may invest in hotel properties and lease them back to their existing owners. We may also consider offering purchase money financing in connection with the sale of properties where the provision of that financing will increase the value to be received by us for the property sold. We may make loans to joint ventures in which we may participate in the future. However, we do not intend to engage in significant lending activities. Any such lending or financing activities would be subject to restrictions applicable to REITs.

Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers

Generally, we do not expect to engage in any significant investment activities with other entities, although we may consider joint venture investments with other investors. We may also invest in the securities of other issuers in connection with acquisitions of indirect interests in hotel properties (normally general or limited partnership units in special purpose partnerships owning properties). We may in the future acquire some, all or substantially all of the securities or assets of other REITs or similar entities where that investment would be consistent with our investment policies and the REIT qualification requirements. There are no limitations on the amount or percentage of our total assets that may be invested in any one issuer, other than those imposed by the gross income and asset tests that we must satisfy to qualify as a REIT. However, we do not anticipate investing in

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other issuers of securities for the purpose of exercising control or acquiring any investments primarily for sale in the ordinary course of business or holding any investments with a view to making short-term profits from their sale. In any event, we do not intend that our investments in securities will require us to register as an “investment company” under the Investment Company Act, and we intend to divest securities before any registration would be required.

We do not intend to engage in trading, underwriting, agency distribution or sales of securities of other issuers.

Dispositions

Generally, our board of directors will consider dispositions of properties, subject to REIT qualification rules and limitations set forth in our hotel management agreements, if our management determines that a sale of a property would be in our best interests based on the price being offered for the property, the operating performance of the property, the tax consequences of the sale and other factors and circumstances surrounding the proposed sale.

Financing Policies

We will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of indebtedness, including the purchase price of hotel properties to be acquired with debt financing, the estimated market value of our hotel properties upon refinancing and the ability of particular hotel properties, and our company as a whole, to generate cash flow to cover expected debt service. We currently maintain a policy that limits our total debt level to no more than 60% of our aggregate property investment and repositioning costs. Our board of directors, however, may change or eliminate this debt limit, and/or the policy itself, at any time without the approval of our stockholders.

We currently are negotiating with a number of financial institutions to obtain a secured revolving line of credit. For a description of the anticipated secured revolving credit facility and its applicable terms, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

We may incur debt in the form of purchase money obligations to the sellers of properties, or in the form of publicly or privately placed debt instruments, financing from banks, institutional investors, or other lenders, any of which indebtedness may be unsecured or may be secured by mortgages or other interests in our properties. This indebtedness may be recourse, non-recourse or cross-collateralized and, if recourse, that recourse may include our general assets and, if non-recourse, may be limited to the particular property to which the indebtedness relates. In addition, we may invest in hotel properties subject to existing loans secured by mortgages or similar liens on the properties, or may refinance properties acquired on a leveraged basis. We may use the proceeds from any borrowings for working capital, to purchase additional interests in partnerships or joint ventures in which we participate, to refinance existing indebtedness or to finance investments. We may also incur indebtedness for other purposes when, in the opinion of our board of directors, it is advisable to do so. In addition, we may need to borrow funds to meet the taxable income distribution requirements under the Code if we do not have sufficient cash available to meet those distribution requirements.

Equity Capital Policies

Subject to applicable law, our board of directors has the authority, without further stockholder approval, to issue additional shares of authorized common stock and preferred stock or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate, including in exchange for property. Existing stockholders will have no preemptive right to additional shares issued in any offering, and any offering might cause a dilution of investment. We may in the future issue

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common stock in connection with acquisitions. We also may issue limited partnership units in our operating partnership or equity interests in other subsidiaries in connection with acquisitions of hotel properties.

Our board of directors may authorize the issuance of preferred stock with terms and conditions that could have the effect of delaying, deterring or preventing a transaction or a change in control in us that might involve a premium price for holders of our common stock or otherwise might be in their best interests. Additionally, any shares of preferred stock could have dividend, voting, liquidation and other rights and preferences that are senior to those of our common stock.

We may, under certain circumstances, purchase common stock in the open market or in private transactions with our stockholders, if those purchases are approved by our board of directors. Our board of directors has no present intention of causing us to repurchase any shares, and any action would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualifying as a REIT.

In the future, we may institute a dividend reinvestment plan, which would allow our stockholders to acquire additional shares of our common stock by automatically reinvesting their cash dividends. Shares would be acquired pursuant to the plan at a price equal to the then prevailing market price, without payment of brokerage commissions or service charges. Stockholders who do not participate in the plan will continue to receive cash dividends as declared and paid.

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FORMATION OF OUR COMPANY

We commenced operations in July 2004 and thus have a limited operating history. We conduct our business through a traditional UPREIT structure. An UPREIT is typically a REIT whose real properties are held by, and whose operations are conducted through, a subsidiary partnership, which in our case is DiamondRock Hospitality Limited Partnership. The following is a summary of our formation transactions:

•

We were formed as a Maryland corporation in May 2004 and our operating partnership, DiamondRock Hospitality Limited Partnership, was formed in May 2004. We are the sole general partner and our wholly-owned subsidiary, DiamondRock Hospitality, LLC, is the sole initial limited partner of our operating partnership. We currently own all of the limited partnership interests in our operating partnership either directly or through DiamondRock Hospitality, LLC.

•

Bloodstone TRS, Inc., a Delaware corporation which we formed in September 2004, operates as our taxable REIT subsidiary. A taxable REIT subsidiary is a corporate subsidiary of a REIT that elects with the REIT to be treated as a taxable REIT subsidiary of the REIT and pays that federal income tax at regular corporate rates on its earnings and the earnings of our TRS lessees. We may form additional taxable REIT subsidiaries, or TRSs, in the future.

•

In July 2004, we completed a private placement of 21,000,000 shares of our common stock at an offering price of $10.00 per share, including 150,000 shares purchased by our senior executive officers and directors and 3,000,000 shares purchased by Marriott Hotel Services, Inc., a wholly-owned subsidiary of Marriott. Friedman, Billings, Ramsey & Co., Inc., which is serving as the lead managing underwriter in this offering, acted as the initial purchaser and sole placement agent. The total net proceeds to us, after deducting fees and expenses of this offering, were approximately $196.3 million.

In order to qualify as a REIT, our income must come primarily from “rents from real property,” mortgage interest and real estate gains. Qualifying “rents from real property” include rents from interests in real property, certain charges for services customarily rendered in connection with the rental of real property, and a limited amount of rent attributable to personal property which is leased under, or in connection with, a lease of real property. However, operating revenues from a hotel property are not qualifying “rents from real property.” Therefore, we generally must lease our hotel properties to another party from whom we will derive rent income that will qualify as “rents from real property” under the REIT rules. Accordingly, we generally will lease our hotels to wholly-owned subsidiaries of Bloodstone TRS, Inc., our existing taxable REIT subsidiary. We refer to these subsidiaries as TRS lessees. Each TRS lessee will pay rent to us that generally should qualify as “rents from real property,” provided that an “eligible independent contractor” operates and manages each hotel property on behalf of the TRS lessee. We expect that each of our hotel properties will be managed by an “eligible independent contractor.”

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INSTITUTIONAL TRADING OF OUR COMMON STOCK

There is no public trading market for our common stock. Shares of common stock issued to qualified institutional buyers in connection with our July 2004 private placement are eligible for trading in the Portal (SM) Market, a subsidiary of the NASDAQ Stock Market, Inc., which permits secondary sales of eligible unregistered securities to qualified institutional buyers in accordance with Rule 144A under the Securities Act. As of March 21, 2005, the last sale of our common stock on the Portal (SM) Market had occurred on March 9, 2005 at a price of $10.85 per share. We have approximately 520 holders of record of our common stock. The following table shows the high and low sales prices for our common stock for each quarterly period since our common stock became eligible for trading in the Portal (SM) Market:


	High Sales Price		Low Sales Price
July 7, 2004 to September 30, 2004	$	10.00	$	10.00
October 1, 2004 to December 31, 2004	$	10.20	$	10.00
January 1, 2005 to March 21, 2005	$	10.85	$	10.20

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PRINCIPAL STOCKHOLDERS

The following table sets forth the beneficial ownership of shares of our common stock before and immediately following the completion of this offering for (i) each person who, to our knowledge, is the beneficial owner of 5% or more of the outstanding common stock, (ii) directors, proposed directors and the executive officers, and (iii) directors, proposed directors and executive officers as a group. To our knowledge, each person named in the table has sole voting and investment power with respect to all of the shares of our common stock shown as beneficially owned by such person, except as otherwise set forth in the notes to the table. The number of shares shown represents the number of shares of common stock the person “beneficially owns,” as determined by the rules of the SEC. The SEC has defined “beneficial” ownership of a security to mean the possession, directly or indirectly, of voting power and/or investment power. A stockholder is also deemed to be, as of any date, the beneficial owner of all securities that such stockholder has the right to acquire within 60 days after that date through (a) the exercise of any option, warrant or right, (b) the conversion of a security, (c) the power to revoke a trust, discretionary account or similar arrangement, or (d) the automatic termination of a trust, discretionary account or similar arrangement. The address of each named person is 10400 Fernwood Road, Bethesda, MD 20817.


	Beneficial Ownership Before Offering				Beneficial Ownership After Offering
Name of Beneficial Owner	Number		Percent(1)		Number	Percent
William W. McCarten	325,100	(2)	1.5	%
Daniel J. Altobello	10,000		*
W. Robert Grafton	8,000		*
Maureen L. McAvey	5,000		*
Gilbert T. Ray	5,000		*
John L. Williams	240,000	(3)	1.1
Mark W. Brugger	175,000	(4)	*
Michael D. Schecter	85,000	(5)	*
Sean M. Mahoney	15,000	(6)	*
All directors and executive officers as a group (9 persons)	868,100		4.0
Marriott Hotel Services, Inc.	3,000,000	(7)	13.8

*	Represents less than 1% of the number of shares of common stock outstanding.

(1)

Calculated using 21,720,600 shares of common stock outstanding as of March 25, 2005. Additionally, in accordance with Rule 13d-3(d)(i) of the Exchange Act, in calculating the percentage of each holder, we treated as outstanding the number of shares of common stock issuable upon the exercise of the holder’s options to purchase common stock, if any, that are exercisable within 60 days of March 25, 2005; however we did not assume the exercise of any other holders’ option.

(2)

Includes 225,000 shares of restricted stock granted to Mr. McCarten under our equity incentive plan. Subject to continued service with us, the restrictions on the restricted stock will lapse pursuant to the following schedule: two-thirds of the restricted shares shall vest on August 1, 2006 and the remaining one-third shall vest on July 7, 2007. Includes 100,000 shares of our common stock that Mr. McCarten purchased from us directly in a private placement on July 7, 2004. Includes 100 shares of our common stock that Mr. McCarten purchased from us directly in connection with out formation in May 2004. Excludes shares of restricted common stock to be awarded upon the completion of this offering.

(3)

Includes 210,000 shares of restricted stock granted to Mr. Williams under our equity incentive plan. Subject to continued service with us, the restrictions on the restricted stock will lapse pursuant to the following schedule: two-thirds of the restricted shares shall vest on August 1, 2006 and the remaining one-third shall vest on July 7, 2007. Includes 30,000 shares of our common stock that Mr. Williams purchased from us directly in a private placement on July 7, 2004. Excludes shares of restricted common stock to be awarded upon the completion of this offering.

(4)

Includes 165,000 shares of restricted stock granted to Mr. Brugger under our equity incentive plan. Subject to continued service with us, the restrictions on the restricted stock will lapse pursuant to the following schedule: two-thirds of the restricted shares shall vest on August 1, 2006 and the remaining one-third shall vest on July 7, 2007. Includes 10,000 shares of our common stock that Mr. Brugger purchased from us directly in a private placement on July 7, 2004. Excludes shares of restricted common stock to be awarded upon the completion of this offering.

(5)	Includes 75,000 shares of restricted stock granted to Mr. Schecter under our equity incentive plan. Subject to continued service with us, the restrictions on the restricted stock will lapse pursuant to the following schedule: two-thirds of the

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restricted shares shall vest on August 1, 2006 and the remaining one-third shall vest on July 7, 2007. Includes 10,000 shares of our common stock that Mr. Schecter purchased from us directly in a private placement on July 7, 2004. Excludes shares of restricted common stock to be awarded upon the completion of this offering.

(6)

Includes 15,000 shares of restricted stock granted to Mr. Mahoney under our equity incentive plan. Subject to continued service with us, the restrictions on the restricted stock will lapse pursuant to the following schedule: two-thirds of the restricted shares shall vest on August 1, 2006 and the remaining one-third shall vest on July 7, 2007. Excludes shares of restricted common stock to be awarded upon the completion of this offering.

(7)	Represents 3,000,000 shares of our outstanding common stock that Marriott purchased from us directly in a private placement on July 7, 2004.

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SELLING STOCKHOLDERS

The following table sets forth the beneficial ownership of our common stock by the selling stockholders as of , 2005 and the number of shares that may be offered for resale by this prospectus. We believe the shares of common stock offered by selling stockholders were acquired either in our July 2004 private placement or through purchases executed on the Portal (SM) Market. The percentages of all shares of common stock beneficially owned before and after resale of the shares of common stock by the selling stockholders is based on shares of common stock outstanding as of , 2005. The selling stockholders may offer all, a portion or none of the shares owned by them and covered by this prospectus. In preparing the table below, we have assumed that the selling stockholders will sell all of the common stock covered by this prospectus. Shares of common stock may also be sold by donees, pledgees or other transferees or successors in interest of the selling stockholders.

Except as described below, to our knowledge, none of the selling stockholders has had a material relationship with us or any of our affiliates within the past three years.


Selling Stockholders	Number of Shares Beneficially Owned	Maximum Number of Shares Being Offered	Percentage of All Shares Beneficially Owned Before Resale(1)	Beneficial Ownership After Resale of Shares
Selling Stockholders	Number of Shares Beneficially Owned	Maximum Number of Shares Being Offered		Number of Shares	Percentage(2)

*	Represents less than 1%.

(1)	Assumes shares of common stock outstanding as of , 2005.

(2)	Assumes shares of common stock outstanding as of , 2005, including shares of common stock issued in this offering.

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REGISTRATION RIGHTS AGREEMENT

At the time of our July 2004 private placement, we entered into a registration rights agreement among us, our operating partnership, Friedman, Billings, Ramsey & Co., Inc. and certain holders of our common stock. The summary of the registration rights agreement is subject to and qualified in its entirety by reference to the registration rights agreement, a copy of which is filed as an exhibit to the registration statement of which this prospectus is a part. See “Where You Can Find More Information.”

IPO Registration. Under the terms of the registration rights agreement, if we propose to file a registration statement providing for the initial public offering of shares of our common stock, the holders of our common stock purchased in our July 2004 private placement have a right to include their shares in that registration statement and participate in the public offering, subject to:

•

compliance with the registration rights agreement;

•

cutback rights on the part of the underwriters and the company; and

•

other conditions and limitations that may be imposed by the underwriters.

We have filed a registration statement relating to our initial public offering and have registered for sale by the selling stockholders shares of our common stock purchased in our July 2004 private placement.

Mandatory Shelf Registration. Pursuant to the registration rights agreement, we also agreed for the benefit of the holders of shares of common stock sold in our July 2004 private placement that are not being sold in this offering to file with the SEC by April 7, 2005 a resale shelf registration statement registering all of the shares of common stock purchased or placed by Friedman, Billings, Ramsey & Co., Inc. in our July 2004 private placement, and all of the 3,000,000 shares of common stock purchased by Marriott. Pursuant to the registration rights agreement, we are required to pay most expenses in connection with the registration of the shares of common stock purchased in our July 2004 private placement. Each selling stockholder participating in this offering will bear a proportionate share based on the total number of shares of common stock sold in this offering of all discounts and commissions payable to the underwriters, all transfer taxes and transfer fees and any other expense of the selling stockholders not allocated to us in the registration rights agreement.

In addition, we agreed to use our commercially reasonable efforts to cause the resale registration statement to become effective under the Securities Act as promptly as practicable, but not later than six months after the filing (subject to certain extensions), and to maintain the resale registration statement continuously effective under the Securities Act until the first to occur of:

•

such time as all of the shares of common stock covered by the resale registration statement have been sold pursuant to the registration statement or pursuant to Rule 144 (or any successor or analogous rule) under the Securities Act;

•

such time as, in the opinion of counsel, all of the common stock not held by our affiliates, and covered by the resale registration statement, are eligible for sale pursuant to Rule 144(k) (or any successor or analogous rule) under the Securities Act; or

•

the second anniversary of the initial effective date of the resale registration statement.

Notwithstanding the foregoing, we will be permitted, under limited circumstances, to suspend the use, from time to time, of this prospectus, and therefore suspend sales under the registration statement, for certain periods, referred to as “blackout periods,” if a majority of the independent directors of our board, in good faith, determines that we are in compliance with the terms of the registration rights agreement, that it is in our best interest to suspend the use of the registration statement, and:

•

that the offer or sale of any registrable shares would materially impede, delay or interfere with any material proposed acquisition, merger, tender offer, business combination, corporate reorganization, consolidation, debt or equity financing or similar material transaction;

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•

after the advice of counsel, sale of the registrable shares would require disclosure of non-public material information not otherwise required to be disclosed under applicable law; and

•

such disclosure would have a material adverse effect on us or on our ability to consummate the applicable transaction.

In addition, we may effect a blackout if a majority of independent directors of our board, in good faith, determines that we are in compliance with the terms of the registration rights agreement, that it is in our best interest to suspend the use of the registration statement, and, after advice of counsel, that it is required by law, rule or regulation to supplement the registration statement or file a post-effective amendment for the purposes of:

•

including in the registration statement any prospectus required under Section 10(a)(3) of the Securities Act;

•

reflecting any facts or events arising after the effective date of the registration statement that represents a fundamental change in information set forth therein; or

•

including any material information with respect to the plan of distribution or change to the plan of distribution not set forth therein.

The cumulative blackout periods in any 12-month period commencing on the closing of the offering may not exceed an aggregate of 90 days and furthermore may not exceed 30 days in any 90-day period. We may not institute a blackout period more than six times in any 24-month period. Upon the occurrence of any blackout period, we are to use our commercially reasonable efforts to take all action necessary to promptly permit resumed use of the registration statement.

If we default on either our obligation to file or maintain the effectiveness of the resale registration statement within the time periods described above or certain other obligations, each of our executive officers will forfeit a pro rata portion of the bonuses payable to him based on the period of time that we have not complied with those obligations and each of our executive officers will forfeit 2% of his shares of restricted stock granted under our equity incentive plan for each day we are not in compliance with our obligations.

Each holder of common stock sold in our July 2004 private placement has agreed that, upon receipt of notice of the occurrence of any event which makes a statement in the prospectus which is part of the resale registration statement untrue in any material respect or which required the making of any changes in such prospectus in order to make the statements therein not misleading, or of certain other events specified in the registration rights agreement, such holder will suspend the sale of our common stock pursuant to such prospectus until we have amended or supplemented such prospectus to correct such misstatement or omission and have furnished copies of such amended or supplemented prospectus to such holder or we have given notice that the sale of the common stock may be resumed.

In connection with the registration of the shares sold in our July 2004 private placement, we agreed to use our commercially reasonable efforts to list our common stock on the NYSE or the NASDAQ National Market and to maintain the listing thereafter.

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LOCK-UP AGREEMENTS

Each of our executive officers and directors has entered into a lock-up agreement in which each has agreed, subject to specified exceptions, not to: (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of common stock or any securities convertible into or exchangeable or exercisable for common stock or make any demand for or exercise any right with respect to the registration of the foregoing under the Securities Act, or (ii) establish or increase any “put equivalent position” or liquidate or decrease any “call equivalent position” or otherwise enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the common stock, whether any such swap or transaction is to be settled by delivery of common stock or other securities, in cash or otherwise for a period of 180 days after the date of this prospectus without the prior written consent of Citigroup Global Markets Inc. and Friedman, Billings, Ramsey & Co., Inc. This restriction terminates after the close of trading of the common stock on and including the 180th day after the date of this prospectus.

Subject to specified exceptions, certain of our directors and senior executive officers and Marriott also have entered into lock-up agreements in connection with our July 2004 private placement that prohibit them from selling, pledging, transferring or otherwise disposing of our common stock or securities convertible into our common stock for 180 days after the effective date of the resale shelf registration statement that we are required to file pursuant to the registration rights agreement, without the consent of Friedman, Billings, Ramsey & Co., Inc. Citigroup Global Markets Inc. also will have the right to consent to any release of securities subject to the lock-up agreements described in the preceding sentence.

In addition, in accordance with the registration rights agreement, subject to specified exceptions, holders of shares of common stock sold in our July 2004 private placement have agreed not to offer, pledge, sell or otherwise dispose of any of shares of our common stock or securities convertible into our common stock that they have acquired prior to the date of this prospectus, and are not selling in this offering, for 60 days following the effective date of the registration statement of which this prospectus is a part.

Citigroup Global Markets, Inc. and Friedman, Billings, Ramsey & Co., Inc., on behalf of the underwriters, may, in their discretion, release all or any portion of the common stock subject to the lock-up agreements with our directors and officers at any time without notice or stockholder approval, in which case, our other stockholders would also be released from the restrictions pursuant to the registration rights agreement. Citigroup Global Markets, Inc. and Friedman, Billings, Ramsey & Co., Inc. have no specific criteria with respect to the conditions under which they may release securities subject to lock-up agreements, which releases are subject to their sole discretion.

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DESCRIPTION OF CAPITAL STOCK AND

CERTAIN MATERIAL PROVISIONS OF MARYLAND LAW,

OUR CHARTER AND BYLAWS

The following is a summary of certain provisions of our charter and bylaws and Maryland law, does not purport to be complete and is subject to and qualified in its entirety by reference to Maryland law and our charter and bylaws. See “Where You Can Find More Information” for information on how to obtain copies of our charter and bylaws.

General

Our charter provides that we may issue up to 100,000,000 shares of common stock, $.01 par value per share, and 10,000,000 shares of preferred stock, $.01 par value per share. A majority of our board of directors may, without any action by the stockholders, amend our charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue. Upon completion of this offering, shares of common stock will be issued and outstanding and no shares of preferred stock will be issued and outstanding. Under Maryland law, stockholders generally are not liable for the corporation’s debts or obligations.

Common Stock

We expect to receive an opinion of counsel that all shares of common stock offered hereby will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of any other class or series of stock and to the provisions of the charter regarding the restrictions on transfer of stock, holders of shares of our common stock are entitled to receive dividends on such stock if, as and when authorized by our board of directors and declared by us out of assets legally available therefor and to share ratably in the assets of our company legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up after payment of or adequate provision for all of our known debts and liabilities.

Subject to the provisions of our charter regarding the restrictions on transfer of stock, each outstanding share of our common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as provided with respect to any other class or series of stock, the holders of such shares will possess the exclusive voting power. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of our common stock can elect all of the directors then standing for election and the holders of the remaining shares will not be able to elect any directors.

Holders of shares of our common stock have no preference, conversion, exchange, sinking fund or redemption rights and have no preemptive rights to subscribe for any of our securities. Subject to the provisions of our charter regarding the restrictions on transfer of stock, shares of our common stock will have equal dividend, liquidation and other rights. Holders of shares of our common stock listed on a national securities exchange or the NASDAQ National Market will not have appraisal rights.

Our charter authorizes our board of directors to reclassify any unissued shares of common stock into other classes or series of classes of stock and to establish the number of shares in each class or series and to set the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption for each such class or series.

Preferred Stock

Our charter authorizes our board of directors to classify any unissued shares of preferred stock and to reclassify any previously classified but unissued shares of any series, as authorized by our board of directors. Prior to issuance of shares of each series, our board of directors is required by the MGCL and our charter to set, subject to the provisions of the charter regarding the restrictions on transfer of stock, the terms, preferences,

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conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such series. Thus, our board of directors could authorize the issuance of shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interests.

Power to Issue Additional Shares of Common Stock and Preferred Stock

We believe that the power of our board of directors to issue additional authorized but unissued shares of common stock or preferred stock and to classify or reclassify unissued shares of common stock or preferred stock and thereafter to cause us to issue such classified or reclassified shares of stock will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs of our company that might arise. The additional classes or series, as well as the common stock, will be available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although our board of directors has no intention at the present time of doing so, it could authorize us to issue a class or series that could have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interests.

Restrictions on Ownership and Transfer

In order for us to qualify for and maintain our status as a REIT under the Code, our shares of stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of twelve months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities such as qualified pension plans) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made).

In order for us to qualify as a REIT under the Code, our charter, subject to certain exceptions, contains restrictions on the number of shares of our capital stock that a person may beneficially own. Our charter provides that, subject to some exceptions, no person may beneficially own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% of our common stock or of the value of the aggregate outstanding shares of our capital stock (the “Ownership Limit”), except that certain “look through entities,” such as mutual funds, may beneficially own up to 15% of our common stock or of the value of the aggregate outstanding shares of our capital stock (the “Look-Through Ownership Limit”). Our board of directors has waived this ownership limitation for Marriott Hotel Services, Inc. and certain institutional investors and may waive it again in the future so long as our board of directors determines these waivers should not affect our REIT qualification. Our charter also prohibits any person from (a) owning shares of our capital stock if such ownership would result in our being “closely held” within the meaning of Section 856(h) of the Code, (b) transferring shares of our capital stock if such transfer would result in our capital stock being owned by fewer than 100 persons, (c) owning shares of our capital stock if such ownership would cause any of our income that would otherwise qualify as rents from real property to fail to qualify as such, including as a result of any of our hotel management companies failing to qualify as “eligible independent contractors” under the REIT rules and (d) owning shares of our capital stock if such ownership would result in our failing to qualify as a REIT for federal income tax purposes. Any person who acquires or attempts or intends to acquire beneficial ownership of shares of our capital stock that will or may violate any of these restrictions on transferability and ownership will be required to give notice immediately to us and provide us with such other information as we may request in order to determine the effect of such transfer on our status as a REIT.

Our board of directors, in its sole discretion, may exempt a person from the Ownership Limit and the Look-Through Ownership Limit. However, the board of directors may not grant such an exemption to any person

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whose ownership, direct or indirect, of in excess of 9.8% of the value of the outstanding shares of our capital stock would result in us failing to qualify as a REIT. The person seeking an exemption must represent to the satisfaction of our board of directors that it will not violate the aforementioned restrictions. The person also must agree that any violation or attempted violation of any of the foregoing restrictions or any such other restrictions that may be imposed by our board of directors will result in the automatic transfer of the shares of stock causing such violation to the Trust (as defined below). The board of directors may require a ruling from the Internal Revenue Service or an opinion of counsel, in either case in form and substance satisfactory to the board of directors in its sole discretion, in order to determine or ensure our status as a REIT. The foregoing restrictions on transferability and ownership will not apply if our board of directors determines that it is no longer in the best interests of the company to attempt to qualify, or continue to qualify, as a REIT.

If any transfer of shares of our capital stock or other event occurs which, if effective, would result in any person beneficially or constructively owning shares of our capital stock in excess or in violation of the above transfer or ownership limitations (a “Prohibited Owner”), then that number of shares of our capital stock the beneficial or constructive ownership of which otherwise would cause such person to violate such limitations (rounded to the nearest whole share) shall be automatically transferred to a trust (the “Trust”) for the exclusive benefit of one or more charitable beneficiaries (the “Charitable Beneficiary”), and the Prohibited Owner shall not acquire any rights in such shares. Such automatic transfer shall be deemed to be effective as of the close of business on the Business Day (as defined in our charter) prior to the date of such violative transfer. Shares of stock held in the Trust shall be issued and outstanding shares of our capital stock. The Prohibited Owner shall not benefit economically from ownership of any shares of stock held in the Trust, shall have no rights to dividends and shall not possess any rights to vote or other rights attributable to the shares of stock held in the Trust. The trustee of the Trust (the “Trustee”) shall have all voting rights and rights to dividends or other distributions with respect to shares of stock held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid prior to the discovery by us that shares of stock have been transferred to the Trustee shall be paid by the recipient of such dividend or distribution to the Trustee upon demand, and any dividend or other distribution authorized but unpaid shall be paid when due to the Trustee. Any dividend or distribution so paid to the Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting rights with respect to shares of stock held in the Trust and, subject to Maryland law, effective as of the date that such shares of stock have been transferred to the Trust, the Trustee shall have the authority (at the Trustee’s sole discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by us that such shares have been transferred to the Trust and (ii) to recast such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary. However, if we have already taken irreversible corporate action, then the Trustee shall not have the authority to rescind and recast such vote.

Within 20 days of receiving notice from us that shares of our capital stock have been transferred to the Trust, the Trustee shall sell the shares of stock held in the Trust to a person, designated by the Trustee, whose ownership of the shares will not violate the ownership limitations set forth in our charter. Upon such sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as follows. The Prohibited Owner shall receive the lesser of (i) the price paid by the Prohibited Owner for the shares or, if the Prohibited Owner did not give value for the shares in connection with the event causing the shares to be held in the Trust (e.g., a gift, devise or other such transaction), the Market Price (as defined in the charter) of such shares on the day of the event causing the shares to be held in the Trust and (ii) the price per share received by the Trustee from the sale or other disposition of the shares held in the Trust. Any net sale proceeds in excess of the amount payable to the Prohibited Owner shall be paid immediately to the Charitable Beneficiary. If, prior to the discovery by us that shares of stock have been transferred to the Trust, such shares are sold by a Prohibited Owner, then (i) such shares shall be deemed to have been sold on behalf of the Trust and (ii) to the extent that the Prohibited Owner received an amount for such shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to the aforementioned requirement, such excess shall be paid to the Trustee upon demand.

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In addition, shares of our capital stock held in the Trust shall be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Trust (or, in the case of a devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date we, or our designee, accept such offer. We shall have the right to accept such offer until the Trustee has sold the shares of stock held in the Trust. Upon such a sale to us, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner.

In addition, until such time as any class of our equity securities becomes “publicly-offered securities” for purposes of certain regulations promulgated under ERISA by the U.S. Department of Labor, or the Plan Assets Regulation, our charter limits equity participation by “benefit plan investors” to less than 25% in the aggregate so that such participation in any class of our equity securities by such “benefit plan investors” will not be deemed “significant.” For such purposes, the terms “benefit plan investors” and “significant” are determined by reference to the Plan Assets Regulation. For as long as this provision of our charter applies, if any transfer of shares of our capital stock or other event occurs that would result in equity participation by benefit investors of greater than 25% in the aggregate in violation of the above equity participation limitations, then that number of shares of our capital stock the ownership of which otherwise would cause such person to violate such limitations (rounded up to the nearest whole share) shall automatically be transferred to the Trust in the manner and with the other effects and consequences described above. We believe that, under the Plan Assets Regulation, our common stock should be considered “publicly-offered securities” after this offering and therefore this 25% limitation will no longer be applicable at that time. Thereafter, “benefit plan investors” will be prohibited from owning any class of our capital stock that does not qualify as “publicly-offered securities.” See “ERISA Considerations.”

All certificates representing shares of common stock and preferred stock, if any, will bear a legend referring to the restrictions described above.

Each stockholder shall provide to us such information as we may request, in good faith, in order to determine our status as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance.

These ownership limits could delay, defer or prevent a transaction or a change in control of our company that might involve a premium price for the common stock or otherwise be in the best interests of our stockholders.

Transfer Agent and Registrar

The transfer agent and registrar of our common stock is American Stock Transfer & Trust Company.

Certain Provisions of Maryland Law and of Our Charter and Bylaws

Number, Election and Removal of Directors

Our charter and bylaws provide that the number of directors may be set only by our board of directors, but may never be less than the minimum number required by the MGCL nor more than 15. Our bylaws provide that a plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a director.

The charter provides that, at such time as the company has three independent directors and our common stock is registered under the Exchange Act, the company elects to be subject to the provision of Subtitle 8 of Title 3 of the MGCL regarding the filling of vacancies on the board of directors. Accordingly, at such time, except as may be provided by the board of directors in setting the terms of any class or series of preferred stock, any and all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the

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remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy shall serve for the remainder of the full term of the directorship in which such vacancy occurred and until a successor is elected and qualified.

The charter provides that a director may be removed with or without cause by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors.

Charter Amendments and Extraordinary Corporate Actions

Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation’s charter. Our charter generally provides that, if such amendment or action is declared advisable by the board of directors and approved by at least 75% of the continuing directors (as defined in the charter), such amendment or action may be approved by stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. If such amendment or action is declared advisable by the board of directors, but does not receive the continuing director approval referred to above, such amendment or action must be approved by stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter.

Amendment of Bylaws

The charter and bylaws provide that our board of directors has the exclusive power to adopt, alter or repeal any provision of the bylaws and to make new bylaws.

Business Combinations

Under the MGCL, certain “business combinations” (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns ten percent or more of the voting power of the corporation’s shares or an affiliate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the then-outstanding voting stock of the corporation (an “Interested Stockholder”) or an affiliate of such an Interested Stockholder are prohibited for five years after the most recent date on which the Interested Stockholder becomes an Interested Stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (b) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the Interested Stockholder with whom (or with whose affiliate) the business combination is to be effected, unless, among other conditions, the corporation’s common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder. A person is not an Interested Stockholder under the statute if the board of directors approved in advance the transaction by which he otherwise would have become an Interested Stockholder. The board of directors may provide that its approval is subject to compliance with any terms and conditions determined by the board. Our board of directors has adopted a resolution opting out of the business combination provisions of the MGCL. This resolution, however, may be altered or repealed in whole or in part at any time and we may opt back into the business combination provisions of the MGCL. If this resolution is repealed, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

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Control Share Acquisitions

The MGCL provides that “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror, by officers or by directors who are employees of the corporation. “Control Shares” are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-tenth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of control shares, subject to certain exceptions.

A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.

If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.

The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation.

Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our capital stock. There can be no assurance that such provision will not be amended or eliminated at any time in the future.

Unsolicited Takeovers

The “unsolicited takeover” provisions of the MGCL permit the board of directors, without stockholder approval and regardless of what is currently provided in the charter or bylaws, to implement takeover defenses, some of which we do not yet have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of the company under the circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then current market price.

Advance Notice of Director Nominations and New Business

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(b) with respect to special meetings of stockholders, only the business specified in our notice of meeting may be brought before the meeting of stockholders and nominations of persons for election to the board of directors may be made only (i) pursuant to our notice of the meeting, (ii) by the board of directors or (iii) provided that the board of directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the bylaws.

Anti-takeover Effect of Certain Provisions of Maryland Law and of the Charter and Bylaws

If the applicable board resolution is repealed, the business combination provisions and, if the applicable provision in the bylaws is rescinded, the control share acquisition provisions of the MGCL, the provisions of the charter relating to removal of directors and the advance notice provisions of the bylaws, among others, could delay, defer or prevent a transaction or a change in control of the company that might involve a premium price for holders of our common stock or otherwise be in their best interests.

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DESCRIPTION OF THE PARTNERSHIP AGREEMENT OF

DIAMONDROCK HOSPITALITY LIMITED PARTNERSHIP

The following is a summary of the material terms of the agreement of limited partnership of our operating partnership, which we refer to as the Partnership Agreement. This summary does not purport to be complete and is subject to and qualified in its entirety by reference to the Partnership Agreement, a copy of which is an exhibit to the registration statement of which this prospectus is a part. See “Where You Can Find More Information.” Because, and so long as, we own all of the partnership interests in our operating partnership, we will be able to amend the Partnership Agreement of our operating partnership and we may, from time to time, modify the agreement so that it varies from the description set forth herein.

Management of the Operating Partnership

DiamondRock Hospitality Limited Partnership is a Delaware limited partnership that was formed on May 26, 2004. As sole general partner of the operating partnership, we exercise exclusive and complete responsibility and discretion in our operating partnership’s day-to-day management and control. We can cause our operating partnership to enter into certain major transactions including acquisitions, developments and dispositions of properties and refinancings of existing indebtedness. Currently, our wholly-owned subsidiary, DiamondRock Hospitality, LLC is the only limited partner of our operating partnership. Generally, limited partners may not transact business for, or participate in the management activities or decisions of, our operating partnership, except as provided in the Partnership Agreement and as required by applicable law. Certain restrictions under the Partnership Agreement restrict our ability to engage in a business combination as more fully described in “—Extraordinary Transactions” below.

In the event of any conflict in the fiduciary duties owed by us to our stockholders and by us, as general partner of our operating partnership, to the limited partners, we may act in the best interests of our stockholders without violating our fiduciary duties to the limited partners or being liable for any resulting breach of our duties to the limited partners.

The Partnership Agreement provides that our operating partnership is empowered to do any and all acts and things for the furtherance and accomplishment of our business, including all activities pertaining to the acquisition and operation of our properties, provided that our operating partnership shall not take, and will refrain from taking, any action which, in our judgment could adversely affect our ability to qualify as a REIT.

Removal of the General Partners; Transfer of the General Partner’s Interest

The Partnership Agreement provides that the limited partners may not remove us as general partner of the operating partnership. We may not transfer any of our interests as a general or limited partner in the operating partnership except (i) in connection with certain extraordinary transactions as described below; (ii) if the limited partners holding more than 50% of the units held by limited partners (other than limited partnership units held by us) consent to such transfer; or (iii) to certain of our affiliates.

Amendments of the Partnership Agreement

Amendments to the Partnership Agreement may only be proposed by us as general partner. Generally, the Partnership Agreement may be amended with our approval and the approval of the limited partners holding a majority of all outstanding limited partner units (including limited partner units held by us). Certain amendments that would, among other things, convert a limited partner’s interest into a general partner’s interest, modify the limited liability of a limited partner in a manner adverse to such limited partner, alter the rights of a partner to receive distributions or allocations, alter or modify the redemption right of a partner in a manner adverse to such partner, or cause the termination of the partnership prior to the time set forth in the Partnership Agreement must be approved by each partner that would be adversely affected by such amendment.

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Notwithstanding the foregoing, we will have the power, without the consent of the limited partners, to amend the Partnership Agreement as may be required to:

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add to our obligations or surrender any right or power granted to us or any of our affiliates for the benefit of the limited partners;

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reflect the admission, substitution, termination or withdrawal of partners in accordance with the Partnership Agreement;

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set forth and reflect in the Partnership Agreement the designations, rights, powers, duties and preferences of the holders of any additional partnership units issued pursuant to the Partnership Agreement;

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reflect a change that is of an inconsequential nature and does not adversely affect the limited partners in any material respect, or to cure any ambiguity, correct or supplement any provision in the Partnership Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under the Partnership Agreement that will not be inconsistent with law or with the provisions of the Partnership Agreement; or

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satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law.

Certain provisions affecting our rights and duties as general partner (e.g., restrictions relating to certain extraordinary transactions involving us or the operating partnership) may not be amended without the approval of a majority of the limited partnership units (excluding limited partnership units held by us).

Redemption Rights

Under the current partnership agreement, limited partners have the right, commencing on or after the first anniversary of the issuance of the units to the limited partners, to require our operating partnership to redeem all or a portion of their units for cash or, at our option, shares of common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distributions and similar events. The cash redemption amount per unit is based on the market price of our common stock at the time of redemption. We presently anticipate that we would elect to issue shares of our common stock in exchange for units in connection with each redemption request, rather than having our operating partnership redeem the units for cash. With each redemption or exchange, we would increase our percentage ownership interest in our operating partnership. Limited partners who hold units may exercise this redemption right from time to time, in whole or in part, subject to certain limitations, unless delivery of shares of common stock to a limited partner pursuant to the redemption right would be prohibited by our charter or prohibited by federal or state securities laws or regulations. At this time, no limited partnership units have been issued (other than to us), and that we may issue limited partnership units with rights, preferences and privileges different from those described in this paragraph or in this registration statement of which this prospectus is a part.

Issuance of Additional Units, Common Stock or Convertible Securities

As sole general partner, we have the ability to cause our operating partnership to issue additional partnership units to the partners (including to us). These additional units may be issued in one or more classes, or one or more series of any of such classes, with such designations, preferences, rights, powers and duties as we may determine in our sole and absolute discretion. In addition, we may issue additional shares of our common stock or rights, options, warrants or convertible or exchangeable securities, but only if it causes our operating partnership to issue, to us, partnership units or rights, options, warrants or convertible or exchangeable securities of the operating partnership having designations, preferences and other rights, so that the economic interests of the operating partnership’s units issued are substantially similar to the securities that we have issued. Unless expressly granted by the operating partnership, no limited partner will have preemptive, preferential or similar rights with respect to additional capital contributions to the operating partnership or the issuance or sale of any partnership units.

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Tax Matters

As the general partner, we are the tax matters partner of our operating partnership and, as such, have authority to make tax elections under the Code on behalf of our operating partnership.

Extraordinary Transactions

The Partnership Agreement provides that we may not generally engage in any merger, consolidation, or other combination with any other person or sale of all or substantially all of our assets, or any reclassification, recapitalization or change of outstanding shares of our common stock or adopt a plan of liquidation and dissolution (an “extraordinary transaction”) unless the holders of units will receive, or have the opportunity to receive, at least the same consideration per unit as holders of our common stock receive per share of common stock in the transaction. If holders of units will not be treated in this manner in connection with a proposed extraordinary transaction, we cannot engage in such a transaction unless limited partners (other than us) holding more than 50% of the units held by limited partners vote to approve the extraordinary transaction.

We may also engage in an extraordinary transaction without the consent or approval of the limited partners if we engage in a merger, or other combination of assets with another entity and:

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substantially all of the assets of the surviving entity are held directly or indirectly by the operating partnership or another limited partnership or limited liability company which is the surviving partnership of a merger, consolidation or combination of assets with the operating partnership;

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the rights, preferences and privileges of such unit holders in the surviving partnership are at least as favorable as those in effect immediately prior to the consummation of the transaction and as those applicable to any other limited partners or non-managing members of the surviving partnership; and

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the limited partners may exchange their units in the surviving partnership for either the same consideration per unit as holders of our common stock receive per share of common stock in the transaction, or if the ultimate controlling person of the surviving partnership has common equity securities, at an exchange ratio based on the relative fair market value of those securities and our common stock.

Term

The operating partnership will continue in full force and effect until 2104, or until sooner dissolved in accordance with the terms of the Partnership Agreement or as otherwise provided by law.

Exculpation and Indemnification of the General Partner

The Partnership Agreement generally provides that we will incur no liability to the operating partnership or any limited partner for losses sustained or liabilities incurred as a result of errors in judgment or mistakes of fact or law or of any act or omission unless we acted in bad faith and the act or omission was material to the matter giving rise to the loss or liability. In addition, we are not responsible for any misconduct or negligence on the part of our agents, provided we appointed our agents in good faith. We may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisors, and any action we may take or omit to take in reliance upon the opinion of such persons, as to matters that we reasonably believe to be within such persons’ professional or expert competence, shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. The Partnership Agreement also provides for indemnification of us, our directors and officers, limited partners and such other persons as we may from time to time designate against any losses, claims, damages, judgments, penalties, fines, settlements and reasonable expenses actually incurred by such person in connection with the preceding unless it is established that:

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the act or omission of the indemnitee was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty;

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the indemnitee actually received an improper personal benefit in money, property or services; or

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in the case of any criminal proceeding, the indemnitee had reasonable cause to believe that the act or omission was unlawful.

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SHARES ELIGIBLE FOR FUTURE SALE

General

Prior to this offering, there has been no public market for our stock. Future sales of substantial amounts of our common stock in the public market following this offering, or the possibility of such sales occurring, could adversely affect prevailing market prices for our common stock or could impair our ability to raise capital through further offerings of equity securities.

Upon completion of this offering, we expect to have outstanding shares of our common stock ( shares if the underwriters’ over-allotment option is exercised in full) including shares of restricted stock with an approximate value of $ million ( shares) issued to our officers and directors in consideration of their services as officers and directors of our company. Our common stock issued in this offering will be freely tradable by persons other than our affiliates, subject to certain limitations on ownership set forth in our governing documents. See “Description of Capital Stock and Certain Material Provisions of Maryland Law, Our Charter and Bylaws—Restrictions on Ownership and Transfer.”

The number of shares of common stock that may be issued pursuant to awards granted under the 2004 Stock Option and Incentive Plan is limited to 1,107,500 shares of common stock. See “Management—Equity Incentive Plan.”

Upon completion of this offering, up to of our outstanding shares will be “restricted” shares, as that term is defined in Rule 144 under the Securities Act. Until we file a registration statement on Form S-8 to register our issuance of common shares under our 2004 Stock Option and Incentive Plan, any restricted shares of common stock that we may issue under the 2004 Stock Option and Incentive Plan will also be “restricted” shares. The resale restrictions applicable to “restricted” shares are described below. We intend to file a registration statement on Form S-8 to register our issuance of common shares under our 2004 Stock Option and Incentive Plan.

We cannot assure you of:

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the likelihood that an active market for the shares will develop;

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the liquidity of any such market;

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the ability of stockholders to sell their common stock; or

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the prices that stockholders may be able to obtain for their common stock.

In connection with our July 2004 private placement, we entered into a registration rights agreement with Friedman, Billings, Ramsey & Co. on behalf of the holders of common stock issued in the private placement. Pursuant to that agreement, we have included in the registration statement, of which this prospectus is a part, shares of common stock proposed to be offered by certain selling stockholders who purchased shares of our common stock originally issued and sold in the private placement. We have also agreed to file a shelf registration statement for the benefit of the holders of shares of our common stock issued in the private placement within nine months after the completion of the private placement and to use our commercially reasonable efforts to have the shelf registration declared effective as promptly as practicable, but no later than six months after the filing (subject to certain extensions). We agreed to cause this shelf registration statement to remain effective until the first to occur of (1) the disposition of all shares of common stock sold in the private placement under a registration statement or pursuant to Rule 144, (2) the date on which the shares of common stock sold in the private placement are saleable under Rule 144 (k) under the Securities Act or (3) the date that is two years after the effective date of the shelf registration statement. Following effectiveness of this shelf registration statement, substantially all of the shares sold in the private placement will be freely tradeable.

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Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares of our common stock for at least one year would be entitled to sell, within any three-month period, that number of shares that does not exceed the greater of:

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1% of the shares of our common stock then outstanding, which will equal approximately shares immediately after this offering ( shares if the underwriters exercise their over-allotment option in full); or

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the average weekly trading volume of our common stock on the New York Stock Exchange during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC.

Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us.

Rule 701

Rule 701 under the Securities Act may be relied upon with respect to the resale of securities originally purchased from us by our employees, trustees or officers prior to this offering. In addition, the SEC has indicated that Rule 701 will apply to the typical stock options granted by an issuer before it becomes a public company, along with the shares acquired upon exercise of those options, including exercises after the date of this offering. Securities issued in reliance on Rule 701 are restricted securities and, subject to the “lock-up” agreements described above, beginning 90 days after the date of this prospectus, may be sold by:

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persons other than affiliates, in ordinary brokerage transactions; and

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by affiliates under Rule 144 without compliance with the one-year holding requirement.

Redemption Rights

Under our Partnership Agreement, limited partners have the right, commencing on or after the first anniversary of the issuance of the units to the limited partners, to require our operating partnership to redeem all or a portion of their units for cash or, at our option, shares of common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distributions and similar events. The cash redemption amount per unit is based on the market price of our common stock at the time of redemption. We presently anticipate that we would elect to issue shares of our common stock in exchange for units in connection with each redemption request, rather than having our operating partnership redeem the units for cash. With each redemption or exchange, we would increase our percentage ownership interest in our operating partnership. Limited partners who hold units may exercise this redemption right from time to time, in whole or in part, subject to certain limitations, unless delivery of shares of common stock to a limited partner pursuant to the redemption right would be prohibited by our charter or prohibited by federal or state securities laws or regulations. It should be noted that no limited partnership units have been issued (other than to us), and that we may issue limited partnership units with rights, preferences and privileges different from those described in this paragraph or in this registration statement of which this prospectus is a part.

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FEDERAL INCOME TAX CONSIDERATIONS

The following summary outlines certain U.S. federal income tax considerations relating to an investment in our common stock, including the federal income tax consequences under current law that are likely to be material to a purchaser of our common stock in this offering who is a “U.S. stockholder” (as hereinafter defined) and who will hold its shares as a capital asset. This summary does not contain a complete discussion of the federal tax aspects of the investment that may be important to you. Moreover, it does not address any foreign, state, or local tax consequences of an investment in our common stock. The provisions of the Code concerning the federal income tax treatment of a REIT and its stockholders are highly technical and complex; the following discussion sets forth only certain aspects of those provisions. This summary is intended to provide you with general information only and is not intended as a substitute for careful tax planning. The discussion below assumes that you will hold our common stock as a capital asset. We do not address the federal income tax consequences that may be relevant to stockholders subject to special treatment under the Code, including, without limitation, insurance companies, regulated investment companies, financial institutions, broker-dealers, tax-exempt or non-U.S. investors (except as specifically discussed below), foreign governments, stockholders that hold our stock as a hedge, part of a straddle, conversion transaction, or other arrangement involving more than one position, or through a partnership or other entity, or U.S. expatriates.

This summary is based on provisions of the Code, applicable final and temporary Treasury Regulations, judicial decisions, and administrative rulings and practice, all in effect as of the date of this prospectus, and should not be construed as legal advice. No assurance can be given that future legislative or administrative changes or judicial decisions will not affect the accuracy of the descriptions or conclusions contained in this summary. In addition, any such changes may be retroactive and apply to transactions entered into prior to the date of their enactment, promulgation or release. We do not expect to seek a ruling from the Internal Revenue Service, or IRS, regarding any of the federal income tax issues discussed in this prospectus, and no assurance can be given that the IRS will not challenge any of the positions we take and that such a challenge will not succeed. Prospective purchasers of our common stock are urged to consult their own tax advisors prior to any investment in our common stock concerning the potential federal, state, local, and foreign tax consequences of the investment with specific reference to their own tax situations.

Except as otherwise noted, references in this discussion of Federal Income Tax Considerations to “we,” “our,” “us” and “our company” refer to DiamondRock Hospitality Company and not our taxable REIT subsidiaries.

Taxation of the Company

During 2004, we received a $2.5 million non-recoverable key money payment from Marriott in connection with our acquisition of the Courtyard Midtown East that, if recognized as income to DiamondRock Hospitality Company for tax purposes, would have prevented us from qualifying as a REIT for 2004. Based on the unique circumstances of that transaction with Marriott, it is not entirely clear whether the receipt of the key money should have been recognized as income to DiamondRock Hospitality Company for tax purposes. For the above reasons, we decided to defer the REIT election until 2005 and be taxed as a C corporation for 2004. We will pay approximately $900,000 of taxes as a C corporation in 2004. Assuming that we could have qualified as a REIT for 2004 and that the key money was received by our TRS, and not DiamondRock Hospitality Company, we estimate that our tax liability for 2004 would have been approximately $1 million as a REIT. In 2005, we began structuring our key money transactions to clarify that our TRS, and not DiamondRock Hospitality Company, will receive all future key money payments. Beginning January 1, 2005, we believe we have qualified as a REIT, and we will elect to be taxed as a REIT for the calendar year ended December 31, 2005 and for subsequent taxable years. Except as otherwise noted, the following discussion assumes that we qualify as a REIT effective January 1, 2005.

In connection with this offering, we will receive an opinion of Goodwin Procter LLP that our form of organization and prior, current and proposed ownership and method of operations will permit us to qualify as a REIT under Sections 856 through 860 of the Code for our taxable year ending December 31, 2005 and for

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subsequent taxable years. The opinion of Goodwin Procter LLP will be based on various assumptions and on our representations to them concerning our current and continuing organization, our prior, current and proposed ownership and operations, and our shareholders’ current and future relationships with our hotel management companies, and other matters relating to our ability to qualify as a REIT. The opinion will be expressly conditioned upon the accuracy of such assumptions and representations, which Goodwin Procter LLP will not verify. Moreover, qualification and taxation as a REIT will depend upon our ability to meet, through actual annual operating results, distribution levels, diversity of stock ownership and the absence of prohibited relationships with our hotel management companies, the various and complex REIT qualification tests imposed under the Code, the results of which will not be reviewed or verified by Goodwin Procter LLP. See “—Qualification as a REIT” below. Accordingly, no assurance can be given that we will in fact satisfy such requirements. The opinion of Goodwin Procter LLP will be based upon current law, which is subject to change either prospectively or retroactively. Changes in applicable law could modify the conclusions expressed in the opinion. Moreover, unlike a ruling from the IRS, an opinion of Goodwin Procter LLP is not binding on the IRS, and no assurance can be given that the IRS could not successfully challenge our status as a REIT.

If we qualify as a REIT, we generally will be allowed to deduct dividends paid to our stockholders, and, as a result, we generally will not be subject to federal income tax on that portion of our ordinary income or net capital gain that we currently distribute to our stockholders. We expect to make distributions to our stockholders on a regular basis as necessary to avoid material federal income tax and to comply with the REIT requirements. See “—Qualification as a REIT—Annual Distribution Requirements” below.

Notwithstanding the foregoing, even if we qualify for taxation as a REIT, we nonetheless may be subject to federal income tax in certain circumstances, including the following:

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We will be required to pay federal income tax on our undistributed taxable income, including net capital gain;

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We may be subject to the “alternative minimum tax;”

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We may be subject to tax at the highest corporate rate on certain income from “foreclosure property” (generally, property acquired by reason of default on a lease or indebtedness held by us);

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We will be subject to a 100% federal income tax on net income from “prohibited transactions” (generally, certain sales or other dispositions of property, sometimes referred to as “dealer property,” held primarily for sale to customers in the ordinary course of business);

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If we fail to satisfy the 75% gross income test or the 95% gross income test (discussed below), but nonetheless maintain our qualification as a REIT pursuant to certain relief provisions, we will be subject to a 100% federal income tax on the greater of (i) the amount by which we fail the 75% gross income test or (ii) the amount by which 95% of our gross income exceeds the amount of our income qualifying under the 95% gross income test, multiplied by a fraction intended to reflect our profitability;

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If we fail to satisfy the 5% or the 10% asset tests, and the failure qualifies under the Non-De Minimis Exception, as described below under “—Asset Tests,” then we will have to pay an excise tax equal to the greater of (i) $50,000; and (ii) an amount determined by multiplying the net income generated during a specified period by the assets that caused the failure by the highest federal income tax applicable to corporations.

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If we fail to satisfy any REIT requirements other than the income test or asset test requirements, described below under “—Income Tests” and “—Asset Tests,” respectively, and we qualify for a reasonable cause exception, then we will have to pay a penalty equal to $50,000 for each such failure.

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We will be subject to a 4% excise tax if certain distribution requirements are not satisfied;

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Because we were a C corporation for our taxable year ending December 31, 2004, we generally will be subject to a corporate-level tax on a taxable disposition of any appreciated asset we hold as of the effective date of our REIT election, which is expected to be January 1, 2005. Specifically, if we dispose

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of a built-in-gain asset in a taxable transaction prior to tenth anniversary of the effective date of our REIT election, we would be subject to tax at the highest regular corporate rate (currently 35%) on the lesser of the gain recognized and the asset’s built-in-gain.

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If we dispose of an asset acquired by us from a C corporation in a transaction in which we took the C corporation’s tax basis in the asset, we may be subject to tax at the highest regular corporate rate on the appreciation inherent in such asset as of the date of acquisition by us;

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We will be required to pay a 100% tax on any redetermined rents, redetermined deductions, and excess interest. In general, redetermined rents are rents from real property that are overstated as a result of services furnished to any of our non-TRS tenants by one of our TRSs. Redetermined deductions and excess interest generally represent amounts that are deducted by a TRS lessee or other TRS for amounts paid to us that are in excess of the amounts that would have been deducted based on arm’s-length negotiations; and

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Income earned by any of our TRS lessees and other TRSs will be subject to tax at regular corporate rates.

No assurance can be given that the amount of any such federal income taxes will not be substantial. We note that the assets we acquired during 2004 were acquired on or after October 27, 2004, and we do not believe the built-in gain in such assets as of January 1, 2005 was material. Accordingly, we do not expect to be subject to significant corporate tax liabilities if we decide to sell an asset we acquired in 2004 within the 10-year period following our REIT election. In addition, because we were a C corporation in 2004, we (including our consolidated subsidiaries) are subject to tax on our 2004 taxable income at regular corporate rates.

Qualification as a REIT

In General

The REIT provisions of the Code apply to a domestic corporation, trust, or association (i) that is managed by one or more trustees or directors, (ii) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest, (iii) that properly elects to be taxed as a REIT, (iv) that is neither a financial institution nor an insurance company, (v) that uses a calendar year for federal income tax purposes and complies with applicable recordkeeping requirements, and (vi) that meets the additional requirements discussed below.

Ownership Tests

Commencing with our second REIT taxable year, (i) the beneficial ownership of our common stock must be held by 100 or more persons during at least 335 days of a 12-month taxable year (or during a proportionate part of the taxable year of less than 12 months) for each of our taxable years and (ii) during the last half of each taxable year, no more than 50% in value of our stock may be owned, directly or indirectly, by or for five or fewer individuals (the “5/50 Test”). The term “individual” for purposes of the 5/50 Test includes a private foundation, a trust providing for the payment of supplemental unemployment compensation benefits, and a portion of a trust permanently set aside or to be used exclusively for charitable purposes. A qualified trust described in Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code generally is not treated as an individual; rather, shares held by it are treated as owned proportionately by its beneficiaries. However, if treating qualified trusts as individuals would cause us to fail the 5/50 Test, we may be treated as a “pension-held REIT.” See “—Unrelated Business Taxable Income—In General.” Stock ownership is determined by applying the constructive ownership provisions of Section 544(a) of the Code, subject to certain modifications.

We believe we have issued sufficient common stock to satisfy the above ownership requirements. In addition, our charter restricts ownership and transfers of our stock that would violate these requirements, although these restrictions may not be effective in all circumstances to prevent a violation. We will be deemed to

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have satisfied the 5/50 Test for a particular taxable year if we have complied with all the requirements for ascertaining the ownership of our outstanding stock in that taxable year and have no reason to know that we have violated the 5/50 Test.

Income Tests

In order to maintain qualification as a REIT, we must annually satisfy two gross income requirements:

First, at least 75% of our gross income (excluding gross income from prohibited transactions) for each taxable year must be derived, directly or indirectly, from investments relating to real property or mortgages on real property or from certain types of temporary investments (or any combination thereof). Qualifying income for the purposes of this 75% gross income test generally includes: (a) rents from real property, (b) interest on debt secured by mortgages on real property or on interests in real property, (c) dividends or other distributions on, and gain from the sale of, shares in other REITs, (d) gain from the sale of real estate assets (other than gain from prohibited transactions), (e) income and gain derived from foreclosure property, and (f) income from certain types of temporary investments; and

Second, in general, at least 95% of our gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from the real property investments described above and from other types of dividends and interest, gain from the sale or disposition of stock or securities that are not dealer property, or any combination of the above. Gross income from certain transactions entered into by us to hedge indebtedness we incur to acquire or carry real estate assets is not included in gross income for purposes of the 95% income test.

For purposes of the 75% and the 95% gross income tests, we are treated as receiving our proportionate share of our operating partnership’s gross income.

If we fail to satisfy one or both of the 75% or the 95% gross income tests, we may nevertheless qualify as a REIT for such year if we are entitled to relief under certain provisions of the Code. Those relief provisions generally will be available if our failure to meet such tests is due to reasonable cause and not due to willful neglect and we file a schedule describing each item of the Company’s gross income for such year(s) in accordance with regulations to be prescribed by the Secretary of the Treasury. It is not possible, however, to state whether in all circumstances we would be entitled to the benefit of these relief provisions. As discussed above in “—Taxation of the Company,” even if these relief provisions were to apply, we would be subject to federal income tax with respect to our excess net income.

Hotel properties

Operating revenues from our hotel properties are not qualifying income for purposes of either the 75% or the 95% gross income test. Accordingly, in order for us to generate qualifying income with respect to our hotel property investments under the REIT rules, we must master-lease our hotels. Specifically, our operating partnership has formed a subsidiary that has elected to be treated as our TRS and may, in the future, form other subsidiaries that elect to be treated as our TRSs (each a “TRS lessee”). The TRS lessee master-leases (directly or through subsidiaries) hotel properties from the operating partnership (or its affiliates). In certain instances (such as non-U.S. investments), we may own a hotel property through a TRS. One or more hotel management company will manage the hotel properties leased to each TRS lessee or owned by a TRS. We also may lease a hotel property to an unrelated lessee.

In general, rent paid by a related party tenant, such as a TRS lessee, is not qualifying “rents from real property” for purposes of the REIT gross income tests, but rent paid by a TRS lessee to our operating partnership with respect to a lease of a “qualified lodging facility” from the operating partnership can be qualifying rents from real property under the REIT rules as long as such TRS lessee does not directly or indirectly operate or manage any hotel property or provide rights to any brand name under which any hotel property is operated.

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Instead, the hotel property must be operated on behalf of the TRS lessee by a person who qualifies as an “eligible independent contractor,” defined as an “independent contractor” who is, or is related to a person who is, actively engaged in the trade or business of operating “qualified lodging facilities” for any person unrelated to us and the TRS lessee. See “—Investments in Taxable REIT Subsidiaries” below for a further discussion of the issue and a discussion of the definition of an “independent contractor” and the qualification of Marriott (or another hotel management company) as an “eligible independent contractor.” A “qualified lodging facility” is a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis, provided that wagering activities are not conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. A “qualified lodging facility” includes customary amenities and facilities operated as part of, or associated with, the lodging facility as long as such amenities and facilities are customary for other properties of a comparable size and class owned by other unrelated owners. We believe that our hotel properties are qualified lodging facilities. Rent paid by a TRS lessee that failed to qualify as rents from real property under the REIT rules would be non-qualifying income for purposes of the REIT gross income tests.

Two other limitations may affect our ability to treat rent paid by a TRS lessee or other lessee as qualifying rents from real property under the REIT rules. If the rent attributable to personal property leased by the TRS lessee (or other lessee) in connection with a lease of real property is greater than 15% of the total rent under the lease, then the portion of the rent attributable to such personal property will not qualify as rents from real property. Also, an amount received or accrued will not qualify as rents from real property for purposes of either the 75% or the 95% gross income test if it is based in whole or in part on the income or profits derived by any person from such property. However, an amount received or accrued will not be excluded from rents from real property solely by reason of being based on a fixed percentage or percentages of receipts or sales. To comply with the limitation on rents attributable to personal property, a TRS lessee may acquire furnishings, equipment, and/or personal property used in hotel property, at least to the extent that they exceed this 15% limit. To comply with the prohibition on rent based on net income, the leases will provide that each TRS lessee is obligated to pay our operating partnership a minimum base rent together with a gross percentage rent, at rates intended to equal market rental rates.

In addition, rent paid by a TRS lessee or other lessee that leases a hotel property from our operating partnership will constitute rents from real property for purposes of the REIT gross income tests only if the lease is respected as a true lease for federal income tax purposes and is not treated as a service contract, joint venture, or some other type of arrangement. The determination of whether a lease is a true lease depends upon an analysis of all the surrounding facts and circumstances. Potential investors in shares of our common stock should be aware, however, that there are no controlling regulations, published administrative rulings, or judicial decisions involving leases with terms substantially similar to the contemplated leases between our operating partnership and the TRS lessees that discuss whether the leases constitute true leases for federal income tax purposes. We believe that the leases with our TRS lessees should be treated as true leases; however, there can be no assurance that the IRS or a court will not assert a contrary position. If any leases between our operating partnership and a TRS lessee are re-characterized as service contracts or partnership agreements, rather than as true leases, part or all of the payment that we receive from such TRS lessee would not be considered rent or would otherwise fail the various requirements for qualification as rents from real property.

Finally, for rents received by or attributed to us to qualify as rents from real property, we generally must not furnish or render any services to tenants, other than through a TRS or an independent contractor from whom we derive no income, except that we and our operating partnership may directly provide services that are “usually or customarily rendered” in connection with the rental of properties for occupancy only, or are not otherwise considered rendered to the occupant “for his convenience.” We believe that neither we nor our operating partnership will provide any services to our TRS lessee or any other tenants.

We believe that, for purposes of both the 75% and the 95% gross income tests, our operating partnership’s investments in hotel properties generally give rise to qualifying income in the form of rents from real property, and that gains on the sales of the hotel properties will also constitute qualifying income. However, no assurance

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can be given that either the rents or the gains will constitute qualifying income. In that case, we may not be able to satisfy either the 75% or the 95% gross income test and, as a result, could lose our REIT status. In the case of hotel properties owned, rather than leased, by a TRS, dividends from such TRS of its earnings and gains from such hotel properties would not be qualifying income for purposes of the 75% gross income test.

Asset Tests

At the close of each quarter of our taxable year, we must also satisfy three tests relating to the nature of our assets. First, real estate assets, cash and cash items, and government securities must represent at least 75% of the value of our total assets. Second, of the investments that are not included in the 75% asset class and that are not securities of our TRS lessees or other TRSs, (i) the value of any one issuer’s securities owned by us may not exceed 5% of the value of our total assets and (ii) we may not own more than 10% by vote or by value of any one issuer’s outstanding securities. For purposes of the 10% value test, debt instruments issued by a partnership are not classified as “securities” to the extent of our interest as a partner in such partnership (based on our proportionate share of the partnership’s equity interests and certain debt securities) or if at least 75% of the partnership’s gross income, excluding income from prohibited transactions, is qualifying income for purposes of the 75% gross income test. For purposes of the 10% value test, the term “securities” also does not include debt securities issued by another REIT, certain “straight debt” securities (for example, qualifying debt securities of a corporation of which we own no equity interest), loans to individuals or estates, and accrued obligations to pay rent. Third, securities of our TRS lessees or other TRSs cannot represent more than 20% of our total assets. Although we intend to meet these asset tests, no assurance can be given that we will be able to do so. For purposes of these asset tests, we are treated as holding our proportionate share of our operating partnership’s assets.

We will monitor the status of our assets for purposes of the various asset tests and will endeavor to manage our portfolio in order to comply at all times with such tests. If we fail to satisfy the asset tests at the end of a calendar quarter, we will not lose our REIT status if one of the following exceptions applies:

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We satisfied the asset tests at the end of the preceding calendar quarter, and the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by the acquisition of one or more non-qualifying assets; or

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We eliminate any discrepancy within 30 days after the close of the calendar quarter in which it arose.

Moreover, if we fail to satisfy the asset tests at the end of a calendar quarter during a taxable year, we will not lose our REIT status if one of the following additional exceptions applies:

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De Minimis Exception: The failure is due to a violation of the 5% or 10% asset tests referenced above and is “de minimis” (for this purpose, a “de minimis” failure is one that arises from our ownership of assets the total value of which does not exceed the lesser of 1% of the total value of our assets at the end of the quarter in which the failure occurred and $10 million), and we either dispose of the assets that caused the failure or otherwise satisfy the asset tests within 6 months after our identification of the failure; or

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Non-De Minimis Exception: All of the following requirements are satisfied: (i) the failure is not “de minimis” as defined above, (ii) the failure is due to reasonable cause and not willful neglect, (iii) we file a schedule in accordance with Treasury Regulations providing a description of each asset that caused the failure, (iv) we either dispose of the assets that caused the failure or otherwise satisfy the asset tests within 6 months after our identification of the failure, and (v) we pay an excise tax as described above in “—Taxation of Our Company.”

Annual Distribution Requirements

In order to qualify as a REIT, we must distribute dividends (other than capital gain dividends) to our stockholders in an amount at least equal to (A) the sum of (i) 90% of our “REIT taxable income” (determined

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without regard to the dividends paid deduction and by excluding any net capital gain) and (ii) 90% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of non-cash income. We generally must pay such distributions in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year and if paid on or before the first regular dividend payment after such declaration.

To the extent that we do not distribute all of our net capital gain and REIT taxable income, we will be subject to tax on the undistributed amount at corporate capital gains and ordinary tax rates, respectively. Furthermore, if we should fail to distribute during each calendar year at least the sum of (i) 85% of our ordinary income for such year, (ii) 95% of our capital gain net income for such year, and (iii) any undistributed ordinary income and capital gain net income from prior periods, we will be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amounts actually distributed.

Under certain circumstances, we may be able to rectify a failure to meet the distribution requirement for a year by paying “deficiency dividends” to our stockholders in a later year that may be included in our deduction for dividends paid for the earlier year. Thus, we may be able to avoid being taxed on amounts distributed as deficiency dividends; however, we will be required to pay interest based upon the amount of any deduction taken for deficiency dividends.

In addition, dividends we pay must not be preferential. If a dividend is preferential, it will not qualify for the dividends paid deduction. To avoid paying preferential dividends, we must treat every stockholder of the class of stock with respect to which we make a distribution the same as every other stockholder of that class, and we must not treat any class of stock other than according to its dividend rights as a class.

We may retain and pay income tax on net long-term capital gains we received during the tax year. To the extent we so elect, (i) each stockholder must include in its income (as long-term capital gains) its proportionate share of our undistributed long-term capital gains, (ii) each stockholder’s basis in its shares of our stock is increased by the included amount of the undistributed long-term capital gains, and (iii) each stockholder is deemed to have paid, and receives a credit for, its proportionate share of the tax paid by us on the undistributed long-term capital gains.

To qualify as a REIT, we may not have, at the end of any taxable year, any undistributed earnings and profits accumulated in any non-REIT taxable year. Our non-REIT earnings and profits will include any earnings and profits we accumulated before the effective date of our REIT election. We expect to distribute sufficient earnings and profits before December 31, 2005 to eliminate any non-REIT earnings and profits, which distributions would be in addition to distributions we are required to make to satisfy the 90% distribution test (as discussed above) and avoid incurring tax on our undistributed income.

Failure to Qualify

If we fail to qualify as a REIT and such failure is not an asset test or income test failure, we generally will be eligible for a relief provision if the failure is due to reasonable cause and not willful neglect and we pay a penalty of $50,000 with respect to such failure.

If we fail to qualify for taxation as a REIT in any taxable year and no relief provisions apply, we generally will be subject to tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Distributions to our stockholders in any year in which we fail to qualify as a REIT will not be deductible by us. In such event, to the extent of current or accumulated earnings and profits, all distributions to our stockholders will be taxable as dividend income. Subject to certain limitations in the Code, corporate stockholders may be eligible for the dividends received deduction, and individual, trust and estate stockholders may be eligible to treat the dividends received from us as qualified dividend income taxable as net capital gains, under the provisions of Section 1(h)(11) of the Code, through the end of 2008. Unless entitled to relief under

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specific statutory provisions, we also will be ineligible to elect REIT status again prior to the fifth taxable year following the first year in which we failed to qualify as a REIT under the Code.

Our qualification as a REIT for federal income tax purposes will depend on our continuing to meet the various requirements summarized above governing the ownership of our outstanding shares, the nature of our assets, the sources of our income, and the amount of our distributions to our stockholders. Although we intend to operate in a manner that will enable us to comply with such requirements, there can be no certainty that such intention will be realized. In addition, because the relevant laws may change, compliance with one or more of the REIT requirements may become impossible or impracticable for us.

Qualified REIT Subsidiaries and Disregarded Entities

If we own a corporate subsidiary that is a “qualified REIT subsidiary” (“QRS”), or if we or our operating partnership own 100% of the membership interests in a limited liability company or other unincorporated entity that does not elect to be treated as a corporation for federal income tax purposes, the separate existence of the QRS, limited liability company or other unincorporated entity generally will be disregarded for federal income tax purposes. Generally, a QRS is a corporation, other than a TRS, all of the stock of which is owned by a REIT. A limited liability company or other unincorporated entity 100% owned by a single member that does not elect to be treated as a corporation for federal income tax purposes generally is disregarded as an entity separate from its owner for federal income tax purposes. All assets, liabilities, and items of income, deduction, and credit of the QRS or disregarded entity will be treated as assets, liabilities, and items of income, deduction, and credit of its owner. If we own a QRS or a disregarded entity, neither will be subject to federal corporate income taxation, although such entities may be subject to state and local taxation in some states.

Taxation of the Operating Partnership

Our operating partnership currently is a disregarded entity because we own 100% of the interests in it, directly or through other disregarded entities. If we admit other limited partners, our operating partnership will be treated as a partnership for tax purposes, as described below.

Under the Code, a partnership is not subject to federal income tax, but is required to file a partnership tax information return each year. In general, the character of each partner’s share of each item of income, gain, loss, deduction, credit, and tax preference is determined at the partnership level. Each partner is then allocated a distributive share of such items in accordance with the partnership agreement and is required to take such items into account in determining the partner’s income. Each partner includes such amount in income for any taxable year of the partnership ending within or with the taxable year of the partner, without regard to whether the partner has received or will receive any cash distributions from the partnership. Cash distributions, if any, from a partnership to a partner generally are not taxable unless and to the extent they exceed the partner’s basis in its partnership interest immediately before the distribution. Any amounts in excess of such tax basis will generally be treated as a sale of such partner’s interest in the partnership.

If and when our operating partnership becomes taxable as a partnership, rather than a disregarded entity, we generally will be treated for federal income tax purposes as contributing our properties to the operating partnership at such time. If our properties are appreciated at such time, we could recognize a smaller share of tax depreciation, and a larger share of tax gain on sale, from such properties subsequent to that deemed contribution, as compared to our percentage interest in the operating partnership. This deemed contribution also could trigger tax gain in some circumstances, but we expect to structure the admission of outside partners in a manner that should avoid any such gain.

As noted above, for purposes of the REIT income and asset tests, we are treated as holding or receiving our proportionate share of our operating partnership’s assets and income respectively. We will control our operating partnership and intend to operate it consistently with the requirements for our qualification as a REIT.

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We may use our operating partnership to acquire hotel properties in exchange for operating partnership units, in order to permit the sellers of such properties to defer recognition of their tax gain. In such a transaction, our initial tax basis in the hotel properties acquired generally will be less than the purchase price of the hotel properties. Consequently, our depreciation deductions for such properties may be less, and our tax gain on a sale of such properties may be more, than the deductions or gain, respectively, that we would have if we acquired these properties in taxable transactions. In addition, we may issue equity compensation to employees in the form of interests in our operating partnership that provides for capital gain treatment to the employees but does not generate a corresponding deduction for our operating partnership.

The discussion above assumes our operating partnership will be treated as a “partnership” for federal income tax purposes once it is no longer treated as a disregarded entity. Generally, a domestic unincorporated entity such as our operating partnership with two or more partners is treated as a partnership for federal income tax purposes unless it affirmatively elects to be treated as a corporation. However, certain “publicly traded partnerships” are treated as corporations for federal income tax purposes. Once our operating partnership is no longer a disregarded entity for federal income tax purposes, we intend to comply with one or more exceptions from treatment as a corporation under the publicly traded partnership rules. Failure to qualify for such an exception would prevent us from qualifying as a REIT.

Investments in Taxable REIT Subsidiaries

We and each subsidiary intended to qualify as a TRS, including each TRS lessee that leases one or more hotel properties from our operating partnership, have made (or will make, as applicable) a joint election for the TRS to be treated as a taxable REIT subsidiary of our REIT. A domestic TRS (or a foreign TRS with income from a U.S. business) pays federal, state, and local income taxes at the full applicable corporate rates on its taxable income prior to payment of any dividends. Thus, our TRS will pay corporate tax on key money when it is paid, notwithstanding the treatment of key money payments for accounting purposes. A TRS owning or leasing a hotel property outside of the U.S. may pay foreign taxes. The taxes owed by our TRSs could be substantial. To the extent that our TRSs are required to pay federal, state, local, or foreign taxes, the cash available for distribution by us will be reduced accordingly.

A TRS is permitted to engage in certain kinds of activities that cannot be performed directly by us without jeopardizing our REIT status. A TRS is subject to limitations on the deductibility of payments made to us which could materially increase its taxable income and also is subject to prohibited transaction taxes on certain other payments made, directly or indirectly, to us. We will be subject to a 100% tax on the amounts of any rents from real property, deductions, or excess interest received from a TRS that would be reduced through reapportionment under Section 482 of the Code in order to more clearly reflect the income of the TRS. In particular, this 100% tax would apply to our share of any rent paid by a TRS lessee that was determined to be in excess of a market rate rent.

As discussed above in “—Qualification as a REIT—Income Tests,” our TRS leases qualified lodging facilities from our operating partnership (or its affiliates). However, a TRS may not directly or indirectly operate or manage any hotel property or provide rights to any brand name under which any hotel property is operated. Specifically, rents paid by a TRS lessee can qualify as rents from real property only so long as the property is operated and managed on behalf of the TRS lessee by an “eligible independent contractor,” which is a person (or entity) that satisfies the following requirements: (i) such person is, or is related to a person who is, actively engaged in the trade or business of operating qualified lodging facilities for any person unrelated to us or the TRS lessee; (ii) such person does not own, directly or indirectly, more than 35% of our stock; and (iii) not more than 35% of such person is owned, directly or indirectly, by one or more persons owning 35% or more of our stock. For purposes of determining whether these ownership limits are satisfied, actual ownership as well as constructive ownership under the rules of Section 318 of the Code (with certain modifications) is taken into account. For example, (a) interests owned by a partnership are also treated as owned proportionately by its partners, (b) interests held by a partner with a 25% or greater share of partnership capital interests or profits interests are also treated as owned by the partnership, (c) interests held by a 10% or greater stockholder are also

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treated as held by the corporation, and (d) interests held by a corporation are also treated as held by a 10% or greater stockholder (in the proportion that such stockholder’s stock bears to all the stock of the corporation). However, if any class of our stock or the stock of a person attempting to qualify as an eligible independent contractor is regularly traded on an established securities market, only persons who own, directly or indirectly, more than 5% of such class of stock shall be taken into account as owning any of the stock of such class for purposes of applying the 35% limitation described in clause (iii) above. In addition, the IRS has ruled to the effect that an advisor or similar fiduciary to a REIT cannot also qualify as an eligible independent contractor with respect to the REIT.

Each TRS lessee (and any other of our TRSs that owns an interest in our hotel properties) has hired (or will hire) a hotel management company that we believe qualifies as an eligible independent contractor to manage and operate the hotels leased by (or owned through) the TRS. Marriott intends to qualify as an eligible independent contractor. In that regard, constructive ownership under Section 318 of the Code resulting, for example, from relationships between Marriott and our other shareholders could impact Marriott’s ability to satisfy the applicable ownership limit. Because of the broad scope of the attribution rules of Section 318 of the Code, it is possible that not all prohibited relationships will be identified and avoided. The existence of such a relationship would disqualify Marriott (or another hotel management company) as an eligible independent contractor, which would in turn disqualify us as a REIT. Our charter restricts ownership and transfer of our shares in a manner intended to facilitate continuous qualification of Marriott (or another hotel management company) as an eligible independent contractor, but no assurances can be given that such transfer and ownership restrictions will ensure that Marriott (or another hotel management company) will, in fact, be an eligible independent contractor. As noted above, Goodwin Procter LLP’s opinion as to REIT qualification will be based upon our representations and covenants as to the absence of such relationships. Marriott’s failure to qualify as an eligible independent contractor will not give us the right to terminate the management agreement.

Taxation of U.S. Stockholders Holding Common Stock

The term “U.S. stockholder” means an investor that, for U. S. federal income tax purposes, is (i) a citizen or resident of the United States, (ii) a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) an estate, the income of which is subject to United States federal income taxation regardless of its source, or (iv) a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. In addition, as used herein, the term U.S. stockholder does not include any entity that is subject to special treatment under the Code.

Distributions by us, other than capital gain dividends, will constitute ordinary dividends to the extent of our current or accumulated earnings and profits as determined for federal income tax purposes. In general, these dividends will be taxable as ordinary income and will not be eligible for the dividends-received deduction for corporate stockholders. Our ordinary dividends generally will not qualify as “qualified dividend income” treated as net capital gain for U.S. stockholders that are individuals, trusts, or estates. However, distributions to U.S. stockholders that are individuals, trusts, or estates generally will constitute qualified dividend income taxed as net capital gains to the extent they are attributable to (i) qualified dividend income we receive from other corporations, such as our TRS lessees and other TRSs, and (ii) dividends paid from our undistributed earnings or from built-in gains taxed at the corporate level and provided we properly designate the distributions as such. We do not anticipate distributing a significant amount of qualified dividend income.

To the extent that we make a distribution in excess of our current and accumulated earnings and profits (a “return of capital distribution”), the distribution will be treated first as a tax-free return of capital, reducing the tax basis in a U.S. stockholder’s shares. To the extent a return of capital distribution exceeds a U.S. stockholder’s tax basis in its shares, the distribution will be taxable as capital gain realized from the sale of such shares.

Dividends declared by us in October, November, or December and payable to a stockholder of record on a specified date in any such month shall be treated both as paid by us and as received by the stockholder on

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December 31 of the year, provided that the dividend is actually paid by us during January of the following calendar year.

We will be treated as having sufficient earnings and profits to treat as a dividend any distribution up to the amount required to be distributed in order to avoid imposition of the 4% excise tax discussed in “—Taxation of the Company” above. Moreover, any deficiency dividend will be treated as an ordinary or a capital gain dividend, as the case may be, regardless of our earnings and profits. As a result, stockholders may be required to treat certain distributions as taxable dividends that would otherwise result in a tax-free return of capital.

Capital Gain Dividends

Distributions that are properly designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed our actual net capital gain for the taxable year) without regard to the period for which the stockholder has held its shares. However, corporate stockholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. In addition, U.S. stockholders may be required to treat a portion of any capital gain dividend as “unrecaptured Section 1250 gain,” taxable at a maximum rate of 25%, if we incur such gain. Capital gain dividends are not eligible for the dividends-received deduction for corporations.

As noted above, the REIT provisions do not require us to distribute our long-term capital gain, and we may elect to retain and pay income tax on our net long-term capital gains received during the taxable year. If we so elect for a taxable year, our stockholders would include in income as long-term capital gains their proportionate share of such portion of our undistributed long-term capital gains for the taxable year as we may designate. A stockholder would be deemed to have paid its share of the tax paid by us on such undistributed capital gains, which would be credited or refunded to the stockholder. The stockholder’s basis in its shares would be increased by the amount of undistributed long-term capital gains (less the capital gains tax paid by us) included in the stockholder’s long-term capital gains.

Passive Activity Loss and Investment Interest Limitations

Our distributions and gain from the disposition of shares will not be treated as passive activity income and, therefore, U.S. stockholders will not be able to apply any “passive losses” against such income. With respect to non-corporate U. S. stockholders, our dividends (to the extent they do not constitute a return of capital) that are taxed at ordinary income rates will generally be treated as investment income for purposes of the investment interest limitation; however, net capital gain from the disposition of shares (or distributions treated as such), capital gain dividends, and dividends taxed at net capital gains rates generally will be excluded from investment income except to the extent the U.S. stockholder elects to treat such amounts as ordinary income for federal income tax purposes. U.S. stockholders may not include on their own federal income tax returns any of our tax losses.

Sale or Disposition of Shares

In general, any gain or loss realized upon a taxable disposition of shares of our common stock by a stockholder that is not a dealer in securities will be a long-term capital gain or loss if the shares have been held for more than one year and otherwise as a short-term capital gain or loss. However, any loss upon a sale or exchange of the shares by a stockholder who has held such stock for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent of our distributions or undistributed capital gains required to be treated by such stockholder as long-term capital gain. All or a portion of any loss realized upon a taxable disposition of shares may be disallowed if other shares are purchased within 30 days before or after the disposition.

Unrelated Business Taxable Income

In General

In general, a tax-exempt organization is exempt from federal income tax on its income, except to the extent of its “unrelated business taxable income” (“UBTI”), which is defined by the Code as the gross income derived

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from any trade or business which is regularly carried on by a tax-exempt entity and unrelated to its exempt purposes, less any directly connected deductions and subject to certain modifications. For this purpose, the Code generally excludes from UBTI any gain or loss from the sale or other disposition of property (other than stock in trade or property held primarily for sale in the ordinary course of a trade or business), dividends, interest, rents from real property, and certain other items. However, a portion of any such gains, dividends, interest, rents, and other items generally are UBTI if derived from debt-financed property, based on the amount of “acquisition indebtedness” with respect to such debt-financed property. Before making an investment in shares of our common stock, a tax-exempt stockholder should consult its own tax advisors with regard to UBTI and the suitability of the investment in our stock.

Distributions we make to a tax-exempt employee pension trust or other domestic tax-exempt stockholder or gains from our shares held as capital assets generally will not constitute UBTI unless the exempt organization’s shares are debt-financed property (e.g., the stockholder has borrowed to acquire or carry its shares). This general rule does not apply, however, to distributions to certain pension trusts that are qualified trusts (as defined below) and that hold more than 10% (by value) of our stock. For these purposes, a qualified trust is defined as any trust described in Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code. If we are treated as a “pension-held REIT,” such qualified trusts will be required to treat a percentage of their dividends received from us as UBTI if we incur UBTI. We will be treated as a pension-held REIT if (i) we would fail the 5/50 Test if qualified trusts were treated as “individuals” for purposes of the 5/50 Test and (ii) we are “predominantly held” by qualified trusts. See “—Qualification as a REIT—Ownership Tests.” We will be “predominantly held” by qualified trusts if either (i) a single qualified trust holds more than 25% by value of our stock or (ii) one or more qualified trusts, each owning more than 10% by value of our stock, hold in the aggregate more than 50% by value of our stock. The percentage of any dividend received from us treated as UBTI would be equal to the ratio of (a) the gross UBTI (less certain associated expenses) earned by us (treating us as if we were a qualified trust and, therefore, subject to tax on UBTI) to (b) our total gross income (less certain associated expenses). A de minimis exception applies where the ratio set forth in the preceding sentence is less than 5% for any year; in that case, no dividends are treated as UBTI.

In the event we are a pension held REIT, a qualified trust owning 10% or more of our shares should expect to recognize UBTI as a result of its investment. Although our charter provides restrictions on ownership and transfer of our stock that we believe will reduce the likelihood of us being a pension held REIT, these restrictions may not in all circumstances prevent us from being treated as a pension held REIT and we cannot assure you that we will never be treated as a pension held REIT.

Special Issues

Social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans that are exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of Section 501(c) of the Code are subject to different UBTI rules, which generally will require them to characterize distributions from us as UBTI.

Information Reporting Requirements and Backup Withholding Tax

We will report to our U.S. stockholders and to the IRS the amount of distributions paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a U.S. stockholder may be subject to backup withholding at the rate of 28% with respect to distributions paid, unless such stockholder (i) is a corporation or other exempt entity and, when required, proves its status or (ii) certifies under penalties of perjury that the taxpayer identification number the stockholder has furnished to us is correct and the stockholder is not subject to backup withholding and otherwise complies with the applicable requirements of the backup withholding rules. A U.S. stockholder that does not provide us with its correct taxpayer identification number also may be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the stockholder’s income tax liability.

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Taxation of Non-U.S. Stockholders Holding Common Stock

The rules governing U.S. federal income taxation of our stockholders who are beneficial owners of our common stock and who are not U.S. stockholders, such as nonresident alien individuals, foreign corporations, foreign partnerships, and other foreign stockholders (“non-U.S. stockholders”), are complex. This section is only a summary of such rules. We urge prospective non-U.S. stockholders to consult their own tax advisors to determine the impact of federal, state, local, and foreign income tax laws on ownership of the common stock, including any reporting requirements.

Distributions

A non-U.S. stockholder that receives a distribution that is not attributable to gain from our sale or exchange of “United States real property interests” (as defined below) and that we do not designate as a capital gain dividend or retained capital gain generally will recognize ordinary income to the extent that we pay the distribution out of our current or accumulated earnings and profits. A withholding tax equal to 30% of the gross amount of the distribution ordinarily will apply unless an applicable tax treaty reduces or eliminates the tax. Under some treaties, lower withholding rates do not apply to dividends from REITs. However, if a distribution is treated as effectively connected with the non-U.S. stockholder’s conduct of a U.S. trade or business, the non-U.S. stockholder generally will be subject to federal income tax on the distribution at graduated rates (in the same manner as U.S. stockholders are taxed on distributions) and also may be subject to the 30% branch profits tax in the case of a corporate non-U.S. stockholder. We plan to withhold U.S. income tax at the rate of 30% on the gross amount of any distribution paid to a non-U.S. stockholder that is not a capital gain dividend or distribution that is not attributable to gain from the sale or exchange of “United States real property interests” unless either (i) a lower treaty rate applies and the non-U.S. stockholder files with us any required IRS Form W-8 (for example, an IRS Form W-8BEN) evidencing eligibility for that reduced rate or (ii) the non-U.S. stockholder files with us an IRS Form W-8ECI claiming that the distribution is effectively connected income.

A non-U.S. stockholder generally will not incur tax on a return of capital distribution in excess of our current and accumulated earnings and profits that is not attributable to the gain from our disposition of a “United States real property” interest if the excess portion of the distribution does not exceed the adjusted basis of the non-U.S. stockholder’s common stock. Instead, the excess portion of the distribution will reduce the adjusted basis of that common stock. However, a non-U.S. stockholder will be subject to tax on such a distribution that exceeds both our current and accumulated earnings and profits and the non-U.S. stockholder’s adjusted basis in the common stock, if the non-U.S. stockholder otherwise would be subject to tax on gain from the sale or disposition of its common stock, as described below. Because we generally cannot determine at the time we make a distribution whether or not the distribution will exceed our current and accumulated earnings and profits, we normally will withhold tax on the entire amount of any distribution at the same rate as we would withhold on a dividend. However, a non-U.S. stockholder may obtain a refund of amounts that we withhold if we later determine that a distribution in fact exceeded our current and accumulated earnings and profits.

We may be required to withhold 10% of any distribution that exceeds our current and accumulated earnings and profits. Consequently, although we intend to withhold at a rate of 30% on the entire amount of any distribution that is neither attributable to the gain from our disposition of a “United States real property interest” nor designated by us as a capital gain dividend, to the extent that we do not do so, we will withhold at a rate of 10% on any portion of a distribution not subject to withholding at a rate of 30%.

Subject to the exception discussed below for 5% or smaller holders of regularly traded classes of stock, a non-U.S. stockholder will incur tax on distributions that are attributable to gain from our sale or exchange of “United States real property interests” under special provisions of the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA. The term “United States real property interests” includes interests in U.S. real property and shares in U.S. corporations at least 50% of whose assets consist of interests in U.S. real property. Under those rules, a non-U.S. stockholder is taxed on distributions attributable to gain from sales of United States real property interests as if the gain were effectively connected with the non-U.S. stockholder’s conduct of a U.S.

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trade or business. A non-U.S. stockholder thus would be taxed on such a distribution at the normal capital gain rates applicable to U.S. stockholders, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of a nonresident alien individual. A corporate non-U.S. stockholder not entitled to treaty relief or exemption also may be subject to the 30% branch profits tax on such a distribution. We generally must withhold 35% of any distribution subject to these rules that we could designate as a capital gain distribution (“35% FIRPTA Withholding”). A non-U.S. stockholder may receive a credit against its tax liability for the amount we withhold.

A non-U.S. stockholder that owns no more than 5% of our common stock at all times during a taxable year will not be subject to 35% FIRPTA Withholding with respect to distributions that are attributable to gain from our sale or exchange of U.S. real property interests, provided that our common stock is regularly traded on an established securities market. Instead, any distributions made to such non-U.S. stockholder will be subject to the general withholding rules discussed above in “—Taxation of Non-U.S. Stockholders Holding Common Stock,” which generally impose a withholding tax equal to 30% of the gross amount of each distribution (unless reduced by treaty).

Dispositions

If the gain on the sale of the common stock were taxed under FIRPTA, a non-U.S. stockholder would be taxed on that gain in the same manner as U.S. stockholders with respect to that gain, subject to applicable alternative minimum tax, and a special alternative minimum tax in the case of nonresident alien individuals. A non-U.S. stockholder generally will not incur tax under FIRPTA on a sale or other disposition of our stock if we are a “domestically-controlled qualified investment entity,” which means that, during the shorter of the period since our formation and the five-year period ending on the date of the distribution or dispositions, non-U.S. stockholders hold, directly or indirectly, less than 50% in value of our stock. We cannot assure you that we will be a domestically-controlled qualified investment entity. However, the gain from a sale of our common stock by a non-U.S. stockholder will not be subject to tax under FIRPTA if (i) our common stock is considered regularly traded under applicable Treasury Regulations on an established securities market, such as the New York Stock Exchange, and (ii) the non-U.S. stockholder owned, actually or constructively, 5% or less of our common stock at all times during a specified testing period. After this offering, we expect that our common stock will be considered regularly traded on an established securities market. Accordingly, a non-U.S. stockholder should not incur tax under FIRPTA with respect to gain on a sale of our common stock unless it owns, actually or constructively, more than 5% of our common stock provided that our common stock continues to be regularly traded on an established securities market. Furthermore, a non-U.S. stockholder generally will incur tax on gain not subject to FIRPTA if (i) the gain is effectively connected with the non-U.S. stockholder’s U.S. trade or business, in which case the non-U.S. stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain, or (ii) the non-U.S. stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, in which case the non-U.S. stockholder will incur a 30% tax on his or her capital gains.

Purchasers of our stock from a non-U.S. stockholder generally will be required to withhold and remit to the IRS 10% of the purchase price unless at the time of purchase (i) any class of our stock is regularly traded on an established securities market (subject to certain limits if the shares sold are not themselves part of such a regularly traded class) or (ii) we are a domestically controlled qualified investment entity. The non-U.S. stockholder may receive a credit against its tax liability for the amount withheld.

State, Local, and Foreign Tax

We may be subject to state, local and foreign tax in states, localities and foreign countries in which we do business or own property. The tax treatment applicable to us and our stockholders in such jurisdictions may differ from the federal income tax treatment described above.

Prospective stockholders should consult their own tax advisers for further information about federal, state, local, and other tax consequences of investing in our common stock.

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ERISA CONSIDERATIONS

The following is a summary of certain considerations associated with an investment in us by a pension, profit sharing or other employee benefit plan, subject to Title I of ERISA or Section 4975 of the Code, that we refer to as “ERISA Plans.” A fiduciary considering investing assets of an ERISA Plan in shares of our common stock should take into account the factors described in this prospectus, including those that are described below, and also should consult its legal advisor about ERISA, fiduciary and other considerations before making such an investment.

A regulation promulgated under ERISA by the United States Department of Labor, or the “Plan Assets Regulation,” generally provides that when an ERISA Plan makes an equity investment in another entity, the underlying assets of the entity will not be considered “plan assets” of the ERISA Plan if, among other provisions not summarized here, the equity interest is a “publicly-offered security” or if it is established that equity participation in the entity by “benefit plan investors,” as described in the Plan Assets Regulation, is not “significant.” For this purpose, equity participation by benefit plan investors is not significant if their aggregate interest is less than 25% of the value of each class of equity securities in the entity, disregarding, for purposes of such determination, certain interests enumerated in the Plan Assets Regulation.

Historically, we have not treated the requirements of Subtitle A and Parts 1 and 4 of Subtitle B of Title I of ERISA and Section 4975 of the Code as applying to investments in us because our charter provides that until such time as any class of our equity securities becomes “publicly traded” for purposes of the Plan Assets Regulation, equity participation in any class of equity securities by benefit plan investors will be limited to less than 25% of the value of such class, disregarding for such purposes certain interests enumerated in the Plan Assets Regulation.

Further, subject to the following, we believe that after this offering, our common stock should qualify as a “publicly-offered security” under the Plan Assets Regulation. Under the Plan Assets Regulation, a security is a “publicly-offered security” if it is freely transferable, part of a class of securities that is widely held, and either (i) part of a class of securities registered under section 12(b) or 12(g) of the Securities Exchange Act of 1934 or (ii) sold to an ERISA Plan as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act of 1933 and the class of securities of which that security is a part is registered under the Securities Exchange Act of 1934 within 120 days (or such later time as may be allowed by the Securities and Exchange Commission) after the end of the fiscal year of the issuer during which this offering of those securities to the public occurred. “Widely-held” for this purpose means the security is of a class owned by 100 or more investors independent of the issuer and of one another. “Freely transferable,” again for purposes of the Plan Assets Regulation, is a question to be determined on the basis of all relevant facts and circumstances but, where the minimum investment is $10,000 or less, is ordinarily not adversely affected by some enumerated restrictions including restrictions against any transfer that would result in a termination or reclassification of the issuer for Federal tax purposes.

While there are restrictions imposed on the transfer of shares of our common stock, we believe they are the type of restrictions on transfer generally permitted under the Plan Assets Regulation or are not otherwise material and should not result in the failure of our stock to be “freely transferable” within the meaning of the Plan Assets Regulation. We also believe that certain restrictions on transfer that derive from the securities laws and from contractual arrangements with the underwriters in connection with this offering should not result in the failure of our common stock to be “freely transferable.”

Assuming that our stock is “widely held” within the meaning of the Plan Assets Regulation and that no facts and circumstances other than those referred to in the preceding paragraph exist that restrict transferability of our common stock, we believe that, under the Plan Assets Regulation, our common stock should be considered “publicly-offered securities” after this offering, and, therefore, that our underlying assets should not be deemed to be plan assets of any ERISA Plan investors that choose to invest in us.

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If our assets were deemed to be plan assets of ERISA Plans that were invested in us, this would result, among other things, in (i) the application of the prudence and other fiduciary standards of ERISA, (ii) potential liability of persons having investment discretion over the assets of the ERISA Plans investing in us, and (iii) the possibility that certain transactions that we might enter into in the ordinary course of our business and operation might constitute “prohibited transactions” under ERISA and the Code. A prohibited transaction, in addition to imposing potential personal liability upon fiduciaries of the ERISA Plans, may also result in the imposition of an excise tax under the Code and correction or unwinding of the transaction.

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UNDERWRITING

Citigroup Global Markets Inc. and Friedman, Billings, Ramsey & Co., Inc. are acting as representatives of the underwriters of this offering. Subject to the terms and conditions in the underwriting agreement entered into in connection with the sale of our common stock described in this prospectus, the underwriters named below have severally agreed to purchase the number of shares of common stock set forth opposite their respective names.


Underwriter		Number of Shares of Common Stock
Citigroup Global Markets Inc.		—
Friedman, Billings, Ramsey & Co., Inc.






Total:

The underwriting agreement provides that the obligations of the underwriters to purchase and accept delivery of the shares of common stock offered by this prospectus are subject to approval by their counsel of legal matters and to other conditions contained in the underwriting agreement including, among other items, the receipt of legal opinions from counsel, the receipt of comfort letters from our current auditors, the absence of any material adverse changes affecting us or our business and the absence of any objections from the National Association of Securities Dealers Inc. with respect to the fairness and reasonableness of the underwriting terms. The underwriters are obligated to purchase and accept delivery of all of the shares of common stock offered by this prospectus, other than those covered by the over-allotment option described below, if any shares are taken. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or, in the event that the purchase commitments of the defaulting underwriters represent more than 10% of the total number shares of common stock offered by this prospectus, the underwriting agreement may be terminated.

The underwriters propose to offer the shares of common stock directly to the public at the public offering price indicated on the cover page of this prospectus and to various dealers at that price less a concession not to exceed $ per share, of which $ may be reallowed to other dealers. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the underwriters. No reduction shall change the amount of proceeds to be received by us as indicated on the cover page of this prospectus. The common stock is offered by the underwriters as stated in this prospectus, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part.

We have granted to the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase from time to time up to an aggregate of additional shares of our common stock to cover over-allotments, if any, at the public offering price less the underwriting discount. If the underwriters exercise their over-allotment option to purchase any of the additional shares of common stock, each underwriter, subject to certain conditions, will become obligated to purchase these additional shares based on the underwriters’ percentage purchase commitment in the offering as indicated in the table above. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares offered by this prospectus are being sold. The underwriters may exercise the over-allotment option to cover over-allotments made in connection with the sale of the shares of common stock offered in this offering.

Each underwriter has represented, warranted and agreed that:

•

it has not offered or sold and, prior to the expiry of a period of six months from the closing date, will not offer or sell any shares included in this offering to persons in the United Kingdom except to persons

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whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995;

•

it has only communicated and caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000, or FSMA, received by it in connection with the issue or sale of any shares included in this offering in circumstances in which section 21(1) of the FSMA does not apply to us;

•

it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares included in this offering in, from or otherwise involving the United Kingdom;

•

in order to comply with the Netherlands Securities Market Supervision Act 1995 (Wet toezicht effectenverkeer 1995), the shares included in this offering shall only be offered in The Netherlands, as part of their initial distribution or by way of reoffering, to individuals or legal entities who or which trade or invest in securities in the conduct of a business or profession (as referred to in article 2 of the “Vrijstellingsregeling Wet Toezicht Effectenverkeer 1995” (Wte Regulation No. BGW95/2982-M); hereinafter, “Professional Investors”), provided that it must be made clear both upon making the offer and in any documents or advertisements in which a forthcoming offering of such shares is publicly announced (whether electronically or otherwise) that such offer is exclusively made to such Professional Investors;

•

the shares included in the offering may not be offered, sold or distributed in Spain except in accordance with the requirements of Law 24/1988, of 28 July, on the Securities Market (Ley 24/1988, de 28 de julio, del Mercado de Valores), as amended and restated, and Royal Decree 291/1992, of 27 March, on Issues and Public Offerings of Securities (Real Decreto 291/1992, de 27 de marzo, sobre Emisiones y Ofertas Públicas de Venta de Valores), as amended and restated, and the decrees and regulations made thereunder. Accordingly, the shares included in this offering may not be offered, sold or distributed in Spain except in circumstances which do not constitute a public offer of securities in Spain within the meaning of Spanish securities laws and regulations or without complying with all legal and regulatory requirements in relation thereto;

•

this prospectus has not been verified or registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores), and therefore it is not intended for any public offer of the shares in Spain;

•

this prospectus has not been submitted to the registration procedures of the French Autorité des Marchés Financiers and, accordingly, the shares included in this offering may not be offered or sold to the public in France. Offers and sales of the shares included in this offering in France may be made only to qualified investors (investisseurs qualifiés) in accordance with Article L.411-2 of the French Code monétaire et financier and decree no. 98-880 dated 1 October 1998. This prospectus or any other offering materials relating to the shares included in the offering may not be distributed in France to any person other than a qualified investor as defined therein;

•

no German sales prospectus (Verkaufsprospekt) within the meaning of the Securities Sales Prospectus Act (Wertpapier-Verkaufsprospektgesetz, the “German Act”) of the Federal Republic of Germany has been or will be published with respect to the shares included in the offering. Each underwriter will comply with the German Act and all other applicable legal and regulatory requirements. In particular, each of the underwriters has not engaged and will not engage in a public offering (öffentliches Angebot) within the meaning of the German Act with respect to any of the shares included in the offering otherwise than in accordance with the German Act;

146

•

this prospectus may only be used by those persons to whom it has been handed out in connection with the offer described herein. The shares included in the offering are not offered to the public in Switzerland. This prospectus constitutes neither a public offer in Switzerland nor a prospectus in accordance with the respective Swiss legislation. Accordingly, this prospectus may not be used in connection with any other offer and shall in particular not be distributed to the public in Switzerland; and

•

it has undertaken that it will comply with all applicable securities laws and regulations in each jurisdiction in which it purchases, offers, sells or delivers the shares of common stock offered hereby or possesses or distributes this prospectus or any other offering material and will obtain any consent, approval or permission which is required by it for the purchase, offer or sale by it of shares of common stock under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchases, offers or sales in all cases at its own expense.

We have agreed to reimburse the underwriters for certain expenses in connection with this offering. The following table summarizes the underwriting compensation to be paid to the underwriters by us and the selling stockholders. These amounts assume both no exercise and full exercise of the underwriters’ over-allotment option to purchase additional shares.


	Without Over-Allotment	With Over-Allotment
By us:
Per share:
Total:

By the selling stockholders:
Per share:
Total:

We estimate that the total expenses payable by us in connection with this offering, other than the items referred to above (including the reimbursement of the underwriters for certain expenses in connection with this offering), will be approximately $ .

We and the selling stockholders have agreed to indemnify the underwriters against various liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make because of any of those liabilities. The underwriters have informed us that they do not intend to confirm sales to any accounts over which they exercise discretionary authority.

We will apply to list our common stock on the New York Stock Exchange upon the completion of this offering under the symbol “DRH.” In connection with the listing of our common stock on the New York Stock Exchange, the underwriters will undertake to sell round lots of 100 shares or more to a minimum of 2,000 beneficial owners.

Prior to this offering, there has been no public market for our common stock, other than limited trading on the Portal Market. The initial public offering price has been determined through negotiations between the underwriters and us. Among the factors considered in such determination were:

•

prevailing market conditions;

•

dividend yields and financial characteristics of publicly traded REITs that we and the underwriters believe to be comparable to us;

•

our financial condition and past and present operating performance;

•

the present state of our business operations;

•

our management;

147

•

estimates of our business and earnings potential; and

•

the economic conditions in and the prospects for the industry in which we operate.

We cannot assure you, however, that the prices at which the shares will sell in the public market after this offering will not be lower than the initial public offering price or that an active trading market in our common stock will develop and continue after this offering.

Each of our executive officers and directors has agreed, subject to specified exceptions, not to: (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of common stock or any securities convertible into or exchangeable or exercisable for common stock or make any demand for or exercise any right with respect to the registration of the foregoing under the Securities Act, or (ii) establish or increase any “put equivalent position” or liquidate or decrease any “call equivalent position” or otherwise enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the common stock, whether any such swap or transaction is to be settled by delivery of common stock or other securities, in cash or otherwise for a period of 180 days after the date of this prospectus without the prior written consent of Citigroup Global Markets Inc. and Friedman, Billings, Ramsey & Co., Inc. This restriction terminates after the close of trading of the common stock on and including the 180th day after the date of this prospectus.

In addition, subject to certain exceptions, we have agreed that, for 180 days after the date of this prospectus, we will not, without the prior written consent of Citigroup Global Markets Inc. and Friedman, Billings, Ramsey & Co., Inc., offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option for the sale of, establish or increase any open “put equivalent option” or liquidate or decrease any “call equivalent option” or otherwise dispose of or transfer any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock or file any registration statement under the Securities Act relating to any such shares or enter into any swap or any other agreement or any transaction that transfers the economic consequence of ownership of common stock, other than our sale of shares in this offering, the issuance of shares of common stock under our 2004 Stock Option and Equity Incentive Plan as described in this prospectus or the issuance of our common stock or securities convertible into or exchangeable for shares of our common stock in connection with acquisitions of real property or other investments. The lock-up provisions do not prohibit us from filing a resale registration statement to register the shares issued in our July 2004 private placement.

Our stockholders other than our executive officers and directors may not sell or otherwise dispose of any of the shares of our common stock or securities convertible into our common stock that they have acquired prior to the date of this prospectus and are not selling in this offering until 60 days after the date of this prospectus, subject to limited exceptions.

In connection with this offering, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our common stock, including:

•

stabilizing transactions;

•

short sales;

•

syndicate covering transactions;

•

imposition of penalty bids; and

•

purchases to cover positions created by short sales.

Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while this offering is in progress. Stabilizing transactions may include making short sales of our common stock, which involves the sale by the underwriters of a greater number

148

of shares of common stock than they are required to purchase in this offering, and purchasing common stock from us or in the open market to cover positions created by short sales. Short sales may be “covered” shorts, which are short positions in an amount not greater than the underwriters’ over-allotment option referred to above, or may be “naked” shorts, which are short positions in excess of that amount.

The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares pursuant to the over-allotment option.

A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchased in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.

The underwriters also may impose a penalty bid on underwriters and selling group members. This means that if the underwriters purchase shares in the open market in stabilizing transactions or to cover short sales, the underwriters can require the selling group members that sold those shares as part of this offering to repay the selling concession received by them.

As a result of these activities the price of our common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on the New York Stock Exchange, in the over-the-counter market or otherwise.

The underwriters do not expect sales to accounts over which they exercise discretionary authority to exceed 5% of the total number of shares of common stock offered by this prospectus.

At our request, the underwriters have reserved up to % of the common stock being offered by this prospectus for sale to our directors, employees, business associates and related persons at the public offering price. The sales will be made by Friedman, Billings, Ramsey & Co., Inc. through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. These persons must commit to purchase no later than the close of business on the day following the date of this prospectus. Any directors, employees or other persons purchasing such reserved shares will be prohibited from disposing of or hedging such shares for a period of at least 180 days after the date of this prospectus. The common stock issued in connection with the directed share program will be issued as part of the underwritten public offering.

Friedman, Billings, Ramsey & Co., Inc. will be facilitating Internet distribution for this offering to certain of its Internet subscription customers. Friedman, Billings, Ramsey & Co., Inc. intends to allocate a limited number of shares for sale to its online brokerage customers. An electronic prospectus is available on the Internet website maintained by Friedman, Billings, Ramsey & Co., Inc. Other than the prospectus in electronic format, the information on the Friedman, Billings, Ramsey & Co., Inc. website is not part of this prospectus.

A prospectus in electronic format may be made available on the Internet sites of or through other online services maintained by one or more of the other underwriters participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online, and, depending upon the particular underwriter, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in

149

electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or any underwriter in its capacity as underwriter and should not be relied upon by investors. In addition, one or more of the underwriters participating in the offering may distribute prospectuses electronically.

In addition to the items of compensation to be paid to the underwriters in connection with this offering, until July 7, 2005, we have granted to Friedman, Billings, Ramsey & Co., Inc. a right of first refusal to act as joint book runner in connection with any public or private offerings in our equity securities and as co-manager in connection with any public or private offering of corporate debt securities or other capital markets financing in which we may engage.

We are negotiating with a number of financial institutions to obtain a secured revolving line of credit, including affiliates of Citigroup Global Markets, Inc. We may enter into this facility with one or more of the underwriters and/or their affiliates. In the event that we enter into the secured revolving credit facility, we expect that these underwriters and/or their affiliates will receive customary fees, interest payments and expense reimbursement.

One of our directors, Mr. Altobello, is also a director of Friedman, Billings, Ramsey Group, Inc., the parent company of Friedman, Billings, Ramsey & Co., Inc. Friedman, Billings, Ramsey & Co., Inc. was the initial purchaser and placement agent in the July 2004 private placement. Friedman, Billings, Ramsey & Co., Inc. is a lead managing underwriter of this offering.

The underwriters and their affiliates may from time to time engage in future transactions with us and our affiliates and provide services to us and our affiliates in the ordinary course of their business.

LEGAL MATTERS

Certain legal matters in connection with this offering will be passed upon for us by Goodwin Procter LLP, Boston, Massachusetts. Certain partners of Goodwin Procter LLP together own approximately 13,000 shares of DiamondRock Hospitality Company’s common stock purchased in our July 2004 private placement. Certain legal matters in connection with this offering will be passed upon for the underwriters by Hunton & Williams LLP.

EXPERTS

The consolidated financial statements and schedule of DiamondRock Hospitality Company as of December 31, 2004 and for the period from May 6, 2004 to December 31, 2004, the financial statements of Sonoma LLC as of October 8, 2004 and January 2, 2004, and for the periods from April 23, 2004 to October 8, 2004 and January 3, 2004 to April 23, 2004, and each of the fiscal years ended January 2, 2004 and January 3, 2003, the financial statements of the Courtyard by Marriott Midtown East as of October 8, 2004 and January 2, 2004, for the period from January 3, 2004 to October 8, 2004 and for the fiscal years ended January 2, 2004 and January 3, 2003, the financial statements of the Rock Spring Park Hotel Limited Partnership as of October 8, 2004 and January 2, 2004, for the period from January 3, 2004 to October 8, 2004 and for the fiscal years ended January 2, 2004 and January 3, 2003, the financial statements of the Marriott Salt Lake City Downtown as of October 8, 2004 and January 2, 2004, for the period from January 3, 2004 to October 8, 2004 and for the fiscal years ended January 2, 2004 and January 3, 2003, the financial statements of the Torrance Marriott as of October 8, 2004 and January 2, 2004, for the period from January 3, 2004 to October 8, 2004 and for the fiscal years ended January 2, 2004 and January 3, 2003, the financial statements of Fifth Avenue Associates LLC for the period from January 1, 2004 to September 30, 2004 and for the years ended December 31, 2003 and 2002, the financial statements of the Marriott Griffin Gate Resort for the period from January 4, 2003 to June 25, 2003 and the fiscal year ended

150

January 3, 2003 and the financial statements for MI Griffin Gate Hotel, LLC for the periods from January 3, 2004 to October 8, 2004 and June 26, 2004 to January 2, 2004, have been included herein in reliance upon the reports of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration statement on Form S-11, including exhibits, schedules and amendments filed with this registration statement, under the Securities Act with respect to the shares of our common stock to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and exhibits and schedules to the registration statement. For further information with respect to our company and the shares of our common stock to be sold in this offering, reference is made to the registration statement, including the exhibits to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document referred to in this prospectus are not necessarily complete and, where that contract is an exhibit to the registration statement, each statement is qualified in all respects by the exhibit to which the reference relates. Copies of the registration statement, including the exhibits and schedules to the registration statement, may be examined without charge at the public reference room of the Securities and Exchange Commission, 450 Fifth Street, N.W. Room 1024, Washington, DC 20549. Information about the operation of the public reference room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0300. Copies of all or a portion of the registration statement can be obtained from the public reference room of the Securities and Exchange Commission upon payment of prescribed fees. Our Securities and Exchange Commission filings, including our registration statement, are also available to you on the Securities and Exchange Commission’s website, www.sec.gov.

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REPORTS TO STOCKHOLDERS

Following this offering, we will file periodic and annual reports with the Securities and Exchange Commission as required by the Securities and Exchange Commission’s rules and regulations. In addition, our annual proxy statement will be mailed to our stockholders accompanied or preceded by an annual report which meets the requirements of the Securities and Exchange Commission’s rules and regulations no later than 120 days following the end of our fiscal year. Our periodic quarterly reports will be filed with the Securities and Exchange Commission within 45 days following the end of the quarter, unless a shorter period is required by the rules and regulations of the Securities and Exchange Commission. Our annual reports will contain consolidated financial statements audited by our independent certified public accountants.

152

D IAMONDROCK HOSPITALITY COMPANY

INDEX TO FINANCIAL STATEMENTS


		Page
DiamondRock Hospitality Company and Subsidiaries:

Unaudited Pro Forma Information:

Unaudited Pro Forma Consolidated Financial Information Statement of Operations		F-4

Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2004		F-5

Notes to Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2004		F-6

Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2004		F-7

Notes to Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2004		F-8

Historical Financial Statements:

Report of Independent Registered Public Accounting Firm		F-11

Consolidated Balance Sheet as of December 31, 2004		F-12

Consolidated Statement of Operations for the period from May 6, 2004 (Inception) to December 31, 2004		F-13

Consolidated Statement of Shareholders’ Equity for the period from May 6, 2004 (Inception) to December 31, 2004		F-14

Consolidated Statement of Cash Flows for the period from May 6, 2004 (Inception) to December 31, 2004		F-15

Notes to Consolidated Financial Statements		F-16

Supplemental Schedule — Schedule III — Real Estate and Accumulated Depreciation		F-30

Courtyard Manhattan/Midtown East:

Independent Auditors’ Report		F-31

Statements of Assets and Liabilities—Account Maintained by Marriott International, Inc. as of October 8, 2004 and January 2, 2004		F-32

Statements of Operating Revenues, Direct Costs and Certain Operating Expenses — Accounts Maintained by Marriott International, Inc. for the period from January 3, 2004 to October 8, 2004 and years ended January 2, 2004 and January 3, 2003		F-33

Statements of Cash Flows — Accounts Maintained by Marriott International, Inc. for the period from January 3, 2004 to October 8, 2004 and years ended January 2, 2004 and January 3, 2003		F-34

Statements of Net Assets — Accounts maintained by Marriott International, Inc. for the period from January 3, 2004 to October 8, 2004 and years ended January 2, 2004 and January 3, 2003		F-35

Notes to Financial Statements — Accounts Maintained by Marriott International, Inc.		F-36

Torrance Marriott:

Independent Auditors’ Report		F-38

Balance Sheets as of October 8, 2004 and January 2, 2004		F-389

Statements of Operations for the period from January 3, 2004 to October 8, 2004 and years ended January 2, 2004 and January 3, 2003		F-40

Statements of Net Assets for the period from January 3, 2004 to October 8, 2004 and years ended January 2, 2004 and January 3, 2003		F-41

F-1


		Page
Statements of Cash Flows for the period from January 3, 2004 to October 8, 2004 and years ended January 2, 2004 and January 3, 2003		F-42

Notes to Financial Statements		F-43

Salt Lake City Marriott Downtown:

Independent Auditors’ Report		F-46

Balance Sheets as of October 8, 2004 and January 2, 2004		F-47

Statements of Operations for the period from January 3, 2004 to October 8, 2004 and years ended January 2, 2004 and January 3, 2003		F-48

Statements of Net Assets for the period from January 3, 2004 to October 8, 2004 and years ended January 2, 2004 and January 3, 2003		F-49

Statements of Cash Flows for the period from January 3, 2004 to October 8, 2004 and years ended January 2, 2004 and January 3, 2003		F-50

Notes to Financial Statements		F-51

Marriott Griffin Gate Resort:

Independent Auditors’ Report		F-54

Statements of Operations for the periods from January 3, 2004 to October 8, 2004 and June 26, 2004 to January 2, 2004		F-55

Statements of Cash Flows for the periods from January 3, 2004 to October 8, 2004 and June 26, 2003 to January 2, 2004		F-56

Notes to Financial Statements		F-57

Marriott Griffin Gate Resort:

Independent Auditors’ Report		F-60

Statements of Operating Revenues, Direct Costs and Certain Operating Expenses — Accounts Maintained by Marriott International, Inc. for the period from January 4, 2003 to June 25, 2003 and fiscal year ended January 3, 2003		F-61

Statements of Cash Flows — Accounts Maintained by Marriott International, Inc. for the period from January 4, 2003 to June 25, 2003 and fiscal year ended January 3, 2003		F-62

Notes to Financial Statements		F-63

Marriott Bethesda Suites:

Independent Auditors’ Report		F-65

Balance Sheets as of October 8, 2004 and January 2, 2004		F-66

Statements of Operations for the period from January 3, 2004 to October 8, 2004 and fiscal years ended January 2, 2004 and January 3, 2003		F-67

Statements of Partners’ Deficit for the period from January 3, 2004 to October 8, 2004 and fiscal years ended January 2, 2004 and January 3, 2003		F-68

Statements of Cash Flows for the period from January 3, 2004 to October 8, 2004 and fiscal years ended January 2, 2004 and January 3, 2003		F-69

Notes to Financial Statements		F-70

F-2


		Page
Courtyard Manhattan/Fifth Avenue:

Independent Auditors’ Report		F-76

Statements of Operations for the nine months ended September 30, 2004 and years ended December 31, 2003 and December 31, 2002		F-77

Statements of Cash Flows for the nine months ended September 30, 2004 and years ended December 31, 2003 and December 31, 2002		F-78

Notes to Financial Statements		F-79

The Lodge at Sonoma Renaissance Resort & Spa:

Independent Auditors’ Report		F-82

Balance Sheets as of October 8, 2004 and January 2, 2004		F-83

Statements of Operations for the periods from April 24, 2004 to October 8, 2004 and January 3, 2004 to April 23, 2004 and fiscal years ended January 2, 2004 and January 3, 2003		F-84

Statements of Cash Flows for the periods from April 24, 2004 to October 8, 2004 and January 3, 2004 to April 23, 2004 and fiscal years ended January 2, 2004 and January 3, 2003		F-85

Statements of Members’ Deficit for the periods from April 24, 2004 to October 8, 2004 and January 3, 2004 to April 23, 2004 and fiscal years ended January 2, 2004 and January 3, 2003		F-86

Notes to Financial Statements		F-87

F-3

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The Company’s historical financial information as of December 31, 2004 and the period from May 6, 2004 (inception) to December 31, 2004 has been derived from our historical financial statements audited by KPMG LLP, independent registered public accounting firm, whose report with respect thereto is included elsewhere in this prospectus. The following unaudited pro forma financial data gives effect to the acquisition of our initial hotels and related mortgage debt and the sources and uses of the proceeds of the offering. The unaudited pro forma consolidated balance sheet data is presented as if these transactions had occurred as of December 31, 2004 and the unaudited pro forma consolidated statement of operations and other data for the year ended December 31, 2004 is presented as if these transactions had occurred on the first day of the period presented.

The unaudited pro forma financial information and related notes are presented for informational purposes only and do not purport to represent what our financial position or results of operations would actually have been if the transactions had in fact occurred on the dates discussed above. They also do not project or forecast our combined financial position or results of operations for any future date or period.

The unaudited pro forma financial information should be read together with our historical financial statements and related notes included elsewhere in this prospectus and with the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The pro forma adjustments are based on available information and upon assumptions that we believe are reasonable. However, we cannot assure you that actual results will not differ from the pro forma information and perhaps in material and adverse ways.

F-4

DIAMONDROCK HOSPITALITY COMPANY

Pro Forma Consolidated Balance Sheet

December 31, 2004


	Historical			A			B	C			Pro Forma
	Historical			Torrance			Debt Repayment	The Offering			Pro Forma
ASSETS

Property and equipment, net	$	285,642,439		$	62,153,996		—		—		$	347,796,435

Deferred financing costs, net		1,344,378			645,872		—		—			1,990,250
Restricted cash		17,482,515			10,000,000		—		—			27,482,515
Due from hotel managers		2,626,262			1,419,749		—		—			4,046,011
Purchase deposits and pre-acquisition costs		3,272,219			(3,272,219	)	—		—			—
Prepaids and other assets		4,340,259			12,076		—		1,916,761			6,269,096
Cash and cash equivalents		76,983,107			(25,387,461	)	—		—			51,595,646

Total assets	$	391,691,179		$	45,572,013		—	$	1,916,761		$	439,179,953


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:

Mortgage debt, at face amount	$	177,827,573		$	44,000,000		—		—		$	221,827,573
Debt premium		2,944,237			—							2,944,237

Total debt		180,771,810			44,000,000		—		—			224,771,810

Deferred income related to key money		2,490,385			—		—		—			2,490,385
Unfavorable lease liability		5,776,946			—		—		—			5,776,946
Due to hotel managers		3,985,795			1,572,013		—		—			5,557,808
Accounts payable and accrued liabilities		3,078,825			—		—		—			3,078,825

Total other liabilities		15,331,951			1,572,013		—		—			16,903,964

Shareholders’ Equity:

Common stock		210,201			—		—		—			210,201
Additional paid-in capital		197,494,842			—		—		4,416,500			201,911,342
Accumulated deficit		(2,117,625	)		—		—		(2,499,739	)		(4,617,364	)

Total shareholders’ equity		195,587,418			—		—		—			197,504,179

Total liabilities and shareholders’ equity	$	391,691,179		$	45,572,013		—	$	1,916,761		$	439,179,953

F-5

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

As of December 31, 2004

The accompanying unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2004 is based on the Historical Consolidated Balance Sheet as of December 31, 2004, adjusted to reflect the initial public offering of common stock by the Company, the acquisition of the Torrance Marriott and the application of the net proceeds as described in “Use of Proceeds.”

•

The unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2004 assumes that the following occurred on December 31, 2004:

•

Initial public offering of shares of common stock of the Company at $ per share, the mid-point of the assumed offering range, with approximately $ of net proceeds to the Company. Net proceeds will be contributed to a subsidiary of the Company, DiamondRock Hospitality Limited Partnership (the “Operating Partnership”). In return the Company will receive units of partnership interest in the Operating Partnership.

•

The acquisition of the Torrance Marriott.

•

Repayment of approximately $ of mortgage debt related to , $ of mortgage debt related to and $ of mortgage debt related to .

In the opinion of the Company’s management, all material adjustments to reflect the effects of the preceding transactions have been made. The accompanying unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2004 is presented for illustrative purposes only and is not necessarily indicative of what the actual financial position would have been had the offering, the acquisition of the Torrance Marriott and the other transactions described above occurred as of December 31, 2004 nor does it purport to represent the future financial position of the Company.

Notes and Management Assumptions:

Represents the adjustment to record the acquisition accounting and mortgage financing obtained by the Company in conjunction with the acquisition of the Torrance Marriott as follows:

•

Record property and equipment at fair value of $62,153,996

•

Record reduction of deposit and pre-acquisition costs of $3,272,219

•

Record due from hotel managers of $1,419,749

•

Record deferred financing costs incurred of $645,872

•

Record cash paid into the various escrow accounts of $10,000,000

•

Reduce cash paid for the acquisition of $25,387,461

•

Record due to hotel managers of $1,572,013

•

Record mortgage debt of $44,000,000

•

Record prepaid interest of $12,076

Represents the adjustment to record the repayment of approximately $ of mortgage debt related to , $ of mortgage debt related to and $ of mortgage debt related to with proceeds from the offering.

Represents the adjustments to record the issuance of shares of common stock at $ per share, the mid-point of the assumed offering range, with approximately $ of net proceeds to the Company after deduction of $ of offering costs. The adjustment also includes the impact of share awards, net of income taxes, that will be awarded to the Company’s executive officers in conjunction with the offering.

F-6

DIAMONDROCK HOSPITALITY COMPANY

Pro Forma Consolidated Statement of Operations

For the Year Ended December 31, 2004


	Historical			D		D		D		D			D		D		D		E			F			G			H			I		Pro Forma
	Historical			Sonoma		Griffin Gate		Courtyard Midtown East		Bethesda Suites			Torrance		Salt Lake City		Courtyard Fifth Avenue		Depreciation			Corporate Expenses			TRS Income Taxes			Mortgage Debt Interest Expense			Repaid Mortgage Debt Interest Expense		Pro Forma
REVENUES

Rooms	$	5,137,370		$	7,002,446	$	10,995,570	$	17,051,490	$	11,055,446		$	13,678,423	$	14,151,990	$	8,412,355		$—			$—			$—			$—		$	—	$	87,485,090
Food and beverage		1,507,960			3,921,515		9,264,203		669,226		3,576,812			6,142,449		5,650,249		—		—			—			—			—			—		30,732,414
Other		428,534			1,473,537		2,027,388		242,799		318,588			743,153		1,559,659		340,167		—			—			—			—			—		7,133,825

Total revenues		7,073,864			12,397,498		22,287,161		17,963,515		14,950,846			20,564,025		21,361,898		8,752,522		—			—			—			—			—		125,351,329

EXPENSES

Rooms		1,455,380			1,764,656		2,519,911		4,419,874		2,634,710			3,410,247		3,503,969		2,968,908		—			—			—			—			—		22,677,655
Food and beverage		1,266,827			3,005,615		6,279,240		632,860		3,015,225			4,611,542		3,953,922		—		—			—			—			—			—		22,765,231
Management fees and other hotel expenses		3,444,683			5,410,693		8,001,819		6,799,526		11,395,691			8,073,376		9,136,926		4,570,910		—			—			—			—			—		56,833,624
Depreciation and amortization		1,053,283			—		—		—		—			—		—		—		16,660,184			—			—			—			—		17,713,467
Corporate expenses		4,114,165			—		—		—		—			—		—		—		—			4,270,292			—			—			—		8,384,457

Total operating expenses		11,334,338			10,180,964		16,800,970		11,852,260		17,045,626			16,095,165		16,594,817		7,539,818		16,660,184			4,270,292			—			—			—		128,374,434

OPERATING (LOSS)/PROFIT		(4,260,474	)		2,216,534		5,486,191		6,111,255		(2,094,780	)		4,468,860		4,767,081		1,212,704		(16,660,184	)		(4,270,292	)		—			—			—		(3,023,105	)

OTHER EXPENSES (INCOME)

Interest income		(1,333,837	)		—		—		—		—			—		—		—		—			—			—			—			—		(1,333,837	)
Interest expense		773,101			—		—		—		—			—		—		—		—			—			—			11,564,403			—		12,337,504

Total other expenses (income)		(560,736	)		—		—		—		—			—		—		—		—			—			—			11,564,403			—		11,003,667

INCOME (LOSS) BEFORE INCOME TAXES		(3,699,738	)		2,216,534		5,486,191		6,111,255		(2,094,780	)		4,468,860		4,767,081		1,212,704		(16,660,184	)		(4,270,292	)		—			(11,564,403)			—		(14,026,772	)
Provision (Benefit) for income taxes		(1,582,113	)		—		—		—		—			—		—		—		—			—			(1,411,483	)		—			—		(2,993,596	)

NET INCOME (LOSS)	$	(2,117,625	)	$	2,216,534	$	5,486,191	$	6,111,255	$	(2,094,780	)	$	4,468,860	$	4,767,081	$	1,212,704	$	(16,660,184	)	$	(4,270,292	)	$	1,411,483		$	(11,564,403	)	$	—	$	(11,033,176	)


																													Calculation of Basic and Diluted EPS (J)

																													Net Loss					(11,033,176	)
																													Number of Shares					21,020,100

																													Basic and Diluted Earnings per Share					(0.52	)

F-7

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2004

The accompanying unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2004 is based on our Historical Consolidated Statement of Operations for the period from May 6, 2004 (inception) to December 31, 2004, adjusted to reflect the initial public offering of common stock by the Company, the acquisitions of the initial seven hotels and the application of the net proceeds as described in “Use of Proceeds.”

•

The unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2004 assumed that the following occurred on January 1, 2004:

•

Initial public offering of shares of common stock of the Company at $ per share, the mid-point of the assumed offering range, with approximately $ of net proceeds to the Company.

•

The acquisition of the following hotels for total consideration of:


Hotel
The Lodge at Sonoma, a Renaissance Resort & Spa	$	32,345,000
Courtyard Midtown Manhattan East		78,857,000
Marriott Bethesda Suites		41,892,000
Salt Lake City Marriott Downtown		53,345,000
Courtyard Manhattan Fifth Avenue		39,740,000
Marriott Griffin Gate Resort		49,842,000
Torrance Marriott		72,002,000

Total	$	368,023,000

•

Repayment of approximately $ of mortgage debt related to , $ of mortgage debt related to and $ of mortgage debt related to with proceeds of the offering.

•

The Company elected REIT status.

•

The accompanying unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2004 only includes the estimated general and administrative costs of the Company for compensation arrangements and other costs for which the Company is currently obligated. This adjustment excludes certain costs related to future employee costs and other costs for which the Company is not currently obligated, which we expect to incur subsequent to completion of the offering.

In the opinion of the Company’s management, all material adjustments to reflect the effects of the preceding transactions have been made. The accompanying unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2004 is presented for illustrative purposes only and is not necessarily indicative of what the actual results of operations would have been had the offering, the acquisitions of the initial seven hotels and the other transactions described above occurred as of January 1, 2004, nor does it purport to represent the future results of operations of the Company.

F-8

Notes and Management Assumptions:

Represents the adjustment to record historical revenues and operating expenses associated with the 2004 and 2005 acquisitions of the following hotels:

•

The Lodge at Sonoma, a Renaissance Resort and Spa, which was acquired in October 2004 effective September 10, 2004.

•

Marriott Griffin Gate Resort, which was acquired in December 2004 effective September 10, 2004.

•

Courtyard Midtown / Manhattan East, which was acquired in November 2004.

•

Bethesda Marriott Suites, which was acquired in December 2004.

•

Torrance Marriott, which was acquired in January 2005.

•

Marriott Salt Lake City Downtown, which was acquired in December 2004.

•

Courtyard Manhattan / Fifth Avenue, which was acquired in December 2004.

Reflects the adjustment to include the depreciation and amortization resulting from the acquisition of the initial seven hotels as follows:


Hotel
The Lodge at Sonoma, a Renaissance Resort & Spa	$	1,454,218
Courtyard Midtown / Manhattan East		2,478,511
Bethesda Marriott Suites		2,198,006
Salt Lake City Marriott Downtown		2,302,107
Courtyard Manhattan / Fifth Avenue		1,788,964
Marriott Griffin Gate Resort		1,741,778
Torrance Marriott		4,696,600

Total	$	16,660,184

The pro forma depreciation and amortization is calculated based on the same depreciable lives and amortization periods as used in the audited historical financial statements.

Reflects the adjustment to include annual salaries and benefits of $1,769,128 to be paid pursuant to employment agreements and offer letters with the executive officers and other employees of the Company as of December 31, 2004 and the annual expense of $1,177,917 relating to existing restricted stock awards to the executive officers and certain other employees of 700,500 shares, based on a three-year vesting period and price of $10 per share. This adjustment also includes the adjustment to reflect corporate expenses that the Company is contractually obligated to pay, including the office lease costs, certain professional fees and certain insurance of $247,521. The pro forma 2004 corporate expenses exclude adjustment for costs which are not permitted under the pro forma rules, but may be incurred subsequent to completion of our initial public offering. The Company’s budgeted 2005 corporate expenses are approximately $13.1 million, which is comprised of approximately $6.3 million of cash corporate expenses and approximately $6.9 million of restricted stock expense. The $6.9 million of restricted stock expense includes a $4.4 million charge relating to share grants that will be awarded to the Company’s executive officers in connection with the offering.

Reflects the adjustment to the Company’s historical income tax benefit to reflect the pro forma tax benefit of the Company’s Taxable REIT Subsidiary assuming the Company had elected REIT status as of January 1, 2004.

Reflects the adjustment to reflect interest expense incurred for debt related to the initial seven hotels. The debt relating to the acquisition of the Bethesda Marriott Suites was assumed at above market terms. The Company recorded a debt premium to adjust this debt to market terms at the acquisition

F-9

date. The amortization of the debt discount reduces interest expense. A 1/8 percent variance in interest rates applicable to our variable rate debt would lead to a $108,750 effect on income. The Company’s management believes that interest rates used in calculating the pro forma adjustments are reasonable.

Reflects the adjustment to reduce interest expense $ of interest of the mortgage debt related to , $ of interest of the mortgage debt related to and $ of interest of the mortgage debt related to , all of which will be repaid with the proceeds of the offering.

The shares used in the basic and diluted earning per share calculation include the following:


The offering
Shares acquired by the CEO in a private transaction		100
Shares issued in 2004 Private Placement Offering		21,000,000
Restricted shares issued to directors		20,000

Total basic and diluted

F-10

Report of Independent Registered Public Accounting Firm

The Board of Directors

DiamondRock Hospitality Company:

We have audited the accompanying consolidated financial statements of DiamondRock Hospitality Company and subsidiaries (the “Company”) as listed in the accompanying index. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DiamondRock Hospitality Company and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for the period from May 6, 2004 (inception) to December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

McLean, Virginia

February 21, 2005

F-11

DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED BALANCE SHEET

December 31, 2004


ASSETS
Property and equipment, at cost	$	286,727,306
Less: accumulated depreciation		(1,084,867	)

		285,642,439

Deferred financing costs, net		1,344,378
Restricted cash		17,482,515
Due from hotel managers		2,626,262
Purchase deposits and pre-acquisition costs		3,272,219
Prepaid and other assets		4,340,259
Cash and cash equivalents		76,983,107

Total assets	$	391,691,179

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:

Mortgage debt, at face amount	$	177,827,573
Debt premium		2,944,237

Total debt		180,771,810

Deferred income related to key money		2,490,385
Unfavorable lease liability		5,776,946
Due to hotel managers		3,985,795
Accounts payable and accrued expenses		3,078,825

Total other liabilities		15,331,951

Shareholders’ Equity:

Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued and outstanding		—

Common stock, $.01 par value; 100,000,000 shares authorized; 21,020,100 shares issued and outstanding		210,201

Additional paid-in capital		197,494,842
Accumulated deficit		(2,117,625	)

Total shareholders’ equity		195,587,418

Total liabilities and shareholders’ equity	$	391,691,179

The accompanying notes are an integral part of these consolidated financial statements.

F-12

DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENT OF OPERATIONS

For the Period from May 6, 2004 (Inception) to December 31, 2004


Revenues:

Rooms	$	5,137,370
Food and beverage		1,507,960
Other		428,534

Total revenues		7,073,864


Operating Expenses:

Rooms		1,455,380
Food and beverage		1,266,827
Management fees		260,724
Other hotel expenses		3,183,959
Depreciation and amortization		1,053,283
Corporate expenses		4,114,165

Total operating expenses		11,334,338

Operating loss		(4,260,474	)


Other Expenses (Income):

Interest income		(1,333,837	)
Interest expense		773,101

Total other income		(560,736	)

Loss before income taxes		(3,699,738	)

Income tax benefit		1,582,113

Net loss	$	(2,117,625	)

Loss per share:

Basic and diluted	$	(0.12	)

Weighted average number of common shares outstanding:

Basic and diluted		18,162,916

The accompanying notes are an integral part of these consolidated financial statements.

F-13

DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the Period from May 6, 2004 (Inception) to December 31, 2004


	Common Stock			Additional Paid-In Capital			Accumulated Deficit			Total
	Shares	Par Value		Additional Paid-In Capital			Accumulated Deficit			Total
Formation transactions on May 6, 2004	100	$	1	$	999		$	—		$	1,000
Sale of common shares in private placement offering, less placement fees and expenses of $12,624,452	21,000,000		210,000		197,165,548			—			197,375,548
Issuance costs incurred related to private placement	—		—		(1,028,588	)		—			(1,028,588	)
Issuance and amortization of stock grants	20,000		200		1,356,883			—			1,357,083
Net loss	—		—		—			(2,117,625	)		(2,117,625	)

Balance at December 31, 2004	21,020,100	$	210,201	$	197,494,842		$	(2,117,625	)	$	195,587,418

The accompanying notes are an integral part of these consolidated financial statements.

F-14

DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

For the Period from May 6, 2004 (Inception) to December 31, 2004


Cash flows from operating activities:
Net loss	$	(2,117,625	)
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization		1,053,283
Amortization of deferred financing costs as interest		28,615
Market value adjustment to interest rate caps		25,655
Amortization of debt premium and unfavorable lease liability		(10,814	)
Amortization of deferred income and corporate depreciation		21,969
Stock-based compensation		1,357,083
Income tax benefit		(1,521,213	)
Changes in assets and liabilities:

Prepaid expenses and other assets		(581,477	)
Due from hotel managers		(2,626,262	)
Accounts payable and accrued expenses		3,545,232

Net cash used in operating activities		(825,554	)


Cash flows from investing activities:

Hotel acquisitions		(279,456,545	)
Receipt of deferred key money		2,500,000
Cash paid for restricted cash at acquisition		(14,199,000	)
Change in restricted cash		(480,515	)
Purchase deposits and pre-acquisition costs		(3,272,219	)

Net cash used in investing activities		(294,908,279	)


Cash flows from financing activities:

Proceeds from mortgage debt		177,827,573
Payment of financing costs		(1,372,993	)
Cash paid for interest rate caps		(85,600	)
Proceeds from sale of common stock		197,376,548
Payment of costs related to sale of common stock		(1,028,588	)

Net cash provided by financing activities		372,716,940


Net increase in cash		76,983,107
Cash and cash equivalents, beginning of period		—

Cash and cash equivalents, end of period	$	76,983,107

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	350,979

Cash paid for income taxes	$	—

The accompanying notes are an integral part of these consolidated financial statements.

F-15

DIAMONDROCK HOSPITALITY COMPANY

Notes to the Consolidated Financial Statements

December 31, 2004

1. Organization

DiamondRock Hospitality Company (the “Company”) was incorporated in Maryland on May 6, 2004 to own hotel properties primarily located in major convention, business, resort and airport markets in the United States. The Company intends to elect to become a self-advised real estate investment trust (“REIT”) effective January 1, 2005. A summary of the formation transactions of the Company is as follows:

•

William W. McCarten, Chief Executive Officer was issued 100 shares of common stock on June 3, 2004 at a price equal to $10.00 per share in exchange for $1,000.

•

DiamondRock Hospitality Limited Partnership (the “Operating Partnership”), a Delaware limited partnership, was formed on May 26, 2004. The Company is the sole general partner of the Operating Partnership, and a wholly owned subsidiary of the Company owns all of the limited partnership units in the Operating Partnership. The Operating Partnership owns the Company’s hotel properties and the Company conducts substantially all of its business through the Operating Partnership.

•

The Company formed Bloodstone TRS, Inc., a wholly owned subsidiary of the Operating Partnership to operate as the Company’s taxable REIT subsidiary (the “TRS”). The provisions of the REIT Modernization Act allow REITs to own up to 100% of the stock of a TRS, which can engage in businesses that a REIT previously could not engage in directly.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company’s financial statements include all of the accounts of the Company and its subsidiaries beginning with its incorporation on May 6, 2004 in accordance with accounting principles generally accepted in the United States of America. All intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents and accounts payable and accrued expenses. Due to their short maturities, the carrying amounts of cash and cash equivalents and accounts payable and accrued expenses reasonably approximate fair value. See Note 11 for disclosures on fair values of debt and interest rate caps.

Property and Equipment

Investments in hotel properties are recorded at acquisition costs, which are allocated to land, land improvements, building and furniture, fixtures and equipment and identifiable intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. Property and equipment purchased after the hotel acquisition date is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation will be removed from the Company’s accounts and any resulting gain or loss will be included in the statements of operations.

F-16

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 15 to 40 years for buildings, land improvements, and building improvements and one to ten years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.

The Company reviews its investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value is recorded and an impairment loss recognized.

The Company will classify a hotel as held for sale in the period that the Company has made the decision to dispose of the hotel, a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing contingencies exist which could cause the transaction to not be completed in a timely manner. If these criteria are met, the Company will record an impairment loss if the fair value less costs to sell is lower than the carrying amount of the hotel and will cease recording depreciation expense. The Company will classify the loss, together with the related operating results, as discontinued operations on the statement of operations and classify the assets and related liabilities as held for sale on the balance sheet.

Revenue Recognition

Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, golf sales, food and beverage sales, and other hotel department revenues, such as telephone and gift shop sales.

Income Taxes

The Company accounts for income taxes using the asset and liability method prescribed in SFAS 109, Accounting for Income Taxes. The deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted.

The Company will elect, effective January 1, 2005, to be treated as a REIT under the provisions of the Internal Revenue Code and, as such, expects not to be subject to federal income tax after December 31, 2004, provided that the Company distributes all taxable income annually to the Company’s shareholders and complies with certain other requirements. In addition to paying federal and state taxes on any retained income, the Company will be subject to taxes on “built in gains” on sales of certain assets. The Company’s taxable REIT subsidiary will be subject to federal and state income taxes on undistributed taxable income.

Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net loss by the weighted average common shares outstanding during the period. Diluted earnings per share is calculated by dividing net loss by the weighted average common shares outstanding during the period plus other potentially dilutive securities such as restricted stock

F-17

awards or shares issuable in the event of conversion of operating partnership units. No adjustment is shown for the potentially dilutive effect of 700,500 shares of restricted stock, as the impact is anti-dilutive during periods when the Company incurs a net loss and, accordingly, diluted loss per share is equal to basic loss per share.

Stock-based Compensation

The Company accounts for stock-based employee compensation using the fair value based method of accounting described in Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation, as amended. For restricted stock awards, the total compensation expense is equal to the number of shares awarded multiplied by the average price of the Company’s common stock on the date of the award, less the purchase price for the stock, if any. The compensation expense is recorded over the period in which the restrictions lapse (i.e., vesting period).

Comprehensive Income (Loss)

Comprehensive income includes net income (loss) as currently reported by the Company on the consolidated statement of operations adjusted for other comprehensive income items. The Company does not have any items of comprehensive income (loss) other than the net loss.

Segment Information

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), requires public entities to report certain information about operating segments. Based on the guidance provided in SFAS 131, the Company has determined that its business is conducted in one reportable segment, hotel ownership.

Restricted Cash

Restricted cash primarily consists of reserves for replacement of furniture and fixtures.

Deferred Financing Costs

Financing costs are recorded at cost and consist of loan fees and other costs incurred in connection with the issuance of debt. Amortization of deferred financing costs is computed using a method, which approximates the effective interest method over the remaining life of the debt and is included in interest expense in the accompanying statement of operations.

Hotel Working Capital

The due from hotel managers consists of hotel level accounts receivable, periodic hotel operating distributions due to owner and prepaid assets held by the hotel managers on the Company’s behalf. The liabilities incurred by the hotel managers are comprised of liabilities incurred on behalf of the Company in conjunction with the operation of the hotels which are legal obligations of the Company. See Note 9.

Key Money

Key money received in conjunction with entering into hotel management agreements is deferred and amortized over the term of the hotel management agreement. Deferred Key Money is classified as deferred income in the accompanying consolidated balance sheet and amortized against management fees on the accompanying consolidated statement of operations.

F-18

Debt Premiums

Debt premiums are recorded to adjust the stated value of assumed debt to fair value at the acquisition date of a hotel. Debt premiums are amortized over the remaining life of the debt to interest expense on the accompanying consolidated statement of operations.

Derivative Instruments

The Company may be party to interest rate swaps in the future and is currently party to interest rate caps, which are considered derivative instruments. The fair value of the interest rate swaps and interest rate caps are recorded on the Company’s balance sheet and gains or losses from the changes in the market value of the contracts are recorded in other income or expense. See Note 11 for disclosures on fair values of the interest rate caps.

Straight-Line Rent

The Company records rent expense on leases that provide for minimum rental payments that increase in pre-established amounts over the remaining term of the lease on a straight-line basis as required by accounting principles generally accepted in the United States.

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain cash and cash equivalents with various high credit-quality financial institutions. We perform periodic evaluations of the relative credit standing of these financial institutions and limit the amount of credit exposure with any one institution.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No. 123(R) establishes standards for companies in the recognition of compensation cost relating to share based payment transactions in the financial statements. SFAS 123(R) will be effective July 1, 2005. The Company currently utilizes the fair value approach of accounting for stock compensation, and therefore, the impact of adopting this statement is expected to be minimal.

3. Property and Equipment

Property and equipment as of December 31, 2004 consists of the following:


Land	$	28,320,000
Land improvements		5,593,922
Buildings		231,300,990
Furniture, fixtures and equipment		21,287,175
Corporate office equipment and CIP		225,219

		286,727,306
Less: accumulated depreciation		(1,084,867	)

	$	285,642,439

F-19

4. Capital Stock

Common Shares

The Company is authorized to issue up to 100,000,000 shares of common stock, $.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company’s common stock are entitled to receive dividends when authorized by the Company’s board of directors out of assets legally available for the payment of dividends.

On July 7, 2004, the Company closed on the sale of 21,000,000 shares of common stock, including 150,000 shares acquired by certain senior executives of the Company, at a price of $10 per share, in a private placement (the “Offering”). The Offering resulted in gross proceeds of $210 million and net proceeds (after deducting placement fees and offering expenses) of approximately $196 million. As of December 31, 2004, the Company had 21,020,100 shares of common stock outstanding.

The Company has agreed to file a registration statement with the Securities and Exchange Commission no later than nine months following the completion of the Offering providing for the resale of the shares issued in the Offering and to use commercially reasonable efforts to cause the registration statement to become effective as promptly as practicable after the filing, but no later than six months after the initial filing of the registration statement.

Preferred Shares

The Company is authorized to issue up to 10,000,000 shares of preferred stock, $.01 par value per share. The Company’s board of directors is required to set for each class or series of preferred stock the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, and terms or conditions of redemption. As of December 31, 2004, there were no shares of preferred stock outstanding.

Operating Partnership Units

Holders of Operating Partnership units have certain redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for cash per unit equal to the market price of the Company’s common stock, at the time of redemption, or, at the option of the Company for shares of the Company’s common stock on a one-for-one basis. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the stockholders of the Company. As of December 31, 2004, there were no Operating Partnership units held by outsiders.

5. Stock Incentive Plan

The Company’s 2004 Stock Option and Incentive Plan (the “Plan”) was adopted and approved by the Board of Directors in June 2004. The Plan permits the Company to make grants of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, unrestricted stock awards, dividend equivalent rights and other share based awards. The Plan provides 1,107,500 shares of our common stock to be reserved for the issuance of such awards. This amount is subject to future adjustment up to a maximum of 2,000,000 shares of common stock. A compensation committee of the Board of Directors administers the Plan. This committee has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the conditions of the Plan.

As of December 31, 2004, the Company’s employees have been awarded 700,500 shares of restricted common stock, which do not require payments by the executives. Subject to continued employment with the

F-20

Company, the executives’ shares vest at the rate of one-third of the number of restricted shares per year commencing on the first anniversary of their issuance. Compensation relating to the executive restricted stock of approximately $7,000,000 is amortized over the 36-month period commencing on the date of the issuance. For the period from May 6, 2004 through December 31, 2004, the Company recorded $1,157,083 of stock-based compensation expense related to these awards which is included in corporate expenses in the accompanying statement of operations.

Concurrent with the Offering, the Company’s independent directors were awarded 20,000 shares of unrestricted common stock, which did not require payments by the directors and vested immediately. At the time of the Offering, the Company recorded $200,000 of stock-based compensation expense related to these awards which is included in corporate expenses in the accompanying statement of operations.

6. Income Taxes

Deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are paid. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realizable based on consideration of available evidence, including future reversals of existing taxable temporary differences, projected future taxable income and tax planning strategies.

The deferred tax assets as of December 31, 2004 are as follows:


Deferred tax asset, net	$	2,461,830
Less: Valuation allowance		—

Deferred tax asset, net	$	2,461,830

The tax effect of each type of temporary difference and carrryforward that gives rise to the net deferred tax asset as of December 31, 2004 is as follows:


Property and equipment	$	(40,831	)
Ground leases		128,205
Restricted stock		179,795
Pre-opening costs		1,118,529
Debt premium		(4,695	)
Deferred income related to Key Money		1,080,827

Deferred tax asset, net	$	2,461,830

A reconciliation of the statutory Federal tax benefit to our income tax benefit is as follows:


Statutory Federal tax benefit (@35%)	$	1,294,908
Permanent tax differences		(19,010	)
State income tax benefit, net of Federal tax benefit		306,215

Income tax benefit	$	1,582,113

The (provision) / benefit for income taxes consists of the following:


Current—Federal	$	(616,942	)
State		(262,775	)

		(879,717	)
Deferred—Federal		1,728,840
State		732,990

		2,461,830

Income tax benefit	$	1,582,113

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The Company intends to elect to become a self-advised REIT effective January 1, 2005. The Company will account for the tax impact of this election in the first quarter of 2005, the period of election. This election will result in the Company recording an expense to write-off deferred tax assets in the first quarter of 2005 income statement. In addition, the Company intends to distribute at least $2,300,000 before December 31, 2005 to eliminate any 2004 non-REIT earnings and profits, regardless of the Company’s 2005 REIT taxable income.

7. Debt

The Company has incurred property specific mortgage debt in conjunction with the acquisition of each of the Company’s hotels. The mortgage debt is recourse solely to specific assets, except for fraud, misapplication of funds and other customary recourse provisions. As of December 31, 2004, all six of our hotel properties are secured by mortgage debt. In addition, the Torrance Marriott, which was acquired on January 5, 2005, is secured by mortgage debt. The Company’s mortgage debt contains certain property specific covenants and restrictions, including minimum debt service coverage ratios as well as restrictions to incur additional debt without lender consent. As of December 31, 2004, the Company was in compliance with all debt covenants.

The following table sets forth information regarding the Company’s mortgage debt as of December 31, 2004:


Property	Principal Balance		Interest Rate	Maturity Date	Amortization Provisions
The Lodge at Sonoma, a Renaissance Resort and Spa	$	20,000,000	LIBOR + 2.40 (4.74% as of December 31, 2004)	11/06	Interest Only
Courtyard Manhattan / Midtown East		45,000,000	5.195	12/09	25 years
Marriott Salt Lake City Downtown		39,000,000	5.50	12/14	20 years
Courtyard Manhattan / Fifth Avenue		23,000,000	LIBOR + 2.70 (5.04% as of December 31, 2004)	1/07	Interest Only
Marriott Griffin Gate Resort		31,000,000	5.11	1/10	25 years
Bethesda Marriott Suites(1)		19,827,573	7.69	2/23	25 years

Total	$	177,827,573

(1)	The Company assumed the Bethesda Marriott Suites mortgage debt in conjunction with the Company’s acquisition of the hotel. The Company recorded a debt premium in purchase accounting to adjust the mortgage debt to a market interest rate. See Note 8.

Cash paid for interest during the period from May 6, 2004 through December 31, 2004 was $350,979. Deferred financing costs amounted to $1,372,993 as of December 31, 2004. Amortization of deferred financing costs totaled $28,615 during the period from May 6, 2004 through December 31, 2004 and is recorded in interest expense.

As of December 31, 2004, the Company had two interest rate caps outstanding for the Sonoma and Courtyard Manhattan / Fifth Avenue debt, respectively. As of December 31, 2004 the fair market values of the Sonoma and Courtyard Manhattan / Fifth Avenue interest rate caps were $36,037 and $23,907, respectively.

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The aggregate debt maturities as of December 31, 2004 are as follows:


2005	$	3,113,034
2006		46,253,042
2007		3,446,169
2008		3,634,734
2009		43,945,165
Thereafter		77,435,429

	$	177,827,573

8. Acquisitions

2004 Acquisitions

On October 27, 2004 the Company acquired the Lodge at Sonoma, a Renaissance Resort and Spa, a 182-room hotel located in Sonoma, California from Marriott for approximately $32.3 million, (including working capital). The acquisition’s effective date was September 11, 2004. Hotel earnings for the period from September 11, 2004 to October 26, 2004 are accounted for as a reduction of the purchase price for accounting purposes. Transaction costs of $238,000 were incurred and capitalized in conjunction with the acquisition. The hotel will continue to be managed by a subsidiary of Marriott under a new management agreement.

On November 19, 2004, the Company acquired the Courtyard by Marriott Midtown East, a 307-room hotel located in Midtown Manhattan, New York for approximately $78.9 million (including working capital). Transaction costs of $717,000 were incurred and capitalized in conjunction with the acquisition. Marriott entered into an Assignment and Assumption of Purchase and Sale Agreement with the Company whereby the Company assumed Marriott’s rights, title and interest in Marriott’s Purchase and Sale Agreement with a third party for the acquisition of the hotel. The hotel will continue to be managed by a subsidiary of Marriott under a new management agreement. Marriott provided the Company with $2.5 million (“Key Money”) as enticement to enter into the management agreement. The Key Money has been deferred and will be recognized over the term of the management agreement.

On December 15, 2004, the Company acquired the Salt Lake City Marriott, a 510-room hotel located in Salt Lake City, Utah for total consideration of approximately $53.3 million (including working capital). Transaction costs of $277,000 were incurred and capitalized in conjunction with the acquisition. The Company leases the land underlying the Salt Lake City Marriott pursuant to a ground lease that provides for ground lease payments that are calculated based on a percentage of gross revenues. The Company reviewed the terms of the ground lease in conjunction with the hotel purchase accounting and concluded that the ground lease terms are consistent with current market terms. The hotel will continue to be managed by a subsidiary of Marriott under the existing management agreement. The terms of the assumed management agreement are consistent with current market terms. Accordingly, no intangible asset or liability was recorded in purchase accounting for this agreement.

On December 15, 2004, the Company acquired the Marriott Bethesda Suites, a 274-suite hotel located in Bethesda, Maryland for total consideration of approximately $41.9 million (including working capital). Transaction costs of $248,000 were incurred and capitalized in conjunction with the acquisition. The Company leases the land underlying the Marriott Bethesda Suites pursuant to a ground lease that provides for ground lease rental payments that are stipulated in the ground lease and increase 5.5 percent per annum over the remaining eighty-three year term of the lease. The Company concluded that the ground lease terms are above current market and recorded a $5.8 million unfavorable lease provision at the acquisition date. The hotel will continue to be managed by a subsidiary of Marriott under a new management agreement. The Company reviewed the terms of the hotel’s mortgage debt in conjunction with the purchase accounting. The Company concluded that the current mortgage terms are above current market and, accordingly, the Company recorded a $3.0 million debt premium to record the debt at fair value as of the acquisition date. The Company is planning to complete a $3 million renovation of the hotel during 2005.

F-23

On December 20, 2004, the Company acquired the Hotel 5A, formerly the Clarion Fifth Avenue, a 189-room hotel located in Midtown Manhattan, New York for total consideration of approximately $39.7 million (including working capital). The hotel was converted to a Courtyard by Marriott in early 2005 and will be operated under a new management agreement with a subsidiary of Marriott and is currently known as the Courtyard Manhattan / Fifth Avenue. Transaction costs of $425,000 were incurred and capitalized in conjunction with the acquisition. The Company leases the land underlying the Courtyard New York / Fifth Avenue pursuant to a ground lease that provides for ground lease rental payments that are stipulated in the ground lease and increase in pre-established amounts over the remaining eighty year term of the lease. The Company reviewed the terms of the ground lease in conjunction with the hotel purchase accounting and concluded that the ground lease terms are consistent with current market terms. The Company is planning to invest approximately $4 million during the hotel conversion. In March 2005, Marriott will pay the TRS of the Company $1.0 million, which was an incentive to enter into the management agreement. The Key Money will be deferred and recognized over the term of the management agreement.

On December 22, 2004, the Company acquired the Marriott Griffin Gate Resort, a 408-room hotel located in Lexington, Kentucky for total consideration of approximately $49.8 million (including working capital). The acquisition’s effective date was September 11, 2004. Hotel earnings for the period from September 11, 2004 to December 22, 2004 are accounted for as a reduction of the purchase price for accounting purposes. Transaction costs of $496,000 were incurred and capitalized in conjunction with the acquisition. The hotel will continue to be managed by a subsidiary of Marriott under a new management agreement. The Company is planning to invest $1.7 million in the hotel during 2005.

2005 Acquisition

On January 5, 2005, the Company acquired the Torrance Marriott, a 487-room hotel located in Torrance, California for total consideration of approximately $72 million (including working capital). Transaction costs of $353,000 were incurred and capitalized in conjunction with the acquisition. The hotel will continue to be managed by a subsidiary of Marriott under a new management agreement. In early 2005, Marriott will pay the TRS of the Company $3.0 million (“Key Money”) which was an incentive to enter into the management agreement. The Key Money will be deferred and recognized over the term of the management agreement. The Company entered into $44 million of mortgage debt on the Torrance Marriott. This interest only mortgage debt bears interest at LIBOR plus 2.50% and matures in January 2007. The Company is planning to complete a $10 million renovation of the hotel during 2005 and 2006.

The allocations, which may be adjusted if any of the assumptions underlying the purchase accounting change, of the purchase prices of the hotels to the acquired assets and liabilities are as follows (in thousands):


	Sonoma			Midtown East			Salt Lake		Courtyard Fifth Avenue
Land	$	3,951		$	16,500		$	—	$	—
Land improvements		5,594			—			—		—
Building		17,865			54,664			45,292		33,779
Furniture, fixtures and equipment		4,846			1,500			3,825		1,000

Total fixed assets		32,256			72,664			49,117		34,779
Due from manager		780			—			—		—
Restricted cash		—			—			—		214
Cash		—			4,000			—		—
FF&E escrow		800			4,539			3,761		4,117
Hotel working capital and other assets, net		(1,491	)		154			467		630
Deferred key money		—			(2,500	)		—		—

Purchase price	$	32,345		$	78,857		$	53,345	$	39,740

F-24


	Griffin Gate			Bethesda			Torrance
Land	$	7,869		$	—		$	7,241
Building		33,428			46,271			51,504
Furniture, fixtures and equipment		6,650			3,425			3,409

Total fixed assets		47,947			49,696			62,154
FF&E Escrow		2,955			830			10,000
Unfavorable lease provision		—			(5,780	)		—
Debt premium					(2,952	)		—
Hotel working capital and other assets, net		(1,060	)		98			(152	)

Purchase Price	$	49,842		$	41,892		$	72,002

The acquired properties will be included in our results of operations from the respective dates of acquisition. The following unaudited pro forma results of operations reflect the 2004 and 2005 acquisitions and the 2004 acquisitions, respectively as if each had occurred on January 1, 2004. These pro forma results do not purport to be indicative of the results of operations, which would have actually occurred had the transactions taken place on January 1, 2004, or of future results of operations.


	2004 and 2005 Acquisitions			2004 Acquisitions
	Year Ended December 31, 2004			Year Ended December 31, 2004
Revenues	$	125,351,329		$	104,787,304
Total expenses		(134,967,788	)		(120,191,171	)

Net loss	$	(9,616,459	)	$	(15,403,867	)

Loss per share—Basic	$	(0.53	)	$	(0.85	)

Loss per share—Diluted	$	(0.53	)	$	(0.85	)

9. Related Party Transactions

Marriott Investment Sourcing Relationship

As of December 31, 2004, Marriott International Inc. (“Marriott”) owns approximately 14.3% of our common stock. While there is no contractual relationship binding upon the Company and Marriott, the Company considers Marriott to be the Company’s preferred hotel management company.

Marriott Management Agreements

The Company was party to hotel management agreements with Marriott for five of the six properties owned as of December 31, 2004. The sixth hotel converted to a Courtyard by Marriott in early 2005. The Torrance Marriott, acquired on January 5, 2005, is subject to a new management agreement with Marriott. Marriott is responsible for hiring, with the Company retaining veto rights on certain executive level employees, training and supervising the managers and employees required to operate the properties and for purchasing supplies, for which generally Marriott will be reimbursed by the Company. Marriott will provide centralized reservation systems, national advertising, marketing and promotional services, as well as various accounting and data processing services. Marriott will also prepare and implement annual operations budgets that will be subject to certain limited review and approval rights by the Company.

F-25

The following table sets forth the effective date, initial term and the number of renewal terms at the option of the manager under the respective management agreements for each of the Company’s acquired hotel properties:


	Date of Agreement	Initial Term	Number of Renewal Terms

The Lodge at Sonoma, a Renaissance Resort and Spa	10/25/2004	20 years	One ten year period

Courtyard Midtown Manhattan East	11/19/2004	30 years	Two ten year periods

Marriott Salt Lake City Downtown	12/29/2001	30 years	Three fifteen year periods

Courtyard Manhattan / Fifth Avenue	1/22/2005	30 years	None

Marriott Griffin Gate Resort	12/22/2004	20 years	One ten year period

Marriott Bethesda Suites	12/15/2004	21 years	Two ten year periods

Torrance Marriott	1/31/05	40 years	None

The following table sets forth the base management fee and incentive management fee, generally due and payable each fiscal year, for each of our seven properties.


	Base Management Fee(1)		Incentive Management Fee(2)
Courtyard Manhattan/Midtown East	5	%	25%(3)
Torrance Marriott	3	%	20%(4)
Salt Lake City Marriott Downtown	3	%	Not more than 20%(5)
Marriott Griffin Gate Resort	3	%	20%(6)
Bethesda Marriott Suites	3	%	50%(7)
Courtyard Manhattan/Fifth Avenue	5	%(8)	25%(9)
The Lodge at Sonoma Renaissance Resort & Spa	3	%	20%(10)

(1)	As a percentage of gross revenues.

(2)	Based on a percentage of hotel operating profits above a negotiated return on our investment capital as more fully described in the following footnotes.

(3)	Calculated as a percentage of operating profits in excess of 10.75% of the sum of (i) $73.7 million and (ii) the amount of certain capital expenditures.

(4)	Calculated as a percentage of operating profits in excess of the sum of (i) $7.5 million and (ii) 10.75% of certain capital expenditures.

(5)

(6)	Calculated as a percentage of operating profits in excess of the sum of (i) $5.5 million and (ii) 10.75% of certain capital expenditures.

(7)

(8)	The base management fee will be equal to 5.5% of gross revenues for fiscal years 2010 through 2014 and 6% for fiscal year 2015 and thereafter until the expiration of the agreement. Also, beginning in 2007, the

F-26

base management fee may increase to 5.5% at the beginning of the next fiscal year if operating profits equal or exceed $4.7 million, and beginning in 2011, the base management fee may increase to 6.0% at the beginning of the next fiscal year if operating profits equal or exceed $5.0 million.

(9)	Calculated as a percentage of operating profits in excess of 12% of the sum of (i) $38.8 million and (ii) the amount of certain capital expenditures, less 5% of the total real estate tax bill (for as long as the hotel is leased to a party other than the manager).

(10)	Calculated as a percentage of operating profits in excess of the sum of (i) $3.6 million and (ii) 10.75% of capital expenditures.

As of December 31, 2004, the liabilities incurred by the hotel managers are comprised of liabilities incurred by the Company’s hotel managers in conjunction with the operation of the hotels which are legal obligations of the Company. As of December 31, 2004, the due from manager is primarily comprised of hotel level accounts receivable, periodic hotel operating distributions due to owner and prepaid assets held by the hotel managers on the Company’s behalf.

Other Business Relationships with Marriott

The Company is party to the following arrangements with Marriott:

•

The Company is party to a one-year lease agreement for approximately 4,000 square feet of office space at Marriott’s headquarters for the Company’s corporate offices for approximately $190,000 per year. In addition, the Company reimbursed Marriott for approximately $45,000 of leasehold improvement costs for the leased space.

•

The Company has entered into a shared services agreement with Marriott. The shared services agreement provides the Company with access to certain information technology and telephone and Internet systems as long as the Company continues to lease its corporate offices from Marriott. The cost of these services was approximately $73,000 for the period from May 6, 2004 to December 31, 2004.

TRS Leases

In order to qualify as a REIT, the Company must lease our hotel properties to another party from whom the Company will derive rent income that will qualify as “rents from real property” under the REIT rules. Accordingly, the Company will lease each of our hotels to a wholly owned TRS lessee subsidiary. Each TRS lessee subsidiary pays rent that generally should qualify as “rents from real property,” provided that an “eligible independent contractor” operates and manages each hotel property on behalf of the TRS lessee. We expect that an “eligible independent contractor” will manage each of our hotel properties. All rents under the TRS leases are eliminated in consolidation.

10. Commitments and Contingencies

Litigation

The Company is not involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Company.

Ground Leases

The Company leases the land underlying the Bethesda Marriott Suites and the Courtyard Manhattan / Fifth Avenue pursuant to ground leases that provide for ground lease rental payments that are stipulated in the ground lease and increase in pre-established amounts over the remaining term of the lease. The Company leases the land underlying the Salt Lake City Marriott Downtown pursuant to a ground lease that provides for ground lease payments that are calculated based on a percentage of gross revenues. The Company records minimum ground rent

F-27

expense on the Bethesda Marriott Suites and the Courtyard Manhattan / Fifth Avenue on a straight-line basis as required by accounting principles generally accepted in the United States.

The Company also leases the ground under the Marriott Griffin Gate Resort golf course. In addition to the main Salt Lake City ground lease, the Company leases the ground under a portion of the Salt Lake City Marriott Downtown ballroom under a separate lease agreement. Ground rent expense was $353,410 for the period from May 6, 2004 to December 31, 2004. Cash paid for ground rent was $53,215 for the period from May 6, 2004 to December 31, 2004.

Future minimum annual rental commitments under non-cancelable operating leases as of December 31, 2004 are as follows:


2005	$	1,557,672
2006		1,376,847
2007		1,299,551
2008		1,404,811
2009		1,423,123
Thereafter		626,790,160

	$	633,852,164

The following table reflects the annual base rents of the Company’s ground leases:


Property	Term(1)	Annual Rent
Salt Lake City Marriott
(Ground Lease for Hotel)	Through 12/56	Greater of $132,000 or 2.6% of annual gross room sales

(Ground Lease for Extension)	Through 12/07	$9,343
	1/08-12/12	10,277
	1/13-12/17	11,305

Marriott Griffin Gate Resort	9/03-8/08	90,750
	9/08-8/13	99,825
	9/13-8/18	109,800
	9/18-8/23	120,750
	9/23-8/28	132,750
	9/28-8/33	147,000

Bethesda Marriott Suites	Through 10/87	374,125(2)

Courtyard Manhattan/Fifth Avenue (3)	10/97-9/07	800,000
	10/07-9/17	906,000
	10/17-9/27	1,132,812
	10/27-9/37	1,416,015
	10/37-9/47	1,770,019
	10/47-9/57	2,212,524
	10/57-9/67	2,765,655
	10/67-9/77	3,457,069
	10/77-9/85	4,321,336

(1)

These terms assume our exercise of all renewal options.

(2)

Represents rent for the year commencing on November 2004 and ending on October 2005. Rent will increase annually by 5.5%

(3)

The ground lease term is 49 years. The Company has the right to renew the ground lease for an additional 49 year term on the same terms then applicable to the ground lease.

F-28

11. Fair Value of Financial Instruments

The fair value of certain financial assets and liabilities and other financial instruments as of December 31, 2004 are as follows:


	Carrying Amount		Fair Value
Mortgage debt	$	177,827,573	$	180,779,372
Interest rate cap agreements		59,944		59,944

The fair value of all other financial assets and liabilities are equal to their carrying amount.

12. Planned Initial Public Offering and Credit Facility (Unaudited)

The Company plans to file a registration statement on Form S-11 with the intention of registering its outstanding common stock and raising of capital through the sale of additional common stock. The Company is currently under negotiations to enter a secured revolving credit facility.

F-29

DiamondRock Hospitality Company

Schedule III—Real Estate and Accumulated Depreciation

As of December 31, 2004


			Initial Cost		Costs Capitalized Subsequent to Acquisition	Gross Amount at End of Year
Description	Encumbrances		Land	Building and Improvements	Costs Capitalized Subsequent to Acquisition	Land	Building and Improvements	Total	Accumulated Depreciation		Net Book Value	Year of Acquisition	Depreciation Life
The Lodge at Sonoma, a Renaissance Resort and Spa	(20,000,000	)	3,951,000	23,459,459	—	3,951,000	23,459,459	27,410,459	(148,123	)	27,262,336	2004	40 Years
Courtyard Manhattan / Midtown East	(45,000,000	)	16,500,000	54,664,374	—	16,500,000	54,664,374	71,164,374	(160,628	)	71,003,746	2004	40 Years
Salt Lake City Marriott Downtown	(39,000,000	)	—	45,292,260	—	—	45,292,260	45,292,260	(53,651	)	45,238,609	2004	40 Years
Courtyard Manhattan / Fifth Avenue	(23,000,000	)	—	33,779,307	—	—	33,779,307	33,779,307	(27,855	)	33,751,452	2004	40 Years
Marriott Griffin Gate Resort	(31,000,000	)	7,869,000	33,428,263	—	7,869,000	33,428,263	41,297,263	(23,237	)	41,274,026	2004	40 Years
Bethesda Marriott Suites	(19,827,573	)	—	46,271,249	—	—	46,271,249	46,271,249	(54,083	)	46,217,166	2004	40 Years

Total	(177,827,573	)	28,320,000	236,894,912	—	28,320,000	236,894,912	265,214,912	(467,577	)	264,747,335

F-30

Independent Auditors’ Report

Marriott International, Inc.:

We have audited the accompanying statements of assets and liabilities—accounts maintained by Marriott International, Inc. for the Courtyard by Marriott Midtown East (the Hotel) as of October 8, 2004 and January 2, 2004 and the related statements of operating revenues, direct costs and certain operating expenses—accounts maintained by Marriott International, Inc., net assets—accounts maintained by Marriott International, Inc., and cash flows—accounts maintained by Marriott International, Inc. for the Hotel for the period from January 3, 2004 to October 8, 2004 and for the years ended January 2, 2004 and January 3, 2003. These financial statements are the responsibility of Marriott International, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

As described in note 2, the accompanying financial statements exclude certain assets, liabilities and expenses and therefore, are not a complete presentation of the Hotel’s assets, liabilities and related revenues and expenses.

In our opinion, the financial statements referred to above present fairly, in all material respects, the assets and liabilities of the Hotel maintained by Marriott International, Inc. (described in note 2) as of October 8, 2004 and January 2, 2004 and the related operating revenues, direct costs and certain operating expenses and cash flows of the Hotel maintained by Marriott International, Inc. in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

McLean, Virginia

November 19, 2004

F-31

COURTYARD BY MARRIOTT MIDTOWN EAST

STATEMENTS OF ASSETS AND LIABILITIES— ACCOUNTS MAINTAINED BY MARRIOTT INTERNATIONAL, INC.

October 8, 2004 and January 2, 2004


	October 8, 2004		January 2, 2004
ASSETS
Cash and cash equivalents	$	93,347	$	35,798
Accounts receivable		730,720		353,078
Due from Marriott International, Inc.		780,238		833,981
Other assets		50,981		85,010

Total assets	$	1,655,286	$	1,307,867

LIABILITIES AND NET ASSETS
Liabilities:
Accounts payable and accrued expenses	$	245,568	$	233,724
Sales and use tax payable		256,069		209,641
Due to fund for replacement of and
additions to furnishings and equipment		129,157		113,368
Advance deposits		30,665		46,959

Total liabilities		661,459		603,692
Net assets		993,827		704,175

Total liabilities and net assets	$	1,655,286	$	1,307,867

See accompanying notes to financial statements.

F-32

COURTYARD BY MARRIOTT MIDTOWN EAST

STATEMENTS OF OPERATING REVENUES, DIRECT COSTS AND CERTAIN OPERATING EXPENSES— ACCOUNTS MAINTAINED BY MARRIOTT INTERNATIONAL, INC.

Period from January 3, 2004 to October 8, 2004 and Years Ended

January 2, 2004 and January 3, 2003


	January 3, 2004 to October 8, 2004		Year ended January 2, 2004		Year ended January 3, 2003
Operating Revenues:
Rooms	$	14,222,711	$	14,898,355	$	16,098,776
Food and beverage		566,422		711,239		782,513
Telephone and other		214,987		351,238		406,927

Total operating revenues		15,004,120		15,960,832		17,288,216


Direct Costs:
Rooms		3,795,646		3,690,098		3,818,414
Food and beverage		547,601		695,381		847,560
Telephone and Other		281,271		341,057		404,074

Total direct costs		4,624,518		4,726,536		5,070,048

Total operating revenues less direct costs		10,379,602		11,234,296		12,218,168


Certain Operating Expenses:
General and administrative		1,593,420		1,977,756		2,600,900
Utilities		503,593		660,493		545,270
Real estate taxes and other taxes		790,593		1,063,074		860,999
Repairs and maintenance		660,189		826,627		366,573
Management fees		750,206		798,042		864,411
Marketing		596,844		646,159		746,744
Insurance		157,359		252,348		340,340
Leases		31,884		58,329		67,830
Other expenses		417,670		472,336		27,799

Total operating expenses		5,501,758		6,755,164		6,420,866

Excess of operating revenues over direct costs and certain operating expenses	$	4,877,844	$	4,479,132$	$	5,797,302

See accompanying notes to financial statements.

F-33

COURTYARD BY MARRIOTT MIDTOWN EAST

STATEMENTS OF CASH FLOWS— ACCOUNTS MAINTAINED BY MARRIOTT INTERNATIONAL, INC.

Period from January 3, 2004 to October 8, 2004 and Years Ended

January 2, 2004 and January 3, 2003


	January 3, 2004 to October 8, 2004			Year ended January 2, 2004			Year ended January 3, 2003
Cash flows from operating activities:
Excess of operating revenues over direct costs and certain operating expenses	$	4,877,844		$	4,479,132		$	5,797,302
Adjustments to reconcile net loss to net cash provided by operating activities:
Changes in operating accounts:
Accounts receivable, net		(377,642	)		(104,748	)		(33,206	)
Due from Marriott International, Inc.		53,743			(355,488	)		(335,074	)
Other assets		34,029			386,936			81,805
Accounts payable and accrued expenses		58,272			23,754			125,096
Due to fund for replacement of and additions to furnishings and equipment		15,789			78,648			(13,699	)
Advance deposits		(16,294	)		13,876			10,202

Net cash provided by operating activities		4,645,741			4,522,110			5,632,426

Net cash used in financing activities—cash distributions to owner		(4,588,192	)		(4,529,826	)		(5,623,366	)

Net increase (decrease) in cash and cash equivalents		57,549			(7,716	)		9,060
Cash and cash equivalents at beginning of period		35,798			43,514			34,454

Cash and cash equivalents at end of period	$	93,347		$	35,798		$	43,514

See accompanying notes to financial statements.

F-34

COURTYARD BY MARRIOTT MIDTOWN EAST

STATEMENTS OF NET ASSETS— ACCOUNTS MAINTAINED BY MARRIOTT INTERNATIONAL, INC.

Period from January 3, 2004 to October 8, 2004 and Years Ended

January 2, 2004 and January 3, 2003


Balance at December 28, 2001	$	580,933
Distributions to owner		(5,623,366	)
Excess of operating revenues over direct costs and certain operating expenses		5,797,302

Balance at January 3, 2003		754,869
Distributions to owner		(4,529,826	)
Excess of operating revenues over direct costs and certain operating expenses		4,479,132

Balance at January 2, 2004		704,175
Distributions to owner		(4,588,192	)
Excess of operating revenues over direct costs and certain operating expenses		4,877,844

Balance at October 8, 2004	$	993,827

See accompanying notes to financial statements.

F-35

COURTYARD BY MARRIOTT MIDTOWN EAST

NOTES TO FINANCIAL STATEMENTS— ACCOUNTS MAINTAINED BY MARRIOTT INTERNATIONAL, INC.

October 8, 2004 and January 2, 2004

1. Organization

866 3rd Generation Hotel L.L.C. (the “866 3rd”) owns the 307 room Courtyard by Marriott Midtown East Hotel (the “Hotel”) located at 866 Third Avenue, New York, New York. The Hotel is operated under a long-term management agreement with Courtyard Management Corporation (the “Manager”), a wholly owned subsidiary of Marriott International, Inc (“MII”). The Manager has managed the Hotel since its original conversion to a hotel in 1998. 866 3^rd is currently a debtor in possession pursuant to a filing under Chapter 11 of the Federal bankruptcy code. MII entered into a Purchase and Sale Agreement with 866 3^rd in October 2004 to acquire the Hotel. MII has assigned their right, title and interest under the Purchase and Sale Agreement to an affiliate of DiamondRock Hospitality Company (“DiamondRock”) (see Note 6).

There are 53 weeks included in the period ended January 2, 2003 and there are 52 weeks included in the period ended January 3, 2004. October 8, 2004 is the end of the Manager’s tenth accounting period in 2004. The Manager’s accounting periods are four weeks in duration and there are 13 periods in a year.

2. Summary of Significant Accounting Policies

Basis of Presentation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates.

The accompanying statements of assets and liabilities include only the accounts maintained by the Manager and, accordingly, do not include buildings, furniture and equipment, mortgage payable and the fund for replacement of additions to furnishings and equipment. In addition, the statements of operating revenues, direct costs and certain operating expenses include only the accounts maintained by the Manager and, accordingly, do not include charges for depreciation and amortization and interest expense, any expenses paid directly by 866 3rd or any income tax accounts, which are the liabilities of the members of 866 3rd. As a result, the accompanying financial statements are not intended to be a complete presentation of the Hotel’s assets and liabilities and the related revenue and expenses, cash flows and net assets. Accordingly, the assets, liabilities and expenses may not be comparable to the assets, liabilities and expenses expected to be recorded by DiamondRock in the future.

Basis of Accounting

The accompanying statements are prepared using the accrual basis of accounting.

Cash and Cash Equivalents

All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents.

Revenue Recognition

Room revenue is recognized on a day-to-day basis when the services have been rendered. Food and beverage and all other revenue are recognized when the services have been rendered.

F-36

3. Management Agreement

The Hotel is operated under a long-term management agreement, which expires in November 2023, before considering any renewal periods, as defined. Pursuant to the terms of the management agreement, the Manager earns a base management fee, which is calculated as 5% of Hotel sales. In addition, the Manager earns an incentive management fee, which is calculated as 20% of available cash flow, as defined, in excess of an owner’s priority, as defined. No incentive fees were earned in any of the periods presented.

The management agreement provides for the establishment of a fund for replacement of and additions to furnishings and equipment (the Fund) to cover the cost of replacements and renewals of furniture and fixtures at the Hotel. Contributions to the Fund are restricted and are calculated as 4% of Hotel sales. Contributions to the Fund, for the period from January 3, 2004 to October 8, 2004 and each of the fiscal years ended January 2, 2004 and January 3, 2003 were $600,165, $638,433 and $691,529, respectively. The Fund is held and owned by 866 3^rd. The balance held by 866 3^rd at October 8, 2004 was $2,971,026.

Pursuant to the terms of the management agreement, 866 3^rd is required to provide the Manager with working capital and supplies to meet the operating needs of the Hotel. 866 3^rd contributed $154,000 to the Manager to meet operating needs when the hotel opened in November 1998.

4. Commitments and Contingencies

The Hotel is involved from time to time in litigation arising in the normal course of business, none of which is expected to have a material adverse effect on the Hotel’s financial statements.

5. Leases

The Manager is currently obligated under several non-cancelable operating lease agreements for computers and office equipment that expire between 2004 and 2007. Future minimum lease payments required under these non-cancelable operating leases as of October 8, 2004 are as follows:


October 8, 2004 to December 31, 2004	$	4,925
2005		29,552
2006		3,955
2007		1,970

	$	40,402

6. Subsequent Events

In November 2004, MII entered into an Assignment and Assumption of Purchase and Sale Agreement with DiamondRock whereby DiamondRock assumed MII’s rights, title and interest in MII’s Purchase and Sale Agreement with 866 3^rd for the acquisition of the Hotel for cash consideration of approximately $75,000,000. DiamondRock is 14.3% owned by MII. The Hotel will continue to be managed by a subsidiary of MII under a new management agreement. The significant terms of the new management agreement are as follows:


Description		Term
Term		30 years with two 10-year extensions at Manager option
Base Management Fee		5% of gross revenues
Incentive Management Fee		25% above owner priority of 10.75% of total investment
FF&E Escrow Contribution Percentage		5%

F-37

Independent Auditors’ Report

The Partners

Host Marriott, L.P.:

We have audited the accompanying balance sheets of the Torrance Marriott (the Hotel), as of October 8, 2004 and January 2, 2004 and the related statements of operations, net assets and cash flows for the period from January 3, 2004 to October 8, 2004 and the fiscal years ended January 2, 2004 and January 3, 2003. These financial statements are the responsibility of the management of Host Marriott, L.P. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Hotel’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Hotel as of October 8, 2004 and January 2, 2004, and the results of its operations and its cash flows for the period from January 3, 2004 to October 8, 2004 and the fiscal years ended January 2, 2004 and January 3, 2003, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

McLean, Virginia

January 5, 2005

F-38

TORRANCE MARRIOTT

BALANCE SHEETS

(in thousands)


	October 8, 2004		January 2, 2004
ASSETS
Property and equipment, net	$	46,957	$	48,214
Accounts receivable		921		1,015
Inventory		58		67
Prepaid expenses and other assets		19		15
Property improvement fund		2,863		2,161
Cash and cash equivalents		321		405

Total assets	$	51,139	$	51,877

LIABILITIES AND NET ASSETS
Liabilities:
Accounts payable	$	474	$	730
Deferred incentive management fees		5,706		5,164
Due to Marriott International, Inc.		97		226
Accrued expenses and other liabilities		480		459

Total liabilities		6,757		6,579
Net assets		44,382		45,298

Total liabilities and net assets	$	51,139	$	51,877

See accompanying notes to financial statements.

F-39

TORRANCE MARRIOTT

STATEMENTS OF OPERATIONS

(in thousands)


	Period from January 3, 2004 to October 8, 2004		Fiscal years ended
	Period from January 3, 2004 to October 8, 2004		January 2, 2004		January 3, 2003
Revenues:
Rooms	$	10,609	$	13,171	$	13,580
Food and beverage		4,510		5,217		5,031
Other		633		806		1,029

Total revenues		15,752		19,194		19,640


Operating costs and expenses:
Rooms		2,615		3,264		3,277
Food and beverage		3,459		4,202		4,362
Hotel departmental expenses		4,701		5,468		5,210
Real estate taxes and other taxes		536		688		640
Other expenses		301		614		198
Management fees		1,010		1,199		1,415
Depreciation and amortization		1,721		2,267		2,186

Total operating costs and expenses		14,343		17,702		17,288


Operating profit		1,409		1,492		2,352
Income tax benefit		117		7		60

Net income	$	1,526	$	1,499	$	2,412

See accompanying notes to financial statements.

F-40

TORRANCE MARRIOTT

STATEMENTS OF NET ASSETS

(in thousands)


Balance at December 28, 2001	$	49,796
Net income		2,412
Capital distributions, net		(4,851	)

Balance at January 3, 2003		47,357
Net income		1,499
Capital distributions, net		(3,558	)

Balance at January 2, 2004		45,298
Net income		1,526
Capital distributions, net		(2,442	)

Balance at October 8, 2004	$	44,382

See accompanying notes to financial statements.

F-41

TORRANCE MARRIOTT

STATEMENTS OF CASH FLOWS

(in thousands)


	Period from January 3, 2004 to October 8, 2004			Fiscal years ended
	Period from January 3, 2004 to October 8, 2004			January 2, 2004			January 3, 2003
Operating Activities:
Net income	$	1,526		$	1,499		$	2,412
Depreciation and amortization		1,721			2,267			2,186
Changes in operating accounts:
Accounts receivable		94			650			159
Deferred incentive management fees		542			623			823
Inventory, Prepaid expenses and other assets		5			1			(12	)
Due to Marriott International, Inc.		(129	)		(359	)		(1,003	)
Accounts Payable, Advanced Deposits, Accrued expenses and other liabilities		(235	)		(375	)		(502	)

Cash provided by operating activities		3,524			4,306			4,063


Investing Activities:
Additions to property and equipment, net		(464	)		(480	)		(628	)
Change in property improvement fund		(702	)		(562	)		(355	)

Cash used in investing activities		(1,166	)		(1,042	)		(983	)


Financing Activities:
Capital distributions to owners, net		(2,442	)		(3,558	)		(4,851	)

Decrease in cash and cash equivalents		(84	)		(294	)		(1,771	)
Cash and cash equivalents at:
Beginning of period		405			699			2,470

End of period	$	321		$	405		$	699

See accompanying notes to financial statements.

F-42

TORRANCE MARRIOTT

NOTES TO FINANCIAL STATEMENTS

October 8, 2004 and January 2, 2004

1. Business and Basis of Presentation

The balance sheet and operating accounts of the Torrance Marriott (the Hotel, as defined below), have been prepared pursuant to the requirements of a purchase and sale agreement between the owner, Host Marriott, L.P. (Host LP) and DiamondRock Hospitality Company (DiamondRock). All of the interests in the Hotel are either directly or indirectly owned by Host LP.

These financial statements present the financial position, results of operations, and the cash flows of the hotel by combining the accounts of Host LP, pertaining to the Hotel, the accounts of the taxable Real Estate Investment Trust subsidiary (TRS) of Host LP, which leases the Hotel and the working capital and operating accounts of the Hotel as of October 8, 2004 and January 2, 2004 and for the period from January 3, 2004 to October 8, 2004 and the fiscal years ended January 2, 2004 and January 3, 2003 and, the rental income received by the owner is eliminated against the lease expense of the TRS as well as other inter-entity transactions and balances. Accordingly, these financial statements reflect the financial position, results of operations and cash flows for the Hotel. October 8, 2004 is the end of the tenth accounting period in 2004. The accounting periods are four weeks in duration, and there are 13 periods in a year. All excess cash generated by the Hotel is distributed to the owner of the Hotel.

The Torrance Marriott (the Hotel), has 487 rooms and is operated under long-term management agreement with Marriott International, Inc. (MII).

2. Summary of Significant Accounting Policies

Basis of Accounting

The assets and liabilities in these financial statements are recorded at their historical costs.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenues

Revenues from operations of the hotel are recognized when the services are provided. Revenues consist of room sales, food and beverage sales, and other department revenues such as telephone and gift shop.

Property and Equipment

Property and equipment is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 40 years for building and improvements and three to ten years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease terms or the estimated useful lives of the assets.

F-43

Host LP assesses impairment of real estate properties based on whether it is probable that estimated undiscounted future cash flows from the Hotel property are less than its net book value. If the Hotel property is impaired, a loss is recorded for the difference between the fair value and net book value of the property.

Income Taxes

Provisions for Federal and state income taxes in the accompanying financial statements are based on the pre-tax loss of the TRS. The effective tax rate applied to the pre-tax loss of the taxable REIT subsidiary was 38.5% for the period from January 3, 2004 to October 8, 2004 and the fiscal years ended January 2, 2004 and January 3, 2003. The deferred tax asset related to the pre-tax loss is transferred to Host LP and treated as an adjustment to capital distributions in the accompanying financial statements.

Cash and Cash Equivalents

All highly liquid investments with a maturity of three months or less at date of purchase are considered cash equivalents.

Property Improvement Fund

The property improvement fund was established pursuant to the management agreement with MII to fund capital expenditures at the Hotel (see note 4).

3. Property and Equipment

Property and equipment consists of the following (in thousands):


	October 8, 2004			January 2, 2004
Land	$	9,215		$	9,215
Building and improvements		43,538			43,222
Furniture and equipment		6,733			6,585

		59,486			59,022
Less accumulated depreciation		(12,529	)		(10,808	)

	$	46,957		$	48,214

4. Management Agreement

The Hotel is managed by MII pursuant to a long-term management agreement, which expires on December 31, 2060, including all renewal periods. Pursuant to the terms of the management agreement, the manager earns a base management fee of 3% of hotel sales and an incentive management fee, which is 20% of Gross Operating Profit (as defined in the management agreement).

Incentive management fees for the Hotel for the period from January 3, 2004 to October 8, 2004 and the fiscal years ended January 2, 2004 and January 3, 2003 were approximately $.5 million, $.6 million and $.8 million, respectively. Incentive management fees must be deferred if the owner’s distribution is less than 70% of Gross Operating Profit. To date, all incentive management fees have been deferred.

The management agreement provides for the establishment of a property improvement fund to cover the cost of replacements and renewals of furniture and fixtures at the Hotel. Contributions to the property improvement fund are based on 5% of Hotel sales. Contributions to the property improvement fund for the period from January 3, 2004 to October 8, 2004 and the fiscal years ended January 2, 2004 and January 3, 2003 were approximately $.8 million, $1.0 million and $1.0 million, respectively.

F-44

5. TRS Lease

The TRS, as the lessee of the Hotel (Lessee), is responsible for paying all of the expenses of operating the Hotel, including all personnel costs, utility costs and general repair and maintenance of the Hotel. The Lessee is also responsible for all fees payable to MII, including base and incentive management fees and chain service payments, with respect to periods covered by the term of the lease. The Lessee is not obligated to bear the cost of any capital improvements or capital repairs to the Hotel or the other expenses borne by Host LP such as real estate taxes, personal property taxes, casualty insurance on the Hotel, required expenditures for replacement of furniture and fixtures (including maintaining the property improvement fund) and capital expenditures.

6. Subsequent Events

On January 5, 2005, DiamondRock acquired Host LP’s rights, title and interest in the Hotel for total consideration of approximately $65 million (including working capital). The Hotel will continue to be managed by a subsidiary of MII under a new management agreement. The significant terms of the new management agreement are as follows:


Term		20 years with two 10-year extensions at MII option
Base Management Fee		3% of gross revenues
Incentive Management Fee		20% above owner priority calculated at 10.75% of total investment
FF&E Escrow Contribution Percentage		5% of gross revenues

F-45

Independent Auditors’ Report

The Partners

Host Marriott, L.P.:

We have audited the accompanying balance sheets of the Salt Lake City Marriott Downtown (the Hotel), as of October 8, 2004 and January 2, 2004, and the related statements of operations, net assets and cash flows for the period from January 3, 2004 to October 8, 2004 and the fiscal years ended January 2, 2004 and January 3, 2003. These financial statements are the responsibility of the management of Host Marriott, L.P. Our responsibility is to express an opinion on these financial statements based on our audits.

/s/ KPMG LLP

McLean, Virginia

January 5, 2005

F-46

SALT LAKE CITY MARRIOTT DOWNTOWN

BALANCE SHEETS

(in thousands)


	October 8, 2004		January 2, 2004
ASSETS
Property and equipment, net	$	47,863	$	49,439
Accounts receivable		1,252		735
Inventory		128		125
Prepaid expenses and other assets		7		20
Property improvement fund		3,562		2,898
Cash and cash equivalents		642		156

Total assets	$	53,454	$	53,373

LIABILITIES AND NET ASSETS
Liabilities:
Accounts payable	$	804	$	521
Due to Marriott International, Inc.		177		97
Accrued expenses and other liabilities		184		233

Total liabilities		1,165		851
Net assets		52,289		52,522

Total liabilities and net assets	$	53,454	$	53,373

See accompanying notes to financial statements.

F-47

SALT LAKE CITY MARRIOTT DOWNTOWN

STATEMENTS OF OPERATIONS

(in thousands)


	Period from January 3, 2004 to October 8, 2004			Fiscal years ended
	Period from January 3, 2004 to October 8, 2004			January 2, 2004			January 3, 2003
Revenues:
Rooms	$	11,656		$	14,504		$	18,019
Food and beverage		4,618			5,761			7,384
Other		1,286			1,337			1,805

Total revenues		17,560			21,602			27,208


Operating costs and expenses:
Rooms		2,850			3,479			4,138
Food and beverage		3,283			4,356			5,131
Hotel departmental expenses		5,310			6,427			7,473
Real estate taxes and other taxes		481			614			589
Ground rent		356			408			445
Other expenses		70			113			88
Management fees		527			628			2,092
Depreciation and amortization		1,826			3,222			3,295

Total operating costs and expenses		14,703			19,247			23,251


Operating profit		2,857			2,355			3,957
Income taxes		(325	)		(239	)		(55	)

Net income	$	2,532		$	2,116		$	3,902

See accompanying notes to financial statements.

F-48

SALT LAKE CITY MARRIOTT DOWNTOWN

STATEMENTS OF NET ASSETS

(in thousands)


Balance at December 28, 2001	$	56,894
Net income		3,902
Capital distributions, net		(6,052	)

Balance at January 3, 2003		54,744
Net income		2,116
Capital distributions, net		(4,338	)

Balance at January 2, 2004		52,522
Net income		2,532
Capital distributions, net		(2,765	)

Balance at October 8, 2004	$	52,289

See accompanying notes to financial statements.

F-49

SALT LAKE CITY MARRIOTT DOWNTOWN

STATEMENTS OF CASH FLOWS

(in thousands)


	Period from January 3, 2004 to October 8, 2004			Fiscal years ended
	Period from January 3, 2004 to October 8, 2004			January 2, 2004			January 3, 2003
Operating Activities:
Net income	$	2,532		$	2,116		$	3,902
Depreciation and amortization		1,826			3,222			3,295
Changes in operating accounts:
Accounts receivable		(517	)		255			(103	)
Due to/from Marriott International, Inc.		80			165			613
Inventory and prepaid expenses		10			53			319
Accounts payable, advanced deposits, accrued expenses and other liabilities		234			(386	)		(2,576	)

Cash provided by operating activities		4,165			5,425			5,450


Investing Activities:
Additions to property and equipment, net		(250	)		(289	)		(384	)
Change in property improvement fund		(664	)		(937	)		(1,015	)

Cash used in investing activities		(914	)		(1,226	)		(1,399	)


Financing Activities:
Capital distributions to owners, net		(2,765	)		(4,338	)		(6,052	)

Increase (decrease) in cash and cash equivalents		486			(139	)		(2,001	)
Cash and cash equivalents at:
Beginning of period		156			295			2,296

End of period	$	642		$	156		$	295

See accompanying notes to financial statements.

F-50

SALT LAKE CITY MARRIOTT DOWNTOWN

NOTES TO FINANCIAL STATEMENTS

October 8, 2004 and January 2, 2004

1. Business and Basis of Presentation

The balance sheet and operating accounts of the Salt Lake City Marriott Downtown (the Hotel, as defined below), have been prepared pursuant to the requirements of a purchase and sale agreement between the owner, Host Marriott, L.P. (Host LP) and DiamondRock Hospitality Company (DiamondRock). All of the interests in the Hotel are either directly or indirectly owned by Host LP.

The Salt Lake City Marriott Downtown (the Hotel), has 510 rooms and is operated under long-term management agreements with Marriott International, Inc. (MII).

2. Summary of Significant Accounting Policies

Basis of Accounting

The assets and liabilities in these financial statements are recorded at their historical costs.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenues

Property and Equipment

F-51

Income Taxes

Provisions for Federal and state income taxes in the accompanying financial statements are based on the pre-tax income of the TRS. The effective tax rate applied to the pre-tax income of the taxable REIT subsidiaries was 38.5% for the period from January 3, 2004 to October 8, 2004 and the fiscal years ended January 2, 2004 and January 3, 2003. The full liability related to the pre-tax income is transferred to Host LP and treated as an adjustment to capital distributions in the accompanying financial statements.

Cash and Cash Equivalents

All highly liquid investments with a maturity of three months or less at date of purchase are considered cash equivalents.

Property Improvement Fund

The property improvement fund was established pursuant to the management agreement with MII to fund capital expenditures at the Hotel (see note 4).

3. Property and Equipment

Property and equipment consists of the following (in thousands):


	October 8, 2004			January 2, 2004
Building and leasehold improvements	$	56,880		$	56,725
Furniture and equipment		13,811			13,725

		70,691			70,450
Less accumulated depreciation		(22,828	)		(21,011	)

	$	47,863		$	49,439

4. Management Agreement

The Hotel is managed by MII pursuant to a long-term management agreement, which expires August 2057, including all renewal periods. Pursuant to the terms of the management agreement, the manager earns a base management fee of 3% of hotel sales and an incentive management fee, which is calculated as available cash flow up to 20% of net house profit, as defined in the management agreement. No incentive management fees were earned in 2003 or 2004. In 2002, the Hotel paid approximately $1.3 million of incentive management fees.

5. TRS Lease

F-52

also responsible for all fees payable to MII, including base and incentive management fees and chain service payments, with respect to periods covered by the term of the lease. The Lessee is not obligated to bear the cost of any capital improvements or capital repairs to the Hotel or the other expenses borne by Host LP such as real estate taxes, personal property taxes, casualty insurance on the Hotel, required expenditures for replacement of furniture and fixtures (including maintaining the property improvement fund) and capital expenditures.

6. Lease Obligations

The Salt Lake City Marriott is located on a site that is leased from a third party for an initial term that expired on January 30, 2004, and was extended through January 30, 2014. The Hotel currently has options to extend the term for up to four successive terms for ten years each. The lease requires minimum annual rent payments of the greater of $132,000 or percentage rent based on 2.6% of room revenues.

Additionally, the hotel leases a common space which includes an entrance to an adjoining mall. The total minimum rents to be paid from the hotel under a noncancelable operating lease in effect at October 8, 2004, are as follows:


Period from October 9, 2004 to December 31, 2004	$	2,336
2005		9,343
2006		9,343
2007		9,343
2008		10,277
2009		10,277
Thereafter		87,356

Total	$	138,275

7. Subsequent Event

On December 15, 2004, DiamondRock acquired Host LP’s rights, title and interest in the Hotel for total consideration of approximately $53.7 million (including working capital). The Hotel will continue to be managed by a subsidiary of MII under the existing management agreement. The significant terms of the management agreement are as follows:


Term		Expires on December 31, 2056
Base Management Fee		3% of gross revenues
Incentive Management Fee		100% above owner priority (sum of ground lease rent, annual debt service and 10% of original owner investment) and is capped at 20% of operating profit.
FF&E Escrow Contribution Percentage		5% of gross revenues

F-53

Independent Auditors’ Report

The Member

MI Griffin Gate Hotel, LLC:

We have audited the accompanying statements of operations and cash flows of MI Griffin Gate Hotel, LLC (the Company) for the periods from January 3, 2004 to October 8, 2004 and June 26, 2003 (acquisition date) to January 2, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of MI Griffin Gate Hotel, LLC for the periods from January 3, 2004 to October 8, 2004 and June 26, 2003 to January 2, 2004, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

McLean, Virginia

January 31, 2005

F-54

MI GRIFFIN GATE HOTEL, LLC

STATEMENTS OF OPERATIONS

Periods from January 3, 2004 to October 8, 2004 and June 26, 2003 to January 2, 2004


	January 3, 2004 to October 8, 2004			June 26, 2003 to January 2, 2004
Operating Revenues:
Rooms	$	8,850,488		$	5,508,396
Food and beverage		6,889,089			4,947,385
Telephone and other		2,011,926			1,134,812

Total operating revenues		17,751,503			11,590,593


Direct Costs and Expenses:
Rooms		2,000,491			1,308,113
Food and beverage		4,820,696			3,480,875
Telephone and Other		1,497,833			993,433

Total direct costs and expenses		8,319,020			5,782,421

Total operating revenues less direct costs and expenses		9,432,483			5,808,172


Operating Expenses:
Depreciation and amortization		1,814,960			854,901
General and administrative		1,400,911			885,945
Utilities		420,566			269,148
Real estate taxes and other taxes		234,612			179,356
Repairs and maintenance		821,074			595,165
Management fees		532,545			347,718
Marketing		1,177,021			746,794
Other expenses		430,876			256,498

Total operating expenses		6,832,565			4,135,525


Operating income		2,599,918			1,672,647
Interest expense		(2,953,189	)		(2,161,799	)

Net loss	$	(353,271	)	$	(489,152	)

See accompanying notes to financial statements.

F-55

MI GRIFFIN GATE HOTEL LLC

STATEMENTS OF CASH FLOWS

Periods from January 3, 2004 to October 8, 2004 and June 26, 2003 to January 2, 2004


	January 3, 2004 to October 8, 2004			June 26, 2003 to January 2, 2004
Cash flows from operating activities:
Net loss	$	(353,271	)	$	(489,152	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,814,960			854,901
Changes in operating accounts:
Accounts receivable, net		(258,094	)		201,191
Inventories		(39,020	)		(16,303	)
Prepaid expenses and other assets		13,238			2,475
Due to/from Marriott International, Inc.		—			(377,411	)
Accrued interest		75,207			(572,544	)
Accounts payable and accrued expenses		(656,996	)		558,382

Net cash provided by operating activities		596,024			161,539


Cash flows from investing activities:
Additions to property, plant and equipment		(4,942,719	)		(1,974,510	)
Change in restricted cash		—			118,222

Net cash used in investing activities		(4,942,719	)		(1,856,288	)


Cash flows from financing activities:
Member contributions		4,519,546			1,432,649
Principal payments to related party		(332,949	)		(44,951	)
Advances from related party		68,062			44,000

Net cash provided by financing activities		4,254,659			1,431,698

Net increase decrease in cash and cash equivalents		(92,036	)		(263,051	)
Cash and cash equivalents at beginning of period		153,136			416,187

Cash and cash equivalents at end of period	$	61,100		$	153,136


Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,877,982		$	2,734,343

See accompanying notes to financial statements.

F-56

MI GRIFFIN GATE HOTEL, LLC

NOTES TO FINANCIAL STATEMENTS

Periods from January 3, 2004 to October 8, 2004 and June 26, 2003 to January 2, 2004

1. Organization

MI Griffin Gate Hotel, LLC (the Company) was formed on May 12, 2003, pursuant to a single member limited liability company agreement for the purpose of acquiring and owning the Griffin Gate Marriott Resort, a 408 room hotel located in Lexington, Kentucky (the Hotel) from Griffin Gate, LLC (GG). The sole member is Marriott Hotel Services, Inc., a wholly owned subsidiary of Marriott International, Inc. (MII). The Hotel commenced operations in 1980. The Hotel is operated under a long-term management agreement with its sole member, Marriott Hotel Services, Inc. (the Manager).

Marriott International Capital Corporation (MICC), a wholly owned subsidiary of MII, was the sole holder of a mortgage loan on the Hotel, as a result of its purchase of the mortgage loan from a third party lender in August 2002. The mortgage loan had a carrying value of $44,714,887 at the date MICC purchased the loan. On June 26, 2003, a settlement agreement was entered into between MICC, the Company and GG and certain individual guarantors, whereby the Hotel was conveyed to the Company, subject to the outstanding debt, which included advances made by MICC (see note 3).

The Manager’s accounting periods are four weeks in duration and there are 13 four-week periods in a year. There are 10 four-week periods included in the period from January 3, 2004 to October 8, 2004. There are approximately seven four-week periods included in the period from June 26, 2003 to January 2, 2004.

On December 22, 2004, the Company sold the Hotel to DiamondRock Hospitality Company (DiamondRock) for total consideration of approximately $49,800,000. DiamondRock is 14.3% owned by MII. The Hotel continues to be managed by the same company under a new management agreement (New Management Agreement). The significant terms of the New Management Agreement are as follows:


Description		Term
Term		20 years with one 10-year extension at Manager option
Base Management Fee		3% of gross revenues
Incentive Management Fee		20% above owner priority of the sum of $5.5 million and 10.75% of certain capital expenditures
FF&E Escrow Contribution Percentage		5%, commencing in 2006

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements are presented in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Real Estate

Property and equipment is recorded at the estimated fair value on the date conveyed to the Company and was allocated to land, buildings and improvements and furniture, fixtures and equipment in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Property and equipment purchased after the hotel acquisition date is recorded at cost. Replacements and improvements since June 2003

F-57

are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of an asset, the cost and related accumulated depreciation will be removed from the Company’s accounts and any resulting gain or loss will be included in the statements of operations.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, 30 years for building and improvements and three to ten years for fixtures and equipment.

Impairment of Long-Lived Assets

In the event that facts or changes in circumstances indicate that the carrying amount of the Hotel may be impaired, an evaluation of recoverability is prepared. In such an event, a comparison is made of the projected future operating cash flows of such Hotel on an undiscounted basis to the carrying amount of the Hotel. If such sum is less than the depreciated cost of the property, the Hotel is written down to its estimated fair market value.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Revenue Recognition

Room revenue is recognized on a day-to-day basis when the services have been rendered. Food and beverage and all other revenue are recognized when the services have been rendered. A provision for possible bad debts is made when collection of receivables is considered doubtful.

Income Taxes

Income taxes are recognized as if the Company were a separate taxable entity and pursuant to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.

Deferred income taxes represent the tax consequences on future years of differences between the tax and financial reporting bases of assets and liabilities. Deferred income taxes consist mainly of net operating loss carryforwards. Based on the continuing losses of the Company and projections of the future operations, there is substantial doubt about the ability of the Company to utilize the net operating loss carryforwards on a separate company basis. Accordingly, a valuation allowance has been recorded to reduce the carrying value of the deferred tax asset to zero at January 2, 2004 and October 8, 2004 and therefore, there is no net tax benefit recorded in the accompanying statements of operations in either period presented.

3. Related Party Obligations

On August 6, 1995, GG closed on a bond financing with a third party lender in the amount of $48,000,000, with a maturity in August 2005 and a fixed interest rate of 6.75%. The financing was backed by a letter of credit, draws on which were to be re-paid by GG and, if not, then paid by a third party lender and MICC on an equal basis with such payments (and certain other advances and payments) secured by a first mortgage lien on the Hotel. MICC purchased the mortgage loan from a third party lender in August 2002, at which time the amount secured by the mortgage equaled $44,714,887. Upon acquiring the Hotel on June 26, 2003, the Company assumed (i) the outstanding principal and interest obligation with a carrying amount of $43,889,981, which included $796,703 of accrued interest and (ii) the obligations to repay other advances that MICC had made to GG, which was $1,491,422, including accrued interest of $4,944, with such advances subject to interest rates ranging from 2.9% to 4.75%, all of which amounts had a maturity date in August 2005.

F-58

Subsequent to August 2002, distributions of the Hotel’s operating profits were applied against outstanding interest and principal pro rata between the mortgage loan and the other advances. Total interest expense incurred from January 3, 2004 to October 8, 2004, and from June 26, 2003 to January 2, 2004 was $2,953,189 and $2,161,799, respectively.

In December 2004, upon the sale to DiamondRock, all related party obligations were repaid in full.

4. Management Agreement

The Hotel was formerly operated under a long-term management agreement (Prior Management Agreement). Pursuant to the terms of the Prior Management Agreement, the Manager earned a base management fee, which was calculated as 3% of Hotel sales. In addition, the Manager earned an incentive management fee, which was calculated as 20% of operating profit, but paid out of operating profit in excess of owner’s priority, as defined in the Prior Management Agreement. There were no incentive fees paid in any of the periods presented.

The Prior Management Agreement provided for the establishment of a property improvement fund to cover the cost of replacements and renewals of furniture and fixtures at the Hotel. Contributions to the property improvement fund were calculated as a percentage (5%) of Hotel sales.

Pursuant to the terms of the Prior Management Agreement, the owner of the Hotel was required to provide the Manager with working capital and supplies to meet the operating needs of the Hotel. The Company assumed the working capital deficit of approximately $1,200,000 upon acquisition of the Hotel on June 25, 2003.

6. Leases

The Company is currently obligated under several non-cancelable operating lease agreements for computers and office equipment that expire between 2005 and 2008. Future minimum lease payments required under these non-cancelable operating leases as of October 8, 2004 are as follows:


October 9, 2004 through December 31, 2004	$	38,595
2005		125,528
2006		59,714
2007		7,464
2008		7,464

	$	238,765

7. Commitments and Contingencies

The Company is involved from time to time in litigation arising in the normal course of business, none of which is expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

F-59

Independent Auditors’ Report

Marriott International, Inc.:

We have audited the accompanying statements of operating revenues, direct costs and certain operating expenses—accounts maintained by Marriott International, Inc. and cash flows—accounts maintained by Marriott International, Inc. for the Griffin Gate Marriott Resort (the Hotel) for the period from January 4, 2003 to June 25, 2003 and for the fiscal year ended January 3, 2003. These financial statements are the responsibility of Marriott International, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

As described in note 2, the accompanying financial statements exclude certain expenses and cash flows and therefore, are not a complete presentation of the Hotel’s expenses and cash flows.

In our opinion, the financial statements referred to above present fairly, in all material respects, the operating revenues, direct costs and certain operating expenses and cash flows of the Hotel for accounts maintained by Marriott International, Inc. (described in note 2) for the period from January 4, 2003 to June 25, 2003 and for the fiscal year ended January 3, 2003, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

McLean, Virginia

January 31, 2005

F-60

GRIFFIN GATE MARRIOTT RESORT

STATEMENTS OF OPERATING REVENUES, DIRECT COSTS AND CERTAIN OPERATING EXPENSES—ACCOUNTS MAINTAINED BY MARRIOTT INTERNATIONAL, INC.

Period from January 4, 2003 to June 25, 2003 and Fiscal Year Ended January 3, 2003


	January 4, 2003 to June 25, 2003		Fiscal Year ended January 3, 2003
Operating Revenues:
Rooms	$	5,158,786	$	10,550,849
Food and beverage		4,110,098		9,082,224
Telephone and other		1,108,585		2,492,105

Total operating revenues		10,377,469		22,125,178


Direct Costs:
Rooms		1,215,778		2,542,726
Food and beverage		3,004,883		6,396,151
Telephone and Other		835,180		1,924,179

Total direct costs		5,055,841		10,863,056

Total operating revenues less direct costs		5,321,628		11,262,122


Certain Operating Expenses:
General and administrative		805,742		1,577,173
Utilities		259,741		500,679
Real estate taxes and other taxes		154,761		337,350
Repairs and maintenance		578,868		1,140,122
Management fees		311,324		663,756
Marketing		636,765		1,229,493
Lease expense		78,548		209,181
Other expenses		173,276		364,560

Total certain operating expenses		2,999,025		6,022,314

Excess of operating revenues over direct costs and certain operating expenses	$	2,322,603	$	5,239,808

See accompanying notes to financial statements.

F-61

GRIFFIN GATE MARRIOTT RESORT

STATEMENTS OF CASH FLOWS— ACCOUNTS MAINTAINED BY MARRIOTT INTERNATIONAL, INC.

Period from January 4, 2003 to June 25, 2003 and Fiscal Year Ended January 3, 2003


	January 4, 2003 to June 25, 2003			Fiscal Year ended January 3, 2003
Cash flows from operating activities:
Excess of operating revenues over direct costs and certain operating expenses	$	2,322,603		$	5,239,808
Adjustments to reconcile the excess of operating revenues over direct costs and certain operating expenses to net cash provided by operating activities:
Changes in operating accounts:
Accounts receivable, net		(580,517	)		(370,219	)
Prepaid expenses and other assets		57,894			2,620
Accounts payable and accrued expenses		(33,267	)		59,690
Due to Marriott International, Inc.		175,670			416,338
Due to fund for replacement of and additions to furnishings and equipment		(9,050	)		161,811

Net cash provided by operating activities		1,933,333			5,510,048

Net cash used provided by (used in) investing activities—change in restricted cash		(25,510	)		5,669

Net cash used in financing activities—cash distributions to owner		(1,802,889	)		(5,312,689	)

Net increase in cash and cash equivalents		104,934			203,028
Cash and cash equivalents at beginning of period		311,253			108,225

Cash and cash equivalents at end of period	$	416,187		$	311,253

See accompanying notes to financial statements.

F-62

GRIFFIN GATE MARRIOTT RESORT

NOTES TO FINANCIAL STATEMENTS

ACCOUNTS MAINTAINED BY MARRIOTT INTERNATIONAL, INC.

Period from January 4, 2003 to June 25, 2003 and Fiscal Year Ended January 3, 2003

1. Organization

Griffin Gate, LLC (GG) was formed pursuant to a limited liability company agreement for the purpose of acquiring and owning the Griffin Gate Marriott Resort, a 408 room hotel located in Lexington, Kentucky (the Hotel). MI Griffin Gate Hotel, LLC (the Company), whose sole member is Marriott Hotel Services, Inc., a wholly owned subsidiary of Marriott International, Inc. (MII) acquired the Hotel from GG on June 26, 2003. Prior to the acquisition by the Company, the Hotel was operated under a long-term management agreement with the Company’s sole member, Marriott Hotel Services, Inc. (the Manager). On December 22 2004, MII sold the Hotel to DiamondRock Hospitality Company (DiamondRock) for total consideration of approximately $49,800,000. DiamondRock is 14.3% owned by MII. The Hotel continues to be managed by Marriott Hotel Services, Inc. under a new management agreement, with similar terms.

These financial statements are for the Hotel for the period from January 4, 2003 to June 25, 2003 and for the fiscal year ended January 3, 2003 and represent periods prior to the acquisition by the Company. There are 53 weeks included in the fiscal year ended January 3, 2003. There are approximately six four-week periods included in the financial statements from January 4, 2003 to June 25, 2003. The Manager’s accounting periods are four weeks in duration and there are 13 periods in a year.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements are prepared using the accrual basis of accounting and in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates, and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates.

The accompanying statements of operating revenues, direct costs and certain operating expenses and cash flows include only the accounts maintained by the Manager and, accordingly, do not include charges for depreciation and interest expense, any expenses paid directly by GG or any income tax accounts, which are the liabilities of the members of GG. As a result, the accompanying financial statements are not intended to be a complete presentation of the Hotel’s expenses and cash flows. Accordingly, the expenses may not be comparable to the expenses that may be incurred by the Hotel in the future and the cash flows may not be comparable to the cash flows of the Hotel in the future.

Cash and Cash Equivalents

All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents.

Revenue Recognition

F-63

3. Management Agreement

The Hotel is managed by Marriott Hotel Services, Inc., the sole member of the Company. Pursuant to the terms of the management agreement, the Manager earns a base management fee, which is calculated as 3% of Hotel sales. In addition, the Manager earns an incentive management fee, which is calculated as 20% of operating profit, but paid out of operating profit in excess of owner’s priority, as defined in the management agreement. There were no incentive fees paid in any of the periods presented.

As discussed in note 1, subsequent to the acquisition by the Company, and subsequently, DiamondRock, the Hotel continues to be managed by Marriott Hotel Services, Inc., under a new management agreement with similar terms.

4. Commitments and Contingencies

The Hotel is involved from time to time in litigation arising in the normal course of business, none of which is expected to have a material adverse effect on the Hotel’s financial statements.

5. Leases

The Manager is currently obligated under several non-cancelable operating lease agreements for computers and office equipment that expire between 2005 and 2008. Future minimum lease payments required under these non-cancelable operating leases as of June 25, 2003 are as follows:


June 26, 2003 to December 31, 2003	$	77,190
2004		154,379
2005		125,528
2006		59,714
2007		7,464
Thereafter		7,464

	$	431,739

F-64

Independent Auditors’ Report

The Partners

Rock Spring Park Hotel Limited Partnership:

We have audited the accompanying balance sheets of Rock Spring Park Hotel Limited Partnership as of October 8, 2004 and January 2, 2004 and the related statements of operations, partners’ deficit and cash flows for the period from January 3, 2004 to October 8, 2004 and the fiscal years ended January 2, 2004 and January 3, 2003. These financial statements are the responsibility of Rock Spring Park Hotel Limited Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Rock Spring Park Hotel Limited Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Rock Spring Park Hotel Limited Partnership as of October 8, 2004 and January 2, 2004, and the results of its operations and its cash flows for the period from January 3, 2004 to October 8, 2004 and the fiscal years ended January 2, 2004 and January 3, 2003 in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

McLean, Virginia

December 15, 2004

F-65

ROCK SPRING PARK HOTEL LIMITED PARTNERSHIP

BALANCE SHEETS

October 8, 2004 and January 2, 2004


	October 8, 2004			January 2, 2004
ASSETS
Property and equipment, net	$	21,968,021		$	22,848,801
Cash		1,181,673			—
Restricted cash		283,672			539,475
Due from Marriott—landlord priority		447,852			143,409
Due from Marriott—escrow deposit		12,977			84,714
Other receivables		—			497,847
Deferred costs, net		599,923			623,653
Working capital deposits due from manager		100,000			100,000
Prepaid expenses and other assets		57,330			27,280

Total assets	$	24,651,448		$	24,865,179

LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accounts payable and accrued expenses	$	69,867		$	169,536
Note payable, partners		6,182,532			6,182,532
Note payable, related party		11,518,266			11,518,266
Accrued interest, partners		1,894,102			1,780,094
Accrued interest, related party		559,998			253,413
Ground rent payable		92,556,582			88,317,067
Note payable, Montgomery County		51,569			55,103
Mortgage payable		19,910,776			20,311,397

Total liabilities		132,743,692			128,587,408
Partners' deficit		(108,092,244	)		(103,722,229	)

Total liabilities and partners' deficit	$	24,651,448		$	24,865,179

See accompanying notes to financial statements.

F-66

ROCK SPRING PARK HOTEL LIMITED PARTNERSHIP

STATEMENTS OF OPERATIONS

Period from January 3, 2004 to October 8, 2004 and Fiscal Years Ended January 2, 2004 and January 3, 2003


	Period From January 3, 2004 to October 8, 2004			Fiscal Year Ended January 2, 2004			Fiscal Year Ended January 3, 2003
Rental Income	$	3,671,572		$	4,244,080		$	4,250,501


Operating expenses:
Repairs and maintenance		245,058			93,389			14,500
Ground rent		4,501,494			5,870,715			5,870,715
Consulting fees		69,341			79,741			80,145
Other expenses, net		39,795			29,477			54,216
Depreciation and amortization		1,052,588			1,381,187			1,372,361

Total operating expenses		5,908,276			7,454,509			7,391,937

Operating income		(2,236,704	)		(3,210,429	)		(3,141,436	)


Non-operating income (expenses):
Mortgage interest		(1,192,782	)		(1,577,939	)		(1,611,207	)
Interest on note payable, Montgomery County		(3,747	)		(3,972	)		(4,182	)
Interest on notes and loan payable, partners		(339,010	)		(438,789	)		(438,789	)
Interest on notes payable, related party		(631,585	)		(817,477	)		(817,477	)
Interest income		33,813			21,100			19,829

Total non-operating expenses		(2,133,311	)		(2,817,077	)		(2,851,826	)

Net loss	$	(4,370,015	)	$	(6,027,506	)	$	(5,993,262	)

See accompanying notes to financial statements.

F-67

ROCK SPRING PARK HOTEL LIMITED PARTNERSHIP

STATEMENTS OF PARTNERS' DEFICIT

Period from January 3, 2004 to October 8, 2004 and Fiscal Years Ended January 2, 2004 and January 3, 2003


Balance at January 1, 2002	$	(91,701,461	)
Net loss		(5,993,262	)

Balance at January 3, 2003		(97,694,723	)
Net loss		(6,027,506	)

Balance at January 2, 2004		(103,722,229	)
Net loss		(4,370,015	)

Balance at October 8, 2004	$	(108,092,244	)

See accompanying notes to financial statements.

F-68

ROCK SPRING PARK HOTEL LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS

Period from January 3, 2004 to October 8, 2004 and Fiscal Years Ended January 2, 2004 and January 3, 2003


	Period From January 3, 2004 to October 8, 2004			Fiscal Year Ended January 2, 2004			Fiscal Year Ended January 3, 2003
Cash flow from operating activities:
Net loss	$	(4,370,015	)	$	(6,027,506	)	$	(5,993,262	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,052,588			1,381,187			1,372,361
Straight-line rent adjustment		4,239,515			5,519,243			5,537,566
Payment of accrued interest, on partners loans		(225,000	)		(664,881	)		(363,930	)
Accrued interest on partners loans		339,008			438,789			438,789
Payments of accrued interest on related party loan		(325,000	)		(1,035,115	)		(586,070	)
Accrued interest on related party loan		631,585			817,477			817,477
Changes in assets and liabilities:
Due from Marriott—landlord priority		(304,443	)		—			—
Other receivables		497,847			(491,687	)		7,117
Prepaid ground rent		(30,050	)		731			(1,461	)
Accounts payable and accrued expenses		(78,053	)		(82,928	)		85,547

Net cash provided by (used in) operating activities		1,427,982			(144,690	)		1,314,134


Cash flows from investing activities:
Additions to property and equipment		(148,078	)		(251,435	)		(504,283	)
Restricted cash—Improvement escrows		255,803			(176,835	)		(63,690	)
Due from Marriott—escrow deposit		71,737			64,840			12,458

Net cash provided by (used in) investing activities		179,462			(363,430	)		(555,515	)


Cash flow from financing activities:
Principal repayments on note payable, Montgomery County		(3,534	)		(3,306	)		(3,097	)
Bank overdraft charge		(21,616	)
Principal repayments on mortgage loan		(400,621	)		(447,954	)		(414,899	)

Net cash used in financing activities		(425,771	)		(451,260	)		(417,996	)

Net increase (decrease) in cash		1,181,673			(959,380	)		340,623
Cash, beginning of period		—			959,380			618,757

Cash, end of period	$	1,181,673			—			959,380


Supplemental Disclosure of Cash Flow Information:
Cash paid for Interest	$	1,582,178		$	3,277,939		$	2,561,207

See accompanying notes to financial statements.

F-69

ROCK SPRING PARK HOTEL LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

October 8, 2004 and January 2, 2004

1. Organization

Rock Spring Park Hotel Limited Partnership (the “Partnership”) was formed on April 28, 1988, pursuant to a limited partnership agreement (the “Agreement”) under the laws of the State of Maryland for the purpose of developing and owning the Marriott Bethesda Suites, a 274-room suite hotel located in Bethesda, Maryland (the “Hotel”). The Hotel has been operated pursuant to a long-term operating lease agreement with Marriott International, Inc (“MII”) since the Hotel’s opening in 1990. The Agreement provides for the Partnership’s profits and losses to be allocated to each partner based on their ownership interest in the Partnership. Distributions are made to the partners at times and in aggregate amounts determined by the general partner.

There are 53 weeks included in the period ended January 2, 2003 and there are 52 weeks included in the period ended January 3, 2004. October 8, 2004 is the end of the MII’s tenth accounting period in 2004. MII’s accounting periods are four weeks in duration and there are 13 periods in a year.

In October, 2004, the partners of the partnership entered into an agreement with a subsidiary of DiamondRock Hospitality Company (“DiamondRock”) for the sale of all of the equity interests in the Partnership for cash consideration of approximately $41,700,000. The acquisition closed on December 15, 2004. DiamondRock assumed the Mortgage note but did not assume the related party liabilities except that DiamondRock did assume the ground lease with 83 years remaining in the term including the rental increases of 5.5% per annum. The Hotel will be managed by a subsidiary of MII under a new management agreement. The significant terms of the management agreement with DiamondRock are as follows:


Description		Term
Term		20 years with two 10-year extensions at Manager option
Base Management Fee		3% of gross revenues
Incentive Management Fee		50% above owner priority of 7.5% of total investment
FF&E Escrow Contribution Percentage		5%

2. Summary of Significant Accounting Policies

Basis of Accounting

The accompanying financial statements are presented in conformity with accounting principles generally accepted in the United States of America.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Property and Equipment

Property and equipment is recorded at historical cost, including capitalized interest and real estate taxes incurred during development and construction. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, 39 years for building and improvements and three to ten years for furniture

F-70

and equipment. Leasehold improvements are amortized over the shorter of the lease term or estimated useful lives of the assets.

Impairment of Long-Lived Assets

In the event that facts or changes in circumstances indicate that the carrying amount of the Hotel may be impaired, an evaluation of recoverability is prepared. In such an event, a comparison is made of the current and projected operating cash flows of such Hotel on an undiscounted basis to the carrying amount of the Hotel. If such sum were less than the depreciated cost of the property, the Hotel would be written down to its estimated fair market value. No impairment write-downs were recorded in any of the periods presented.

Cash

The Partnership considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. There were no cash equivalents in any period.

Revenue Recognition

Rental income is recognized by the Partnership as earned pursuant to its lease to MII (See Notes 6 and 9).

Income Taxes

Provisions for Federal and state income taxes have not been made in the accompanying financial statements since the Partnership does not pay income taxes but rather allocates its profits and losses to the individual partners. Significant differences exist between the net income (loss) for financial reporting purposes and the taxable income (loss) reported in the Partnership’s tax return. These differences are primarily due to the use, for income tax purposes, of accelerated depreciation methods and shorter depreciable lives of the assets.

3. Property and Equipment

Property and equipment consists of the following:


	October 8, 2004		January 2, 2004
Land improvements	$	484,948	484,948
Building		31,960,278	31,960,278
Furniture, fixtures and equipment		6,591,019	6,545,544
Artwork		107,161	107,161

		39,143,406	39,097,931
Less: accumulated depreciation		17,175,385	16,249,130

	$	21,968,021	22,848,801

Total depreciation expense for the periods ended October 8, 2004, January 2, 2004 and January 3, 2003 was $1,028,856, $1,350,360 and $1,341,534, respectively.

4. Deferred Costs

Deferred costs consist of the following:


	October 8, 2004		January 2, 2004
Loan costs and fees	$	417,718	$	417,718
Lease acquisition costs—brokerage fees		500,000		500,000

		917,718		917,718
Less: accumulated amortization		317,795		294,065

	$	599,923	$	623,653

Total amortization expense for the periods ended October 8, 2004, January 2, 2004 and January 3, 2003 was $23,732, $30,827 and $30,827, respectively.

F-71

5. Debt

The Partnership is obligated under a mortgage loan in the original principal amount of $22,500,000 (the Mortgage Loan) which is secured by the Partnership’s property and equipment. The Mortgage Loan has a term of 25 years with a maturity date of February 1, 2023. The Mortgage Loan bears interest at 7.69% per annum and requires monthly principal and interest payments of $168,878. The Mortgage Loan includes a prepayment penalty if repaid prior to 2013 of the greater of 1% of the principal amount outstanding or the yield maintenance premium in relation to the prepayment. Required principal payments are summarized as follows:


Period	Amount
October 9, 2004—December 31, 2004	$	83,201
2005		522,173
2006		563,774
2007		608,689
2008		657,183
2009		709,540
Thereafter		16,766,216

	$	19,910,776

6. Operating Lease Agreement

The Hotel is operated under a long-term operating lease agreement, which expires in December 2025 (the “Lease”). The Lease provides for two ten-year renewal terms at the option of the Lessee. The annual rental is calculated as the sum of: 1) the Landlord Priority, as defined, 2) the amount required to fund the contribution to the property improvement fund (as discussed below) and 3) 50% of remaining net house profit. The Landlord Priority is an amount equal to the interest on the sum of the Partnership’s total development and loan procurement costs at the effective interest rate of the Mortgage Loan plus annual ground rent, plus amortization at 10% of the development and loan procurement costs. For all periods presented, the Landlord Priority plus the required contribution to the property improvement fund exceeded net house profit so the lease revenue equaled net house profit.

The Lease provides for the establishment of a property improvement fund which is restricted to replacements and renewals of furniture and fixtures at the Hotel. Contributions to the property improvement fund are restricted and are 5% of Hotel sales. The required contributions for the period from January 3, 2004 to October 8, 2004 and each of the fiscal years ended January 2, 2004 and January 3, 2003 were $597,000, $728,936 and $688,814, respectively. The actual contributions to the property improvement fund, for the period from January 3, 2004 to October 8, 2004 and each of the fiscal years ended January 2, 2004 and January 3, 2003 were $119,400, $567,013 and $615,024, respectively. The funding shortfalls of $477,600, $161,923 and 73,790 for the period ended October 8, 2004, January 2, 2003 and January 3, 2002, respectively, and $713,313 in total, is required to be made up in subsequent years provided cash flow from operations is sufficient. Following acquisition of the partnership by DiamondRock, the lease was replaced by a management agreement between a DiamondRock subsidiary and the lessee providing the lessee with substantially the same economic benefits as the lease.

F-72

Pursuant to the terms of the lease agreement, the owner of the Hotel is required to provide the manager with working capital and supplies to meet the operating needs of the Hotel. Working capital advances were $100,000 at October 8, 2004, January 2, 2003 and January 3, 2002 and are summarized as follows:


	October 8, 2004		January 2, 2004
Assets:
Cash	$	564,117	$	393,281
Escrow		308,302		562,993
Other receivables		439,015		157,272
Inventory		58,095		41,661
Other assets		17,825		14,808
Less Liabilities:
Trade payables		359,150		292,119
Sales and use tax		130,897		73,407
Rent payable		447,850		583
Payable to Escrow		266,412		562,993
Other payables		83,045		140,913

Working capital, net	$	100,000	$	100,000

7. Commitments and Contingencies

The Partnership is involved from time to time in litigation arising in the normal course of business, none of which is expected to have a material adverse effect on the Partnership’s financial position, results of operations or cash flows.

The Partnership has 20-year commitment with the Montgomery County, Maryland Department of Transportation which requires the Partnership to contribute approximately $7,000 per annum towards the construction of a local bridge through July 2014. The obligation was recorded at the present value of the required payments at a discount rate of 6.8% per annum.

8. Related Party Transactions

The Partnership has entered into various transactions with related parties. A description of these related party transactions is as follows:

•

The Partnership borrowed funds from certain partners of the Partnership and Charles E. Smith Management, Inc. These borrowings are represented by notes payable. These notes bear interest at 7% per annum and are due upon demand. The Partnership paid interest of $225,000, $664,881 and $363,930 to the partners during the period from January 3, 2003 to October 8, 2004, and the fiscal years ended January 2, 2004 and January 3, 2003, respectively. The Partnership paid interest of $325,000, $1,035,115 and $586,070 to the Charles E. Smith Management, Inc. during the period from January 3, 2003 to October 8, 2004, and the fiscal years ended January 2, 2004 and January 3, 2003, respectively. These notes were not assumed by DiamondRock as part of its purchase of the Partnership interests on December 15, 2004.

•

The Partnership has a ground lease with several of the limited partners in the Partnership under a 99-year lease that expires in April 2087. The ground rent increases 5.5% annually. In accordance with U.S. generally accepted accounting principles annual rent expense is computed based on straight-lining the total minimum lease payments over the term of the lease (99 years). Ground rent expense was $4,501,494, $5,844,225 and $5,868,052 during the period from January 3, 2003 to October 8, 2004 and the fiscal years ended January 2, 2004 and January 3, 2003, respectively.

F-73

Future minimum ground lease payments are as follows:


Year ending December 31:
2005	$	391,197
2006		412,713
2007		435,412
2008		459,360
2009		484,625

Total	$	2,183,307

•

The Partnership has an agreement with Charles E. Smith Real Estate Services L.P. (“CESRES”) to provide consulting services. The agreement expires in March 2008. The consulting fees are calculated based on a percentage of Hotel net house profit. CESRES consulting fees were $69,341, $79,741 and $80,145 during the period from January 3, 2004 to October 8, 2004 and the fiscal years ended January 2, 2004 and January 3, 2003, respectively.

•

CESRES maintains the cash for the Partnership as well as other affiliated partnerships for which it provides property management services. CESRES advanced $21,616 to the Partnership at January 2, 2004.

9. Rental Income

The Rental Income of the Partnership is calculated based on hotel net house profit, which is summarized as follows:


	Period From January 3, 2004 to October 8, 2004		Fiscal Year Ended January 2, 2004		Fiscal Year Ended January 3, 2003
Hotel Sales
Rooms	$	8,886,554	$	10,918,291	$	10,031,484
Food and Beverage		2,650,594		3,166,027		3,049,639
Telephone and Other		402,878		494,398		695,160

Total hotel sales		11,940,026		14,578,716		13,776,283

Operating costs and expenses
Rooms		2,109,683		2,781,624		2,555,387
Food and Beverage		2,365,572		2,957,412		2,657,588
Telephone and Other		254,381		314,556		252,977
General and administrative		901,166		1,012,055		1,021,640
Utilities		435,576		457,469		465,904
Real estate taxes and other taxes		386,666		490,943		476,821
Repairs and maintenance		501,320		628,690		611,491
Management fees		358,201		437,361		413,288
Marketing		737,953		959,089		836,384
Insurance		21,483		36,726		45,717
Other expenses		196,453		258,711		188,585

Total Operating Costs and Expenses		8,268,454		10,334,636		9,525,782

Net House Profit	$	3,671,572	$	4,244,080	$	4,250,501

Room revenue is recognized on a day-to-day basis when the services have been rendered. Food and beverage and all other revenue are recognized when the services have been rendered.

F-74

Pursuant to the Lease (See Note 6) the net house profit is allocated first to the landlord priority and the improvement escrow with any remainder being split 50% to the lessor and 50% to the lessee for all periods:


	Period From January 3, 2004 to October 8, 2004		Fiscal Year Ended January 2, 2004		Fiscal Year Ended January 3, 2003
Net House Profit	$	3,671,572	$	4,244,080	$	4,250,501
Landlord priority		3,552,172		3,677,067		3,635,477

Excess available to improvement escrow	$	119,400	$	567,013	$	615,024

Calculated escrow requirement	$	597,000	$	728,936	$	688,814

Begining cumulative shortfall		235,713		73,790		—

Escrow shortfall		477,600		161,923		73,790

Cumulative shortfall	$	713,313	$	235,713	$	73,790

F-75

Independent Auditors’ Report

The Members

Fifth Avenue Hospitality Associates, LLC:

We have audited the accompanying statements of operations and cash flows of Fifth Avenue Hospitality Associates, LLC (the Company) for the nine month period ended September 30, 2004 and each of the two years ended December 31, 2003 and 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis of designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Fifth Avenue Hospitality Associates, LLC for the nine month period ended September 30, 2004 and each of the two years ended December 31, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

McLean, Virginia

January 17, 2005

F-76

FIFTH AVENUE HOSPITALITY ASSOCIATES, LLC

STATEMENTS OF OPERATIONS

Nine months ended September 30, 2004 and Years ended December 31, 2003 and 2002


	Nine months ended September 30, 2004			Years ended December 31,
	Nine months ended September 30, 2004			2003			2002
Total operating revenues
Rooms	$	5,981,915		$	7,133,976		$	7,842,067
Rental income		95,690			126,072			122,636
Other		158,447			223,228			245,716

Total operating revenues		6,236,052			7,483,276			8,210,419

Operating expenses
Rooms		2,267,577			2,649,077			2,680,146
Telephone		56,245			76,290			90,981
Depreciation and amortization		975,211			1,245,583			1,231,337
General and administrative		640,560			671,945			628,320
Utilities		230,830			277,296			227,275
Real estate and other taxes		600,434			804,136			705,883
Repairs and maintenance		359,923			419,159			436,782
Management fees		124,559			149,529			164,192
Marketing		230,000			266,656			262,573
Franchise fees		156,693			237,194			245,588
Insurance		110,338			111,786			120,400
Ground lease		807,704			1,076,938			1,076,938
Other income (expenses), net		(4,186	)		19,522			136,682

Total operating expenses		6,555,888			8,005,111			8,007,097

Operating (loss) income		(319,836	)		(521,835	)		203,322
Interest expense		1,043,634			1,825,976			2,009,310
Change in fair values of swaps		429,843			728,200			(312,013	)

Net loss	$	(933,627	)	$	(1,619,611	)	$	(2,118,001	)

See accompanying notes to financial statements.

F-77

FIFTH AVENUE HOSPITALITY ASSOCIATES, LLC

STATEMENTS OF CASH FLOWS

Nine months ended September 30, 2004 and Years ended December 31, 2003 and 2002


	Nine months ended September 30, 2004			Years ended December 31,
	Nine months ended September 30, 2004			2003			2002
Cash flows from operating activities:
Net loss	$	(933,627	)	$	(1,619,611	)	$	(2,118,001	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		975,211			1,245,583			1,231,337
Amortization of deferred financing costs as interest expense		92,016			184,035			291,190
Straight-line rent adjustment		207,704			276,938			276,938
Change in fair value of swaps		(429,843	)		(728,200	)		312,013
Changes in assets and liabilities:
Accounts receivable, net		(14,566	)		53,125			(188,199	)
Prepaid expenses		265,603			(474,683	)		331,084
Deposits		(1,750	)		(256	)		—
Accounts payable—trade		(84,141	)		(118,003	)		138,552
Accrued taxes		55,123			(2,863	)		(39,075	)
Accrued salaries and benefits		54,705			(61,132	)		98,754
Advance deposits		23,832			(61,460	)		62,612
Accrued interest		(147,591	)		20,213			(56,560	)

Net cash provided by (used in) operating activities		62,676			(1,286,314	)		340,645


Cash flows from investing activities:
Additions to furniture, fixtures, and equipment		(190,047	)		(87,252	)		(21,907	)


Cash flows from financing activities:
Mortgage payable repayments		(70,360	)		—			(3,500,000	)
Capital contribution		625,000			1,075,000			3,894,818

Net cash provided by financing activities		554,640			1,075,000			394,818

Net increase (decrease) in cash and cash equivalents		427,269			(298,566	)		713,556
Cash and cash equivalents at the beginning of period		1,144,975			1,443,541			729,985

Cash and cash equivalents at the end of period	$	1,572,244		$	1,144,975		$	1,443,541


Supplemental disclosure of cash flow information
Cash paid for interest	$	1,099,209		$	1,621,728		$	1,774,770

See accompanying notes to financial statements.

F-78

FIFTH AVENUE HOSPITALITY ASSOCIATES, LLC

STATEMENTS OF CASH FLOWS

Nine months ended September 30, 2004 and Years ended December 31, 2003 and 2002

1. Organization

Fifth Avenue Hospitality Associates, LLC (the “Fifth Avenue”) owned the 189 room Hotel 5A, formerly known as the Clarion Hotel Fifth Avenue (the “Hotel”) located at 3 East 40th Street, New York, New York until the Hotel was acquired by DiamondRock Hospitality Company (“DiamondRock”) for cash consideration of approximately $39,600,000. The acquisition closed on December 20, 2004. DiamondRock did not assume the Mortgage note but did assume the ground lease with 33 years remaining. The Hotel was converted to a Courtyard by Marriott in January 2005 and is managed by a subsidiary of MII under a new management agreement. The significant terms of the management agreement with DiamondRock are as follows:


Description		Term
Term		25 years
Base Management Fee		5% of gross revenues
Incentive Management Fee		25% above owner priority of 12% of total investment
FF&E Escrow Contribution Percentage		2% of gross revenues

Prior to the DiamondRock acquisition the Hotel was operated under a management agreement with Tishman Hotel Corporation (the “Manager”).

2. Summary of Significant Accounting Policies

Basis of Accounting

The accompanying financial statements are presented in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Property and Equipment

Property and equipment is recorded at historical cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, 39 years for building and improvements and three to ten years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease term or estimated useful lives of the assets.

Impairment of Long-Lived Assets

In the event that facts or changes in circumstances indicate that the carrying amount of the Hotel may be impaired, an evaluation of recoverability would be prepared. In such an event, a comparison is made of the projected future operating cash flows and proceeds from projected disposition of such Hotel on an undiscounted basis to the carrying amount of the Hotel. If such sum were less than the depreciated cost of the property, the Hotel would be written down to its estimated fair market value. No impairment write-downs were recorded in any of the periods presented.

Cash

The Partnership considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

F-79

Revenue Recognition

Revenues from operations of the hotel are recognized when the services are provided. Revenues consist of room sales and other departmental revenues such as telephone and vending machine. A provision for possible bad debts is made when collection of receivables is considered doubtful.

Income Taxes

Provisions for Federal and state income taxes have not been made in the accompanying financial statements since Fifth Avenue does not pay income taxes but rather allocates its profits and losses to the individual members. Differences exist between the net income (loss) for financial reporting purposes and the taxable income (loss) reported in the Fifth Avenue’s tax return. These differences are primarily due to the use, for income tax purposes, of accelerated depreciation methods and shorter depreciable lives of the assets.

3. Debt

Fifth Avenue was obligated under a mortgage loan in the original principal amount of $23,000,000 which was secured by Fifth Avenue’s real estate. The mortgage loan matured in June 2004 and was extended for a one year period. The outstanding balance on September 31, 2004 was $19,429,640. The mortgage loan bore interest at LIBOR + 275 basis points per annum. At September 30, 2004 the interest rate was 5.04%.

DiamondRock Hospitality Company did not assume the mortgage loan.

Fifth Avenue had an interest rate swap which fixed the interest rate at 6.79%. The fair value of the swap was a liability of $846,030, $1,158,043 and $429,843 at December 31, 2001, 2002 and 2003. Fifth Avenue did not designate this swap as an accounting hedge so the change in fair value is recorded as interest expense. The swap expired on June 1, 2004.

4. Commitments and Contingencies

Fifth Avenue is involved from time to time in litigation arising in the normal course of business, none of which is expected to have a material adverse effect on Fifth Avenue’s results of operations or cash flows.

5. Ground Lease

The Hotel is located on a site that is leased from a third party for an initial term that expires on September 30, 2036. Fifth Avenue had the option to extend the term for an additional 49-year period. The ground lease has periodic step increases. In accordance with generally accepted accounting principles in the United States of America, annual rent expense is computed based on a straight-line basis over the initial term of the lease (36 years). Ground rent expense was $807,703, $1,076,937 and $1,076,937 for the nine month period ended September 30, 2004, and the years ended December 31, 2003 and December 31, 2002, respectively. Payments under the lease were $600,000 for the nine months ended September 30, 2004 and $800,000 for each of the years ended December 31, 2003 and 2002. DiamondRock assumed the ground lease on December 20, 2004 with 32 years remaining on the lease.

6. Management Agreement

Pursuant to the terms of the management agreement, the Manager earned a base management fee, calculated as 2% of Hotel sales. In addition, the Manager earned an incentive management fee calculated as 20% of the increase, if any of the adjusted NOI for such Incentive Fee Operating Year over the Base Years Adjusted NOI (the Base year is FY 2000). No incentive fees were earned during any of the periods presented.

The management agreement provided for the establishment of a fund for replacement of and additions to furnishings and equipment (the Fund). Contributions to the Fund were restricted and were calculated as 4% of

F-80

Hotel sales. Contributions to the Fund, for the nine months ended September 30, 2004 and the years ended December 31, 2003 and 2002 were $246,814, $274,816 and $323,909, respectively.

7. Leases

Fifth Avenue was obligated under several capital lease agreements for telephone, televisions and other miscellaneous leases that were fully paid by September 30, 2004. Fifth Avenue has entered into agreements for operating leases on equipment with varying terms and payments. Total lease expense for operating leases was $6,835, $10,696 and $9,495 for the nine month period ending September 30, 2004, and the years ended December 31, 2003 and 2002, respectively.

Future minimum rental payments under noncancelable operating leases are nominal as of September 30, 2004.

F-81

Independent Auditors’ Report

The Members of Sonoma LLC:

We have audited the accompanying balance sheets of Sonoma LLC (the Company) as of October 8, 2004 and January 2, 2004 and the related statements of operations, members’ deficit and cash flows for the period from April 24, 2004 to October 8, 2004 (Successor period) and for the period from January 3, 2004 to April 23, 2004, and the fiscal years ended January 2, 2004 and January 3, 2003 (Predecessor periods). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis of designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sonoma LLC as of October 8, 2004 and January 2, 2004, and the results of their operations and their cash flows for the Successor period and the Predecessor periods in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, effective April 23, 2004, a subsidiary of Marriott International, Inc. acquired the remaining equity interests of Sonoma LLC in a business combination accounted for as a purchase. As a result of the acquisition, the financial information for the period after the acquisition, the Successor period, is presented on a different cost basis than that for the periods before the acquisition, the Predecessor periods, and, therefore, is not comparable.

/s/ KPMG LLP

McLean, Virginia

January 5, 2005

F-82

SONOMA LLC

BALANCE SHEETS

October 8, 2004 and January 2, 2004


	October 8, 2004			January 2, 2004
ASSETS
Property and equipment, net	$	31,175,019		$	34,182,512
Cash and cash equivalents		361,888			132,534
Restricted cash—property improvement fund		—			536,167
Accounts receivable		1,312,646			691,547
Inventory		128,427			154,136
Due from Marriott International, Inc.		—			44,600
Prepaid expenses and other assets		44,181			86,768

Total assets	$	33,022,161		$	35,828,264

LIABILITIES AND MEMBERS’ DEFICIT
Liabilities:
Accounts payable and accrued expenses	$	1,246,787		$	667,654
Accrued interest		6,435,469			3,867,648
Advances from Marriott International, Inc.		2,149,633			2,149,633
Notes payable		37,117,216			37,117,216

Total liabilities		46,949,105			43,802,151
Members’ deficit		(13,926,944	)		(7,973,887	)

Total liabilities and members’ deficit	$	33,022,161		$	35,828,264

See accompanying notes to financial statements.

F-83

SONOMA LLC

STATEMENTS OF OPERATIONS

Periods from April 24, 2004 to October 8, 2004 and January 3, 2004 to April 23, 2004

and Fiscal Years ended January 2, 2004 and January 3, 2003


	Successor Period			Predecessor Periods
	April 24, 2004- October 8, 2004			January 3, 2004- April 23, 2004			2003			2002
Operating Revenues:
Rooms	$	4,818,368		$	1,665,270		$	7,626,393		$	7,117,255
Food and beverage		2,543,441			1,081,273			3,832,066			3,829,871
Telephone and other		929,326			426,436			1,495,940			1,437,635

Total operating revenues		8,291,135			3,172,979			12,954,399			12,384,761


Direct Costs and Expenses:
Rooms		1,083,345			570,517			1,858,046			1,927,747
Food and beverage		1,832,288			963,436			3,258,583			3,403,603
Telephone and Other		602,172			316,355			1,101,952			1,288,834

Total direct costs and expenses		3,517,805			1,850,308			6,218,581			6,620,184

Total operating revenues less direct costs and expenses		4,773,330			1,322,671			6,735,818			5,764,577


Operating Expenses:
Depreciation and amortization		741,691			840,341			2,709,844			2,738,002
General and administrative		679,739			396,239			1,236,948			1,164,780
Utilities		159,784			119,320			379,293			370,443
Real estate taxes and other taxes		173,517			115,422			369,762			330,281
Repairs and maintenance		307,688			184,805			585,372			533,451
Management fees		248,734			95,189			388,632			371,543
Marketing		678,977			521,865			1,507,474			1,240,311
Insurance		89,852			34,529			113,110			101,142
Other expenses		395,799			186,920			737,910			569,125

Total operating expenses		3,475,781			2,494,630			8,028,345			7,419,078

Operating income (loss)		1,297,549			(1,171,959	)		(1,292,527	)		(1,654,501	)


Other income (expense)
Interest expense		(1,528,470	)		(1,039,351	)		(3,131,819	)		(3,117,351	)
Interest income		25			16			58			45

Net loss	$	(230,896	)	$	(2,211,294	)	$	(4,424,288	)	$	(4,771,807	)

See accompanying notes to financial statements.

F-84

SONOMA LLC

STATEMENTS OF CASH FLOWS

Periods from April 24, 2004 to October 8, 2004 and January 3, 2004 to April 23, 2004

and Fiscal Years ended January 2, 2004 and January 3, 2003


	Successor period			Predecessor periods
	April 24, 2004-October 8, 2004			January 3, 2004-April 23, 2004			2003			2002
Cash flows from operating activities:
Net loss	$	(230,896	)	$	(2,211,294	)	$	(4,424,288	)	$	(4,771,807	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		741,691			840,341			2,709,844			2,738,002
Changes in operating accounts:
Accounts receivable, net		(782,193	)		161,094			163,627			(129,234	)
Inventories		21,559			4,150			(7,146	)		79,755
Prepaid expenses and other assets		92,926			(50,339	)		(7,612	)		12,375
Due to/from Marriott International, Inc.		30,138			14,462			(286,098	)		(2,216,886	)
Accrued interest		1,528,470			1,039,351			1,249,295			2,018,353
Accounts payable and accrued expenses		350,814			299,429			347			12,054

Net cash provided by (used in) operating activities		1,752,509			97,194			(602,031	)		(2,257,388	)

Cash flows from investing activities:
Additions to furniture, fixtures and equipment		(87,129	)		(71,110	)		(297,690	)		(175,643	)
Change in restricted cash		—			(37,278	)		(226,362	)		(228,625	)

Net cash provided by (used in) investing activities		(87,129	)		(108,388	)		(524,052	)		(404,268	)

Cash flows from financing activities—member contributions (distributions)		(1,451,442	)		26,610			1,118,493			2,156,596

Net increase (decrease) in cash and cash equivalents		213,938			15,416			(7,590	)		(505,060	)
Cash and cash equivalents at beginning of period		147,950			132,534			140,124			645,184

Cash and cash equivalents at end of period	$	361,888		$	147,950		$	132,534		$	140,124

Supplemental disclosure of cash flow information:
Cash paid for interest	$	—		$	—		$	1,884,000		$	1,099,000

See accompanying notes to financial statements.

F-85

SONOMA LLC

STATEMENTS OF MEMBERS’ DEFICIT

Periods from April 24, 2004 to October 8, 2004 and January 3, 2004 to April 23, 2004

and Fiscal Years ended January 2, 2004 and January 3, 2003


Balance at December 28, 2001	$	(2,052,881	)
Contributions from owner		2,156,596
Net loss		(4,771,807	)

Balance at January 3, 2003		(4,668,092	)
Contributions from owner		1,118,493
Net loss		(4,424,288	)

Balance at January 2, 2004		(7,973,887	)
Contributions from owner		26,610
Net loss		(2,211,294	)

Balance at April 23, 2004		(10,158,571	)
Distributions to owner		(1,451,442	)
Adjustment for successor’s basis at acquisition		(2,086,035	)
Net loss		(230,896	)

Balance at October 8, 2004	$	(13,926,944	)

See accompanying notes to financial statements.

F-86

SONOMA LLC

NOTES TO FINANCIAL STATEMENTS

October 8, 2004 and January 2, 2004

1. Organization

Sonoma LLC (the Company) was formed on July 29, 1999, pursuant to a limited liability company agreement (the Agreement) between Sonoma Lodge LLC (Sonoma Lodge) and Sonoma Renaissance LLC (Sonoma Renaissance) under the laws of the State of California for the purpose of acquiring and owning The Lodge at Sonoma Renaissance Resort and Spa, a 182 room hotel located in Sonoma, California (the Hotel).

The Agreement provided for the Company’s profits and losses to be allocated to each member based on their ownership interest in the Company. Distributions are to be made to the members at times and in aggregate amounts determined by the managing member, Sonoma Lodge. Sonoma Renaissance is wholly owned by a subsidiary of Marriott International, Inc. (MII). The Hotel is operated under a long-term management agreement with Renaissance Hotel Operating Company (the Manager), a wholly owned subsidiary of MII. MICC LLC (the Mezzanine Lender or MICC), a wholly owned subsidiary of MII, made a mezzanine loan to the Company in July 2000. The hotel commenced operations on January 27, 2001.

Effective December 31, 2001, Sonoma Lodge, Sonoma Renaissance, the Manager, the Mezzanine Lender and the Company’s mortgage lender entered into a comprehensive debt and equity restructuring agreement. At the time of the restructuring, the first mortgage loan of $30,950,000 was in default, the Mezzanine Debt of $6,167,216 was in default and Manager advances of $2,149,633 were outstanding. In the restructuring, Sonoma Lodge made an additional equity contribution of $750,000 and Sonoma Renaissance made additional equity contributions totaling approximately $3,200,000. The defaults were cured as a result of the restructuring. See further discussion of the debt restructuring in note 4.

MII acquired the Company’s first mortgage loan on April 13, 2004. The Company became a wholly owned subsidiary of MII when a wholly owned subsidiary of MII acquired 100% of the equity interest of Sonoma Lodge as of April 23, 2004.

There are 53 weeks included in the period ended January 2, 2003 and there are 52 weeks included in the period ended January 3, 2004. October 8, 2004 is the end of MI’s tenth accounting period in 2004. MI’s accounting periods are four weeks in duration and there are 13 periods in a year.

DiamondRock Hospitality Company (DiamondRock) purchased the Hotel from MII on October 26, 2004 for cash consideration of $32,331,000. DiamondRock is 14.3% owned by MII. The Hotel will continue to be managed by a subsidiary of MII under a new management agreement. The significant terms of the new management agreement are as follows:


Description		Term
Term		20 years with one 10-year extension
Base Management Fee		3% of gross revenues
Incentive Management Fee		20% above owner priority, as defined
FF&E Escrow Contribution Percentage		3%

2. Summary of Significant Accounting Policies

Basis of Presentation

F-87

amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounting period subsequent to April 23, 2004 reflects MII’s basis in the assets and liabilities of the Company. The accounting periods prior to April 24, 2004 reflect the Company’s historical basis before the acquisition of 100% of the equity interests by MII.

Basis of Accounting

The accompanying financial statements are presented in conformity with accounting principles generally accepted in the United States of America.

Real Estate

Property and equipment is recorded at historical cost, including capitalized interest of approximately $1,700,000 incurred during development and construction. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Prior to MII’s purchase, depreciation was computed using the straight-line method over the estimated useful lives of the assets, 39 years for building and improvements and three to ten years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease term or estimated useful lives of the assets.

Subsequent to April 23, 2004, the real estate was recorded at the purchase cost of subsidiaries of MII and is being depreciated over its estimated remaining useful lives of the assets, 30 years for building and improvements and three to ten years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease term or estimated useful lives of the assets.

Impairment of Long-Lived Assets

In the event that facts or changes in circumstances indicate that the carrying amount of the Hotel may be impaired, an evaluation of recoverability is prepared. In such an event, a comparison is made of the current and projected operating cash flows of such Hotel on an undiscounted basis to the carrying amount of the Hotel. If such sum were less than the depreciated cost of the property, the Hotel would be written down to its estimated fair market value. No impairment write-downs were recorded in any of the periods presented.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Revenue Recognition

Income Taxes

Provisions for Federal and state income taxes have not been made in the accompanying financial statements since the Company does not pay income taxes but rather allocates its profits and losses to the individual members. Significant differences exist between the net income (loss) for financial reporting purposes and the taxable income (loss) reported in the Company’s tax return. These differences are primarily due to the use, for income tax purposes, of accelerated depreciation methods and shorter depreciable lives of the assets.

Pre-Opening Costs

Pre-opening costs incurred prior to the opening of the Hotel of approximately $4,600,000 were expensed as incurred in periods prior to these presented herein.

F-88

3. Property and Equipment

Property and equipment consist of the following:


	October 8, 2004			January 2, 2004
Land and improvements	$	9,262,397		$	11,105,764
Buildings and improvements		19,706,319			22,104,994
Furniture and equipment		2,947,994			8,889,848

		31,916,710			42,100,606
Less: accumulated depreciation		(741,691	)		(7,918,094	)

	$	31,175,019		$	34,182,512

4. Debt

On July 30, 1999, the Company obtained third party mortgage financing in the amount of $30,950,000 (the Mortgage Loan). The Mortgage Loan required the payment of interest only in monthly installments during the construction period of the Hotel. The maturity date of this loan was August 1, 2004, with an extension to August 1, 2007. The loan bore interest at prime plus 1.875% with an 8.5% floor during the construction period. After completion of the construction, the loan bore interest at LIBOR as defined, plus 4% per annum, with an 8.5% floor.

The loan was secured by a deed of trust on the Hotel. As indicated in note 1, the loan was in default prior to the 2001 restructuring. During the 2001 restructuring, a third party purchased the Mortgage Loan. The maturity date of the restructured Mortgage Loan was April 1, 2007. The other terms of the loan did not change. On April 13, 2004, a wholly owned subsidiary of MII purchased the Mortgage Loan and related accrued interest from the third party. The terms of the loan did not change. Total interest expense incurred for the Mortgage Loan from April 24, 2004 to October 8, 2004, from January 3, 2004 to April 23, 2004, and for each of the fiscal years ended January 2, 2004 and January 3, 2003 was $1,302,096, $888,718, $2,665,813 and $2,674,596, respectively. Total accrued interest as of October 8, 2004 and January 2, 2004 was $4,549,700 and $2,358,886, respectively.

On July 30, 2000, the Company entered into a $5,000,000 loan (the Mezzanine Loan) with MICC. The Mezzanine Loan bore interest of 10% and was increased to $6,167,216 after additional advances. After the December 31, 2001 restructuring, the Mezzanine Loan bore interest at 5% and is scheduled to mature on April 1, 2007. Total interest expense incurred for the Mezzanine Loan from April 24, 2004 to October 8, 2004, from January 3, 2004 to April 23, 2004, and for each of the fiscal years ended January 2, 2004 and January 3, 2003 was $146,433, $108,685, $336,616 and $320,011, respectively. Total accrued interest as of October 8, 2004 and January 2, 2004 was $911,745 and $656,627, respectively.

During 2000 and 2001, the Manager advanced $2,149,633 to the Company. No interest was due on these advances until after the December 31, 2001 restructuring, whereby these advances were to be repaid from available cash flow and bore interest at 5.5%. These advances also mature on April 1, 2007. Total interest expense incurred for these advances from April 24, 2004 to October 8, 2004, from January 3, 2004 to April 23, 2004, and for each of the fiscal years ended January 2, 2004 and January 3, 2003 was $79,941, $41,948, $129,390 and $122,744, respectively. Total accrued interest as of October 8, 2004 and January 2, 2004 was $974,024 and $852,135, respectively.

5. Management Agreement

The Hotel is operated under a long-term management agreement, which expires on July 29, 2019, prior to any renewal periods, as defined. Pursuant to the terms of the management agreement, the manager earns a base management fee, which is calculated as 3% of Hotel sales. In addition, the manager earns an incentive

F-89

management fee, which is calculated as 30% of available cash flow, as defined, in excess of an owner’s priority, as defined. No incentive fees were earned in any of the periods presented.

The management agreement provides for the establishment of a property improvement fund to cover the cost of replacements and renewals of furniture and fixtures at the Hotel. Contributions to the property improvement fund are restricted and are calculated as a percentage of Hotel sales. Contributions to the property improvement fund, for the period from January 3, 2004 to April 23, 2004, and the fiscal years ended January 2, 2004 and January 3, 2003 were $107,266, $388,632 and $296,555, respectively. MII paid cash for and received $669,000 for the property improvement funds in escrow on April 23, 2004. No further contributions were made into this fund subsequent to April 23, 2004.

Pursuant to the terms of the management agreement, the owner of the Hotel is required to provide the manager with working capital and supplies to meet the operating needs of the Hotel. MII assumed working capital deficit of $85,000 upon acquisition on April 18, 2004.

6. Leases

The Company is currently obligated under several non-cancelable operating lease agreements for computers and office equipment that expire between 2004 and 2006. Future minimum lease payments required under these non-cancelable operating leases as of October 8, 2004 are as follows:


October 9, 2004 through December 31, 2004	$	17,130
2005		84,387
2006		10,140

	$	111,657

The Company also has leases for retail space and equipment with varying terms for which minimum annual rents are received. The leases require fixed monthly payments over the terms of the leases. Future minimum rents to be received under noncancelable operating leases as of October 8, 2004 are as follows:


October 9, 2004 through December 31, 2004	$	16,711
2005		86,915
2006		49,769
2007		23,895
2008		10,500

	$	187,790

7. Commitments and Contingencies

F-90


		Page
SUMMARY		1
THE OFFERING		13
SUMMARY SELECTED FINANCIAL AND OPERATING DATA		14
RISK FACTORS		17
FORWARD LOOKING STATEMENTS		38
MARKET DATA		39
USE OF PROCEEDS		40
DIVIDEND POLICY AND DISTRIBUTIONS		41
CAPITALIZATION		43
DILUTION		44
SELECTED FINANCIAL AND OPERATING DATA		45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		49
HOTEL INDUSTRY		59
OUR BUSINESS		63
OUR PROPERTIES		70
OUR PRINCIPAL AGREEMENTS		83
MANAGEMENT		92
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		103
INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES		106
FORMATION OF OUR COMPANY		109
INSTITUTIONAL TRADING OF OUR COMMON STOCK		110
PRINCIPAL STOCKHOLDERS		111
SELLING STOCKHOLDERS		113
REGISTRATION RIGHTS AGREEMENT		114
LOCK-UP AGREEMENTS		116
DESCRIPTION OF CAPITAL STOCK AND CERTAIN MATERIAL PROVISIONS OF MARYLAND LAW, OUR CHARTER AND BYLAWS		117
DESCRIPTION OF THE PARTNERSHIP AGREEMENT OF DIAMONDROCK HOSPITALITY LIMITED PARTNERSHIP		124
SHARES ELIGIBLE FOR FUTURE SALE		127
FEDERAL INCOME TAX CONSIDERATIONS		129
ERISA CONSIDERATIONS		143
UNDERWRITING		145
LEGAL MATTERS		150
EXPERTS		150
WHERE YOU CAN FIND MORE INFORMATION		151
REPORTS TO STOCKHOLDERS		152
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1

Dealer Prospectus Delivery Requirement

Until , 2005 (25 days after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to unsold allotments or subscriptions.

LOGO

                                    [GRAPHIC]

Shares of Common Stock

P R O S P E C T U S

Citigroup

FRIEDMAN BILLINGS RAMSEY

, 2005

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 31. Other Expenses of Issuance and Distribution.

The following table itemizes the expenses incurred by us in connection with the issuance and registration of the securities being registered hereunder. All amounts shown are estimates except the Securities and Exchange Commission registration fee.


SEC Registration Fee	$	20,500
NASD Fee	$	17,750
NYSE Listing Fee		*
Printing and Engraving Expenses		*
Legal Fees and Expense (other than Blue Sky)		*
Accounting Fees and Expenses		*
Blue Sky Fees and Expenses		*
Transfer Agent and Registrar Fees		*
Advisory Fees		*
Miscellaneous		*

Total		*

*	To be filed by amendment.

Item 32. Sales to Special Parties.

See the response to Item 33 below.

Item 33. Recent Sales of Unregistered Securities.

On May 6, 2004, we sold 100 shares of our common stock to our Chairman of the Board and Chief Executive Officer, Mr. McCarten, at a purchase price of $10.00 per share. We relied upon Section 4(2) of the Securities Act in selling these shares of common stock to Mr. McCarten.

We have issued the following securities that were not registered under the Securities Act pursuant to our 2004 Stock Option and Incentive Plan:

•

on July 7, 2004, 695,000 shares of restricted common stock to certain of our directors and officers;

•

on July 14, 2004, 18,000 shares of restricted common stock to one of our officers and one of our employees; and

•

on September 23, 2004, 7,500 shares of restricted common stock to one of our employees.

For a more detailed description of our 2004 Stock Option and Incentive Plan, see “Management — 2004 Stock Option and Incentive Plan” in this registration statement. In granting the restricted shares, we relied upon exemptions from registration set forth in Rule 701 and Section 4(2) of the Securities Act.

On July 7, 2004, we sold an aggregate of 20,850,000 shares of common stock as follows:

•

13,586,050 shares at a price of $9.30 per share in a private unregistered offering to Friedman billings Ramsey & Co., Inc., or FBR, pursuant to the exemptions from registration set forth in Sections 4(1) and 4(2) of the Securities Act, which shares were subsequently resold by FBR at a price of $10.00 per share to qualified institutional buyers in accordance with Rule 144A under the Securities Act or to non-U.S. persons as defined in Regulation S under the Securities Act;

•

4,113,950 shares at a price of $10.00 per share in a private unregistered offering directly to certain accredited investors, including FBR and certain of its affiliates, directors, officers and employees, pursuant to an exemption from registration set forth in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. We paid a placement fee of $0.70 per share to FBR with respect to these shares;

II-1

•

150,000 shares at a price of $10.00 per share in a private unregistered offering to our executive officers pursuant to an exemption from registration set forth in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder; and

•

3,000,000 shares at a price of $10.00 per share in a private unregistered offering directly to a wholly owned subsidiary of Marriott International, Inc. pursuant to an exemption from registration set forth in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.

The net proceeds to us from these sales, net of placement fees and expenses, were $ .

Item 34. Indemnification of Directors and Officers.

The Maryland General Corporation Law, or MGCL, permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our charter contains such a provision which eliminates such liability to the maximum extent permitted by the MGCL.

II-2

We currently have in place a directors’ and officers’ liability insurance policy issued by American International Specialty Lines Insurance Company, an affiliate of American International Group, Inc. (AIG). The policy has a limit of $15 million per claim as well as in the aggregate. The policy does not have a self-insured retention for non-indemnified claims, but it has a self-insured retention of $250,000 per claim for all other covered claims.

Item 35. Treatment of Proceeds from Stock Being Registered.

None of the proceeds will be credited to an account other than the appropriate capital share account.

Item 36. Financial Statements and Exhibits.

(A) Financial Statements. See Index to Consolidated Financial Statements and the related notes thereto.

(B) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this registration statement on Form S-11:


Exhibit
1.1		Form of Underwriting Agreement among DiamondRock Hospitality Company and the underwriters named therein*

3.1		Articles of Amendment and Restatement of DiamondRock Hospitality Company**

3.2		Amended and Restated Bylaws of DiamondRock Hospitality Company**

4.1		Form of Certificate for Common Stock for DiamondRock Hospitality Company*

5.1		Opinion of Goodwin Procter LLP as to legality of the securities being issued*

8.1		Opinion of Goodwin Procter LLP as to certain U.S. federal income tax matters*

10.1		Agreement of Limited Partnership of DiamondRock Hospitality Limited Partnership, dated as of June 4, 2004**

10.2		Registration Rights Agreement among DiamondRock Hospitality Company, DiamondRock Hospitality Limited Partnership, Friedman, Billings, Ramsey & Co., Inc. and certain holders of the common stock of DiamondRock Hospitality Company, dated as of July 7, 2004**

10.3		Form of Hotel Management Agreement*

10.4		Form of TRS Lease***

10.5		2004 Stock Option and Incentive Plan**

10.6		Form of Restricted Stock Award Agreement***

10.7		Form of Incentive Stock Option Agreement***

10.8		Form of Non-Qualified Stock Option Agreement***

10.9		Form of Indemnification Agreement between DiamondRock Hospitality Company and its directors and officers*

10.10		Employment Agreement between DiamondRock Hospitality Company and William W. McCarten, dated as of June 4, 2004**

10.11		Employment Agreement between DiamondRock Hospitality Company and John L. Williams, dated as of June 4, 2004**

10.12		Employment Agreement between DiamondRock Hospitality Company and Mark W. Brugger, dated as of June 4, 2004**

10.13		Employment Agreement between DiamondRock Hospitality Company and Michael D. Schecter, dated as of June 4, 2004**

10.14		Employment Agreement between DiamondRock Hospitality Company and Sean M. Mahoney, dated as of June 30, 2004**

10.15		Amended and Restated Restricted Stock Award Agreement between DiamondRock Hospitality Company and William W. McCarten, dated as of March 18, 2005***

10.16		Amended and Restated Restricted Stock Award Agreement between DiamondRock Hospitality Company and John L. Williams, dated as of March 18, 2005***

II-3


Exhibit

10.17		Amended and Restated Restricted Stock Award Agreement between DiamondRock Hospitality Company and Mark W. Brugger, dated as of March 18, 2005***

10.18		Amended and Restated Restricted Stock Award Agreement between DiamondRock Hospitality Company and Michael D. Schecter, dated as of March 18, 2005***

10.19		Amended and Restated Restricted Stock Award Agreement between DiamondRock Hospitality Company and Sean M. Mahoney, dated as of March 18, 2005***

10.20		Information Acquisition Agreement between DiamondRock Hospitality Company and Marriott International, Inc., dated as of July 6, 2004**

21.1		List of Subsidiaries of DiamondRock Hospitality Company**

23.1		Consent of Goodwin Procter LLP (included in Exhibit 5.1)*

23.2		Consent of KPMG LLP***

24.1		Power of Attorney**

99.1		Consent of Smith Travel Research, Inc. ***

*	To be filed by amendment.

**	Previously filed.

***Filed

herewith.

Item 37. Undertakings.

(a) The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers or controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue.

(1) For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that the registrant meets all of the requirements for filing on Form S-11 and has duly caused this Amendment No. 1 to this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bethesda, State of Maryland, on this 31st day of March, 2005.


DIAMONDROCK HOSPITALITY COMPANY

By:		/s/ MICHAEL D. SCHECTER
		Name: Michael D. Schecter
		Title: General Counsel and Secretary

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.


Signature	Title	Date

* William W. McCarten	Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)	March 31, 2005

* John L. Williams	President, Chief Operating Officer and Director	March 31, 2005

* Daniel J. Altobello	Director	March 31, 2005

* W. Robert Grafton	Director	March 31, 2005

* Gilbert T. Ray	Director	March 31, 2005

* Maureen L. McAvey	Director	March 31, 2005

II-5


Signature	Title	Date

* Mark W. Brugger	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)	March 31, 2005

* Sean M. Mahoney	Chief Accounting Officer and Corporate Controller (Principal Accounting Officer)	March 31, 2005

*	By Michael D. Schecter, as attorney-in-fact pursuant to written power of attorney.

II-6


Exhibit
1.1		Form of Underwriting Agreement among DiamondRock Hospitality Company and the underwriters named therein*

3.1		Articles of Amendment and Restatement of DiamondRock Hospitality Company**

3.2		Amended and Restated Bylaws of DiamondRock Hospitality Company**

4.1		Form of Certificate for Common Stock for DiamondRock Hospitality Company*

5.1		Opinion of Goodwin Procter LLP as to legality of the securities being issued*

8.1		Opinion of Goodwin Procter LLP as to certain U.S. federal income tax matters*

10.1		Agreement of Limited Partnership of DiamondRock Hospitality Limited Partnership, dated as of June 4, 2004**

10.2		Registration Rights Agreement among DiamondRock Hospitality Company, DiamondRock Hospitality Limited Partnership, Friedman, Billings, Ramsey & Co., Inc. and certain holders of the common stock of DiamondRock Hospitality Company, dated as of July 7, 2004**

10.3		Form of Hotel Management Agreement*

10.4		Form of TRS Lease***

10.5		2004 Stock Option and Incentive Plan**

10.6		Form of Restricted Stock Award Agreement***

10.7		Form of Incentive Stock Option Agreement***

10.8		Form of Non-Qualified Stock Option Agreement***

10.9		Form of Indemnification Agreement between DiamondRock Hospitality Company and its directors and officers*

10.10		Employment Agreement between DiamondRock Hospitality Company and William W. McCarten, dated as of June 4, 2004**

10.11		Employment Agreement between DiamondRock Hospitality Company and John L. Williams, dated as of June 4, 2004**

10.12		Employment Agreement between DiamondRock Hospitality Company and Mark W. Brugger, dated as of June 4, 2004**

10.13		Employment Agreement between DiamondRock Hospitality Company and Michael D. Schecter, dated as of June 4, 2004**

10.14		Employment Agreement between DiamondRock Hospitality Company and Sean M. Mahoney, dated as of June 30, 2004**

10.15		Amended and Restated Restricted Stock Award Agreement between DiamondRock Hospitality Company and William W. McCarten, dated as of July 7, 2004***

10.16		Amended and Restated Restricted Stock Award Agreement between DiamondRock Hospitality Company and John L. Williams, dated as of July 7, 2004***

10.17		Amended and Restated Restricted Stock Award Agreement between DiamondRock Hospitality Company and Mark W. Brugger, dated as of July 7, 2004***

10.18		Amended and Restated Restricted Stock Award Agreement between DiamondRock Hospitality Company and Michael D. Schecter, dated as of July 7, 2004***

10.19		Amended and Restated Restricted Stock Award Agreement between DiamondRock Hospitality Company and Sean M. Mahoney, dated as of March 18, 2005***

10.20		Information Acquisition Agreement between DiamondRock Hospitality Company and Marriott International, Inc., dated as of July 6, 2004**

21.1		List of Subsidiaries of DiamondRock Hospitality Company**

23.1		Consent of Goodwin Procter LLP (included in Exhibit 5.1)*

23.2		Consent of KPMG LLP***

24.1		Power of Attorney**

99.1		Consent of Smith Travel Research, Inc.***

*	To be filed by amendment.

**	Previously filed.

***	Filed herewith.

II-7

EXHIBIT 10.4

EXHIBIT 10.4

LEASE AGREEMENT

DATED AS OF [ ,] 200

BETWEEN

DIAMONDROCK [ ] OWNER, LLC

AS LESSOR

AND

DIAMONDROCK [ ] TENANT, LLC

AS LESSEE

TABLE OF CONTENTS


		Page
Article I - Lease		1
Section 1.1.	Leased Property	1
Section 1.2.	Term	2
Section 1.3.	Initial Transition	2

Article II - Definitions		2
Section 2.1.	Definitions	2

Article III - Rent		11
Section 3.1.	Rent	11
Section 3.2.	Confirmation of Percentage Rent.	13
Section 3.3.	Additional Charges	14
Section 3.4.	No Set Off	14

Article IV - Impositions		14
Section 4.1.	Real Estate Taxes and Personal Property Taxes	14
Section 4.2.	Utility Charges	14

Article V - Property Ownership		14
Section 5.1.	Ownership of the Leased Property	14
Section 5.2.	Lessee’s Personal Property	14
Section 5.3.	Equipment Lease Property	15

Article VI - Condition, Use		16
Section 6.1.	Condition of the Leased Property	16
Section 6.2.	Use of the Leased Property	16

Article VII - Legal Requirements		18
Section 7.1.	Compliance with Legal and Insurance Requirements	18
Section 7.2.	Legal Requirement Covenants	18
Section 7.3.	Environmental Covenants	18

Article VIII - Maintenance And Repairs		20
Section 8.1.	Maintenance and Repair	20

Article IX - Alterations		21
Section 9.1.	Alterations	21
Section 9.2.	Salvage	21
Section 9.3.	Lessor Alterations	21

Article X - Liens		21
Section 10.1.	Liens	21


Article XI - Permitted Contests		22
Section 11.1.	Permitted Contests	22

Article XII - Insurance		23
Section 12.1.	General Insurance Requirements.	23
Section 12.2.	Replacement Cost	25
Section 12.3.	Waiver of Subrogation	25
Section 12.4.	Form Satisfactory, etc.	25
Section 12.5.	Increase in Limits	26
Section 12.6.	Blanket Policy	26
Section 12.7.	Separate Insurance	26
Section 12.8.	Reports On Insurance Claims	26

Article XIII - Damage And Reconstruction		27
Section 13.1.	Insurance Proceeds	27
Section 13.2.	Reconstruction in the Event of Damage or Destruction Covered by Insurance	27
Section 13.3.	Reconstruction in the Event of Damage or Destruction Not Covered by Insurance	28
Section 13.4.	Lessee’s Property and Business Interruption Insurance	28
Section 13.5.	Abatement of Rent	28

Article XIV - Condemnation		29
Section 14.1.	Definitions.	29
Section 14.2.	Parties’ Rights and Obligations	29
Section 14.3.	Total Taking	29
Section 14.4.	Allocation of Award	29
Section 14.5.	Partial Taking	29
Section 14.6.	Temporary Taking	30

Article XV - Defaults		31
Section 15.1.	Events of Default	31
Section 15.2.	Remedies	32
Section 15.3.	Waiver	33
Section 15.4.	Application of Funds	33

Article XVI - Lessor’s Right To Cure		34
Section 16.1.	Lessor’s Right to Cure Lessee’s Default	34

Article XVII - Limitations		34
Section 17.1.	Personal Property Limitation	34
Section 17.2.	Sublease Rent Limitation	34
Section 17.3.	Sublease Lessee Limitation	35
Section 17.4.	Compliance with Exception to Related-Party Tenant Rules	35

Article XVIII - Holding Over		35
Section 18.1.	Holding Over	35


Article XIX - Indemnities		35
Section 19.1.	Indemnification	35

Article XX - Subletting And Assignment		37
Section 20.1.	Subletting and Assignment	37
Section 20.2.	Attornment	37
Section 20.3.	Management Agreement	37

Article XXI - Estoppel Certificates		38
Section 21.1.	Officer’s Certificates; Financial Statements; Lessor’s Estoppel Certificates and Covenants	38

Article XXII - Meeting and Inspections		39
Section 22.1.	Regular Meetings; Lessor’s Right to Inspect	39

Article XXIII - No Waiver		39
Section 23.1.	No Waiver	39

Article XXIV - Cumulative Remedies		39
Section 24.1.	Remedies Cumulative	39

Article XXV - Surrender		40
Section 25.1.	Acceptance of Surrender	40

Article XXVI - No Merger		40
Section 26.1.	No Merger of Title	40

Article XXVII - Conveyance By Lessor		40
Section 27.1.	Conveyance by Lessor	40
Section 27.2.	Lessor May Grant Liens	40

Article XXVIII - Quiet Enjoyment		43
Section 28.1.	Quiet Enjoyment	43

Article XXIX - Notices		43
Section 29.1.	Notices	43

Article XXX - Appraisals		43
Section 30.1.	Appraisers	43

Article XXXI - Lessor’s Option to Terminate		44
Section 31.1.	Lessor’s Option to Terminate Lease	44

Article XXXII - Lessor’s Rights		45
Section 32.1.	Lessor’s Rights	45

Article XXXIII - Capital Expenditures		45
Section 33.1.	Capital Expenditures	45


Article XXXIV - Lessor’s Default		46
Section 34.1.	Lessor’s Default	46

Article XXXV - Arbitration		46
Section 35.1.	Arbitration	46
Section 35.2.	Alternative Arbitration	47
Section 35.3.	Arbitration Procedures	47

Article XXXVI - Miscellaneous		47
Section 36.1.	Miscellaneous	47
Section 36.2.	Transition Procedures	48
Section 36.3.	Waiver of Presentment, etc.	49
Section 36.4.	Action for Damages	49
Section 36.5.	No Third Party Rights	49

Article XXXVII - Option to Extend		49
Section 37.1.	Option to Extend.	49
Section 37.2.	Determination of Base Rent for the Extension Term	49
Section 37.3.	Market Rent	50


EXHIBITS
Exhibit A	-	Property Description

LEASE AGREEMENT

THIS LEASE AGREEMENT (hereinafter called “Lease”), made as of the [ ] day of October, 2004, by and between DiamondRock [ ] Owner, LLC, a Delaware limited liability company (hereinafter called “Lessor”), and DiamondRock [ ] Tenant, LLC, a Delaware limited liability company (hereinafter called “Lessee”), provides as follows:

Lessor, in consideration of the payment of rent by Lessee to Lessor, the covenants and agreements to be performed by Lessee, and upon the terms and conditions hereinafter stated, does hereby rent and lease unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased Property (as hereinafter defined).

Article I - Lease

Section 1.1. Leased Property. The Leased Property (herein so called) is comprised of Lessor’s interest in the following:

(a) the land described in Exhibit A attached hereto and by reference incorporated herein (the “Land”);

(b) all buildings, structures and other improvements of every kind including, but not limited to, alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines (on-site and off-site) and roadways appurtenant to such buildings and structures presently or hereafter situated upon the Land (collectively, the “Leased Improvements”);

(d) all equipment, machinery, fixtures, and other items of property required for or incidental to the use of the Leased Improvements as a hotel, including all components thereof, now and hereafter permanently affixed to or incorporated into the Leased Improvements, including all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, all of which to the greatest extent permitted by law are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto (collectively, the “Fixtures”);

(e) all furniture and furnishings and all other items of personal property (excluding Inventory and personal property owned by Lessee) located on, and used in connection with, the operation of the Leased Improvements as a hotel, together with all replacements, modifications, alterations and additions thereto (collectively, the “FF&E”); and

(f) all existing occupancy leases of the Leased Property (including any security deposits or collateral held by Lessor pursuant thereto).

THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS OF RECORD INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS AND MATTERS WHICH WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE SURVEY THEREOF.

Section 1.2. Term. The term of this Lease (the “Term”) shall commence on [ ] [ ,] 200_ (the “Commencement Date”) and shall end on [ ] [ ,] 200 , unless sooner terminated or extended in accordance with the provisions hereof.

Section 1.3. Initial Transition. As between Lessor and Lessee, Lessor shall be entitled to all income and shall be responsible for the payment or settlement of all expenses of the Leased Property accruing prior to the Commencement Date. Lessee shall act as Lessor’s agent for the collection of all such income and shall remit the same to Lessor promptly upon Lessee’s receipt thereof. Lessee shall notify Lessor of all such expenses and shall act as Lessor’s payment agent for such expenses using funds provided by Lessor from time to time. On the Commencement Date, Lessee shall be entitled to receive all cash, working capital funds, bank accounts, house banks and similar accounts existing at or with respect to the Leased Property as of the Commencement Date and, as between Lessor and Lessee, Lessee shall be entitled to retain all such cash and other accounts for its own use.

Article II - Definitions

Section 2.1. Definitions. For all purposes of this Lease, except as otherwise expressly provided or unless the context otherwise requires, (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP, (c) all references in this Lease to designated “Articles”, “Sections” and other subdivisions are to the designated Articles, Sections and other subdivisions of this Lease, (d) any use of the word “including” or “include” in this Lease will, unless the context otherwise requires, be deemed to respectively mean “including without limitation” or “include without limitation,” and (e) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Lease as a whole and not to any particular Article, Section or other subdivision:

Additional Charges: As defined in Section 3.3.

Affiliate: As used in this Lease the term “Affiliate” of a person shall mean (a) any person that, directly or indirectly, controls or is controlled by or is under common control with such person, (b) any other person that owns, beneficially, directly or indirectly, ten percent or more of the outstanding capital stock, shares or equity interests of such person, or (c) any officer, director, employee, partner or trustee of such person or any person controlling, controlled by or

under common control with such person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of such person). The term “person” means and includes individuals, corporations, general and limited partnerships, limited liability companies, stock companies or associations, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, or other entities and governments and agencies and political subdivisions thereof. For the purposes of this definition (a) “control” (including the correlative meanings of the terms “controlled by” and “under common control with”), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, through the ownership of voting securities, partnership interests or other equity interests, by contract or otherwise and (b) it is acknowledged and agreed that Lessor and Lessee are not Affiliates of each other.

Award: As defined in Section 14.1(c).

Base Rent: As defined in Section 3.1(a).

Base Rate: The prime rate (or base rate) reported in the Money Rates column or comparable section of The Wall Street Journal as the rate then in effect for corporate loans at large U.S. money center commercial banks, whether or not such rate has actually been charged by any such bank. If no such rate is reported in The Wall Street Journal or if such rate is discontinued, then Base Rate shall mean such other successor or comparable rate as Lessor may reasonably designate.

Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which national banks in the city where the Leased Property is located are closed.

Capital Expenditures: Amounts advanced to pay the costs of Capital Improvements.

Capital Expenditures Reserve: An amount equal to 4% of Revenues for each Fiscal Year (or such greater amount as required by the Lessor Mortgage Documents), to be collected and reserved by Lessor in accordance with the provisions of Article XXXIII hereof; notwithstanding the foregoing, as long as the Management Agreement is in full force and effect, the Capital Expenditures Reserve shall be the amount set forth in the Management Agreement.

Capital Improvements: Replacements of and Improvements to (a) the external walls and internal load bearing walls (other than windows and plate glass), (b) the roof of the Facility, (c) private roadways, parking areas, sidewalks and curbs appurtenant thereto that are under Lessee’s control (other than cleaning, patching and striping) and (d) mechanical, electrical and plumbing systems that service common areas, entire wings of the Facility or the entire Facility, including conduit and ductware connected thereto.

CERCLA: The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended.

Claims: As defined in Section 11.1.

COBRA: The Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

Code: The Internal Revenue Code of 1986, as amended.

Commencement Date: As defined in Section 1.2.

Company: DiamondRock Hospitality Company, a Maryland corporation.

Condemnation, Condemnor: As defined in Section 14.1.

Consumable Supplies: Office supplies, cleaning supplies, uniforms, laundry and valet supplies, engineering supplies, fuel, stationery, soap, matches, toilet and facial tissues, and such other supplies as are consumed customarily on a recurring basis in the operation of the Facility, together with food and beverages that are to be offered for sale to guests and to the public.

Current Loan: That certain loan from to Lessor in the original principal amount of [$ ], made as of [ , 20 ].

[Current Loan Documents: Those certain documents from Lessor to or for the benefit of the Holder of the Current Loan evidencing and or securing the Current Loan, including the Current Mortgage.]

[Current Mortgage: That certain [Mortgage/Deed of Trust] from Lessor as grantor/mortgagor to [ as trustee for the benefit of] [ ] dated as [ , 20 ].

Date of Taking: As defined in Section 14.1(b).

Emergency Expenditures: Expenditures required to take necessary or appropriate actions to respond to Emergency Situations.

Emergency Situations: Fire, any other casualty, or any other events, circumstances or conditions (including those involving Hazardous Materials) which threaten the safety or physical well-being of the Facility’s guests or employees or which involve the risk of material property damage or material loss to the Facility.

Environmental Authority: Any department, agency or other body or component of any Government that exercises any form of jurisdiction or authority under any Environmental Law.

Environmental Authorization: Any license, permit, order, approval, consent, notice, registration, filing or other form of permission or authorization required under any Environmental Law.

Environmental Laws: All applicable federal, state, local and foreign laws and regulations relating to pollution of the environment (including ambient air, surface water, ground water, land surface or subsurface strata), including laws and regulations relating to emissions, discharges, Releases or threatened Releases of Hazardous Materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. Environmental Laws include but are not limited to CERCLA, FIFRA, RCRA, SARA and TSCA.

Environmental Liabilities: Any and all actual or potential obligations to pay the amount of any judgment or settlement, the cost of complying with any settlement, judgment or order for injunctive or other equitable relief, the cost of compliance or corrective action in response to any notice, demand or request from an Environmental Authority, the amount of any civil penalty or criminal fine, and any court costs and reasonable amounts for attorney’s fees, fees for witnesses and experts, and costs of investigation and preparation for defense of any claim or any Proceeding, regardless of whether such Proceeding is threatened, pending or completed, that may be or have been asserted against or imposed upon Lessor, Lessee, any Predecessor, the Leased Property or any property used therein and arising out of:

(a) the failure to comply at any time with all Environmental Laws applicable to the Leased Property;

(b) the presence of any Hazardous Materials on, in, under, at or in any way affecting the Leased Property;

(c) a Release or threatened Release of any Hazardous Materials on, in, at, under or in any way affecting the Leased Property;

(d) the identification of Lessee, Lessor or any Predecessor as a potentially responsible party under CERCLA or under any other Environmental Law;

(e) the presence at any time of any above-ground and/or underground storage tanks, as defined in RCRA or in any applicable Environmental Law on, in, at or under the Leased Property or any adjacent site or facility; or

(f) any and all claims for injury or damage to persons or property arising out of exposure to Hazardous Materials originating or located at the Leased Property, or resulting from operation thereof or any adjoining property.

Event of Default: As defined in Section 15.1.

Existing Condition: As defined in Section 7.3(b).

Extended Term. As defined in Section 37.1.

Extension Notice. As defined in Section 37.1.

Facility: The hotel offering lodging and other services or amenities being operated on the Leased Property.

FIFRA: The Federal Insecticide, Fungicide, and Rodenticide Act, as amended.

FF&E. As defined in Section 1.1.

Fiscal Year: Any twelve month period from January 1 to December 31 during the Term; provided that, to the extent any computation or other provision hereof provides for an action to be taken on a Fiscal Year basis, an appropriate proration or other adjustment shall be made in respect of the initial and final Fiscal Years to reflect that such periods are less than full calendar year periods.

Fixtures: As defined in Section 1.1.

GAAP: Generally accepted accounting principles as are at the time applicable and otherwise consistently applied.

Government: The United States of America, any city, county, state, district or territory thereof, any foreign nation, any city, county, state, district, department, territory or other political division thereof, or any political subdivision of any of the foregoing.

Hazardous Materials: All chemicals, pollutants, contaminants, wastes and toxic substances, including:

(a) Solid or hazardous waste, as defined in RCRA or in any Environmental Law;

(b) Hazardous substances, as defined in CERCLA or in any Environmental Law;

(d) Insecticides, fungicides, or rodenticides, as defined in FIFRA or in any Environmental Law;

(e) Gasoline or any other petroleum product or byproduct, polychlorinated biphenyls, asbestos and urea formaldehyde;

(f) Asbestos or asbestos containing materials;

(g) Urea Formaldehyde foam insulation; and

(h) Radon gas.

Holder: Any holder of any indebtedness of the Lessor or any of its Affiliates [(including the Current Loan)], any holder of a Mortgage, any purchaser of the Leased Property or any portion thereof at a foreclosure sale or any sale in lieu thereof, or any designee of any of the foregoing.

Impositions: Collectively, all taxes (including all ad valorem, sales and use, occupancy, single business, gross receipts, transaction privilege, rent or similar taxes as the same relate to or are imposed upon Lessee or Lessor or Lessee’s business conducted upon the Leased Property), assessments (including all assessments for public improvements or benefit, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term), ground rents, water, sewer or other rents and charges, excises, tax inspection, authorization and similar fees and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of

the Leased Property or the business conducted thereon by Lessee (including all interest and penalties thereon caused by any failure in payment by Lessee), which at any time prior to, during or with respect to the Term hereof may be assessed or imposed on or with respect to or be a lien upon (a) Lessor’s interest in the Leased Property, (b) the Leased Property, or any part thereof or any rent therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, or sales from, or activity conducted on or in connection with the Leased Property, or the leasing or use of the Leased Property or any part thereof by Lessee. Nothing contained in this definition of Impositions shall be construed to require Lessee to pay (1) any tax based on net income (whether denominated as a franchise or capital stock or other tax) imposed on Lessor or any other person, or (2) any net revenue tax of Lessor or any other person, or (3) any tax imposed with respect to the sale, exchange or other disposition by Lessor of any Leased Property or the proceeds thereof.

Indemnified Party: Either of a Lessee Indemnified Party or a Lessor Indemnified Party.

Indemnifying Party: Any party obligated to indemnify an Indemnified Party pursuant to any provision of this Lease.

Initial Nonconsumable Inventory: As defined in Section 5.2(a).

Insurance Requirements: All terms of any insurance policy required by this Lease and all requirements of the issuer of any such policy.

Inventory: All “Inventories of Merchandise” and “Inventories of Supplies” as defined in the Uniform System, including, but not limited to, linens, china, silver, glassware and other non-depreciable personal property, and any property of the type described in Section 1221(a)(1) of the Code.

Land: As defined in Article I.

Lease Quarter: Each three (3) month period during a Lease Year. Lease Quarters shall end on the last day of [ , and ], except that the first Lease Quarter shall be from the Commencement Date until the last day of [ , 20 ] and the last Lease Quarter shall be the period beginning on the day after the end of the immediately preceding Lease Quarter and ending on the date of termination of this Lease.

Lease Year: A twelve month period beginning on the Commencement Date and ending on the day immediately prior to the first anniversary of the Commencement Date, unless the Commencement Date shall not be the first day of a calendar month, in which case the first Lease Year shall end on the last day of the month in which the Commencement Date occurred, and each twelve month period thereafter during the Term.

Leased Improvements; Leased Property: Each as defined in Article I.

Legal Requirements: All federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting either the Leased Property or the maintenance, construction, use, operation or alteration thereof

(whether by Lessee or otherwise), now or hereafter enacted and in force, including (a) all laws, rules or regulations pertaining to the environment, occupational health and safety and public health, safety or welfare, and (b) any laws, rules or regulations that may (1) require repairs, modifications or alterations in or to the Leased Property or (2) in any way adversely affect the use and enjoyment thereof; and all permits, licenses and authorizations necessary or appropriate to operate the Leased Property for its Primary Intended Use; and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Lessee (other than encumbrances hereafter created by Lessor without the consent of Lessee), at any time in force affecting the Leased Property.

Lessee: The Lessee designated on this Lease and its permitted successors and assigns.

Lessee Indemnified Party: Lessee, any Affiliate of Lessee, any other Person against whom any claim for indemnification may be asserted hereunder as a result of a direct or indirect ownership interest in Lessee, the officers, directors, stockholders, partners, members, employees, agents and representatives of any of the foregoing Persons and any corporate stockholder, agent, or representative of any of the foregoing Persons, and the respective heirs, personal representatives, successors and assigns of any such officer, director, stockholder, employee, agent or representative.

Lessee’s Personal Property: As defined in Section 5.2(a).

Lessor: The Lessor designated on this Lease and its respective successors and assigns.

Lessor Indemnified Party: Lessor, any Affiliate of Lessor, including the Company, any other Person against whom any claim for indemnification may be asserted hereunder as a result of a direct or indirect ownership interest in Lessor, the officers, directors, stockholders, partners, members, employees, agents and representatives of any of the foregoing Persons and of any stockholder, partner, member, agent, or representative of any of the foregoing Persons, and the respective heirs, personal representatives, successors and assigns of any such officer, director, partner, stockholder, employee, agent or representative.

Lessor’s Audit: An audit by Lessor’s independent certified public accountants of the operation of the Leased Property during any Fiscal Year, which audit may, at Lessor’s election, be either a complete audit of the Leased Property’s operations or an audit of Room Revenues or Other Revenues realized from the operation of the Leased Property during such Fiscal Year.

Lessor’s Mortgage Documents: The Current Loan Documents and any other loan documents evidencing and securing any other Mortgage and any loan evidenced thereby; provided that a copies of such documents shall be delivered to Lessee by Lessor.

Licenses: As defined in Section 36.2(a).

Management Agreement: Any management agreement with a manager under which the Facility is operated, including, that certain Management Agreement by and between Lessor and Manager, dated as of [ , 20 ], as assigned to Lessee pursuant to the Owner Agreement.

Manager: As used in this Agreement, shall mean [ ] or any permitted successor or assign.

Market Rent. As defined in Section 37.3.

Migration: As defined in Section 7.3(b).

Mortgage: As defined in Section 27.2(a).

Nonconsumable Inventory: Inventory exclusive of Consumable Supplies.

Notice: A notice given pursuant to Article XXIX.

Officer’s Certificate: A certificate of Lessee reasonably acceptable to Lessor, signed by the chief financial officer or another officer duly authorized so to sign by Lessee or a managing member of Lessee, or any other person whose power and authority to act has been authorized by delegation in writing by any such officer.

Other Revenues: All gross revenues, receipts and income of any kind derived directly or indirectly by Lessee from or in connection with the Facility (including fees collected for amenities, such as telephone, laundry, movies, vending machines and concessions, and sublease rental payments); provided that Other Revenues shall not include Room Revenues.

Overdue Rate: On any date, a rate equal to the Base Rate plus 5% per annum, but in no event greater than the maximum rate then permitted under applicable law.

Owner Agreement: That certain Assignment, Assumption and Owner Agreement dated as of [ , 20 ] by and among Lessor, Lessee and Manager.

Percentage Rent: As defined in Section 3.1(b).

Person: Any Government, natural person, corporation, partnership or other legal entity.

Personal Property Limitation: As defined in Section 17.1.

Personal Property Taxes: All personal property taxes imposed on the FF&E or other items of personal property located on, and used in connection with, the operation of the Leased Improvements as a hotel (other than Inventory and other personal property owned by the Lessee and/or its tenants, licensees, concessionaires, agents or contractors (including Manager)), together with all replacements, modifications, alterations and additions thereto.

Predecessor: Any Person whose liabilities arising under any Environmental Law have or may have been retained or assumed by Lessor or Lessee pursuant to the provisions of this Lease.

Primary Intended Use: As defined in Section 6.2(b).

Proceeding: Any judicial action, suit or proceeding (whether civil or criminal), any administrative proceeding (whether formal or informal), any investigation by a governmental authority or entity (including a grand jury), and any arbitration, mediation or other non-judicial process for dispute resolution.

RCRA: The Resource Conservation and Recovery Act, as amended.

Real Estate Taxes: All real estate taxes, including general and special assessments, if any, which are imposed upon the Land and any improvements thereon.

REIT: A “real estate investment trust” under the applicable provisions of the Code.

Release: A “Release” as defined in CERCLA or in any Environmental Law, unless such Release has been properly authorized and permitted in writing by all applicable Environmental Authorities or is allowed by such Environmental Law without authorizations or permits.

Rent: Collectively, the Base Rent, Percentage Rent and Additional Charges.

Revenues: Room Revenues and Other Revenues.

Room Revenues: Gross revenue from the rental of guest rooms, whether to individuals, groups or transients, at the Facility, determined in a manner consistent with the Uniform System, excluding the following:

(i) The amount of all credits, rebates or refunds to customers, guests or patrons; and

(ii) All sales taxes or any other taxes imposed on the rental of such guest rooms; and

(iii) any fees collected for amenities including, but not limited to, parking revenue, telephone, laundry, movies, vending machines and concessions.

SARA: The Superfund Amendments and Reauthorization Act of 1986, as amended.

State: [State where Leased Property is located].

Taking: A permanent or temporary taking or voluntary conveyance during the Term hereof of all or part of the Leased Property, or any interest therein or right accruing thereto or use thereof, as the result of, or in settlement of, any Condemnation or other eminent domain proceeding affecting the Leased Property whether or not the same shall have actually been commenced.

Tax Law Change: A change in the Code (including a change in the Treasury regulations promulgated thereunder) or in the judicial or administrative interpretations of the Code, which in Lessor’s determination will permit Lessor or an Affiliate thereof to operate the Facility as a hotel without adversely affecting the Company’s qualification for taxation as a REIT.

Tax Structure Change: A change in the corporate structure of the Company and its Affiliates which in the Lessor’s determination will permit an Affiliate of the Company to lease the Leased Property from Lessor or another Affiliate of the Company without adversely affecting the Company’s qualification for taxation as a REIT.

Term: As defined in Section 1.2.

TSCA: The Toxic Substances Control Act, as amended.

Unavoidable Delay: Delay due to strikes, lock-outs, labor unrest, inability to procure materials, power failure, acts of God, governmental restrictions, enemy action, civil commotion, acts of terrorists, fire, unavoidable casualty, condemnation or other similar causes beyond the reasonable control of the party responsible for performing an obligation hereunder, provided that lack of funds shall not be deemed a cause beyond the reasonable control of either party hereto unless such lack of funds is caused by the breach of the other party’s obligation to perform any obligations of such other party under this Lease.

Uneconomic for its Primary Intended Use: A state or condition of the Facility such that in the judgment of Lessor the Facility cannot be operated on a commercially practicable basis for its Primary Intended Use, such that Lessor intends to, and shall, complete the cessation of operations from the Leased Facility, if and to the extent permitted under the Management Agreement.

Uniform System: Shall mean the Uniform System of Accounts for Hotels (8th Revised Edition, 1986) as published by the Hotel Association of New York City, Inc., as the same may hereafter be revised, and as the same is interpreted and applied by the Lessor’s independent certified public accountants in connection with any Lessor’s Audit.

Unsuitable for its Primary Intended Use: A state or condition of the Facility such that in the judgment of Lessor to the extent such judgment is not prohibited under the Management Agreement, the Facility cannot function as an integrated hotel facility consistent with standards applicable to a well maintained and operated hotel comparable in quality and function to that of the Facility prior to the damage or loss.

Article III - Rent

Section 3.1. Rent. Lessee will pay to Lessor in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, at Lessor’s address set forth in Article XXIX hereof or at such other place or to such other Person, as Lessor from time to time may designate in a Notice, all Rent contemplated hereby during the Term on the basis hereinafter set forth. If there is a dispute as to the amount of Rent to be paid by Lessee, either party may submit the dispute to arbitration pursuant to Section 35.2. However, Lessee shall be required to pay, as and when Rent is due and payable hereunder, the amount of Rent calculated by Lessor to be due and payable until such time as the dispute is resolved by agreement between the parties or by arbitration pursuant to Section 35.2.

(a) Base Rent: During the Term, Lessee shall pay to Lessor Base Rent as set forth in the following table, which shall be payable in advance in monthly installments on or before the first day of the month, provided, however, the monthly payment of Base Rent shall be prorated as to any partial month:


RENTAL PERIOD	ANNUAL BASIC RENT	MONTHLY PAYMENT
First Lease Year	[$ ]	[$ ]
Second Lease Year	[$ ]	[$ ]
Third Lease Year	[$ ]	[$ ]
Fourth Lease Year	[$ ]	[$ ]
Fifth Lease Year	[$ ]	[$ ]

(b) Percentage Rent: In addition to the Base Rent set forth above, and as part of the total Rent to be paid by Lessee to Lessor, Lessee covenants and agrees to pay to Lessor, as Percentage Rent for each Lease Year of the Term, an amount equal to (1) the sum of :

(i) [ percent ( %)] of the amount of Room Revenues during such Lease Year up to [$ ] of Room Revenues; plus

(ii) [ percent ( %)] of the amount of Room Revenues, if any, during such Lease Year in excess of [$ ] for such Lease Year up to [$ ] of Room Revenues; plus

(iii) [ percent ( %)] of the amount of Room Revenues, if any, during such Lease Year in excess of [$ ] for such Lease Year; plus

(iv) [ percent ( %)] of the amount of Other Revenues for such Lease Year;

reduced by (but not below zero) (2) the amount of Base Rent payable by Lessee under this Lease during such Lease Year.

(c) Payment of Percentage Rent. Percentage Rent shall be paid by Lessee to Lessor not later than the date thirty (30) days after the end of each Lease Year or as otherwise provided herein. Lessee shall record Room Revenues and Other Revenues (collectively referred to herein as “Revenues”) in order to provide an audit trail for the Revenues. Lessee shall give a written statement to Lessor, accompanied by an Officer’s Certificate, within thirty (30) days after the end of each Lease Quarter of (a) Room Revenues and Other Revenues for that Lease Quarter, (b) the cumulative total through the end of that Lease Quarter of Room Revenues and Other Revenues for such Lease Year, (c) the cumulative total through the end of that Lease Quarter of the applicable percentages of Room Revenues and Other Revenues, and (d) the cumulative total of any Percentage Rent then due and the cumulative total of any Percentage Rent

previously paid with respect to any Lease Quarter within such Lease Year. If such Officer’s Certificate indicates that any Percentage Rent is due for such Lease Year, within thirty (30) days after the end of such Lease Quarter, Lessee shall pay any Percentage Rent then due. With respect to any Percentage Rent due for any Lease Year, at the end of such Lease Year, Lessee shall receive a credit for any Percentage Rent previously paid with respect to such Lease Year. All statements deliverable by Lessee to Lessor under this Lease shall be delivered to the place where rent is then payable, or to such other place or places as Lessor may from time to time direct by written notice to Lessee.

Section 3.2. Confirmation of Percentage Rent.

(a) Lessee shall utilize, or cause to be utilized, an accounting system for the Leased Property in accordance with GAAP and the Uniform System, that will accurately record all data necessary to compute Percentage Rent, and Lessee shall retain, for at least five (5) years after the expiration of each Lease Year, reasonably adequate records conforming to such accounting system showing all data necessary to conduct Lessor’s Audit and to compute Percentage Rent for the applicable Lease Years.

(b) Lessor shall have the right from time to time by its accountants or representatives to audit such information in connection with Lessor’s Audit, and to examine all Lessee’s records (including supporting data and sales and excise tax returns) reasonably required to complete Lessor’s Audit and to verify Percentage Rent, subject to any prohibitions or limitations on disclosure of any such data under Legal Requirements. If any Lessor’s Audit discloses a deficiency in the payment of Percentage Rent, and either Lessee agrees with the result of Lessor’s Audit or the matter is otherwise determined or compromised, Lessee shall forthwith pay to Lessor the amount of the deficiency, as finally agreed or determined, together with interest at the Overdue Rate from the date when said payment should have been made to the date of payment thereof; provided, however, that as to any Lessor’s Audit that is commenced more than one (1) year after the end of any Lease Year, the deficiency, if any, with respect to such Percentage Rent shall bear interest at the Overdue Rate only from the date such determination of deficiency is made unless such deficiency is the result of gross negligence or willful misconduct on the part of Lessee, in which case interest at the Overdue Rate will accrue from the date such payment should have been made to the date of payment thereof. In addition to the amounts described above in this Section 3.2(b), if any Lessor’s Audit discloses a deficiency in the payment of Percentage Rent which, as finally agreed or determined, exceeds 3%, Lessee shall pay the costs of the portion of Lessor’s Audit allocable to the determination of Revenues (the “Revenue Audit”). In no event shall Lessor undertake a Lessor’s Audit more than five (5) years after the last day of the Lease Year for which such audit is requested.

(c) Any proprietary information obtained by Lessor pursuant to the provisions of this Section 3.2 shall be treated as confidential, except that such information may be used, subject to appropriate confidentiality safeguards, in any litigation between the parties and except further that Lessor may disclose such information to prospective lenders and investors and to any other persons to whom disclosure is necessary or appropriate to comply with applicable laws, regulations and government requirements.

(d) The obligations of Lessee and Lessor contained in this Section 3.2 shall survive the expiration or earlier termination of this Lease. Any dispute as to the existence or amount of any deficiency in the payment of Percentage Rent as disclosed by Lessor’s Audit shall, if not otherwise settled by the parties, be submitted to arbitration pursuant to the provisions of Section 35.2.

Section 3.3. Additional Charges. In addition to the Base Rent and Percentage Rent, Lessee also will pay and discharge as and when due and payable all other amounts, liabilities, obligations and Impositions that Lessee assumes or agrees to pay under this Lease (“Additional Charges”).

Section 3.4. No Set Off. Rent shall be paid to Lessor without set off, deduction or counterclaim; provided, however, that Lessee shall have the right to assert any claim or counterclaim in a separate action brought by Lessee under this Lease or to assert any mandatory counterclaim in any action brought by Lessor under this Lease.

Article IV - Impositions

Section 4.1. Real Estate Taxes and Personal Property Taxes. Lessor shall be responsible for paying all Real Estate Taxes and Personal Property Taxes prior to delinquency without reimbursement from Lessee. Lessor, however, reserves the right to effect any such protest, appeal or other action and Lessee shall fully cooperate with Lessor in such action at no cost or expense to Lessee. To the extent received by it, Lessee shall furnish Lessor with copies of all assessment notices for Real Estate Taxes and Personal Property Taxes in sufficient time for Lessor to file a protest and pay such Real Estate Taxes without penalty.

Section 4.2. Utility Charges. Lessee will be solely responsible for obtaining and maintaining utility services to the Leased Property and will pay or cause to be paid all charges for electricity, gas, oil, water, sewer and other utilities used in the Leased Property during the Term.

Article V - Property Ownership

Section 5.1. Ownership of the Leased Property. Lessee acknowledges that the Leased Property is the property of Lessor and that Lessee has only the right to the possession and use of the Leased Property upon the terms and conditions of this Lease.

Section 5.2. Lessee’s Personal Property.

(a) Upon commencement of the Term, (i) Lessor shall transfer (to the extent owned by Lessor) to Lessee all Consumable Supplies at the Facility for their fair market value, and (ii) Lessor shall transfer (to the extent owned by Lessor) to Lessee all Nonconsumable Inventory located at the Facility on the Commencement Date (the

“Initial Nonconsumable Inventory”). At all times during the Term, Lessee shall maintain, or cause Manager to maintain, Inventory consistent with the amount of inventory which is customarily maintained in a hotel of the type and character of the Facility and is otherwise required to operate the Leased Property in the manner contemplated by this Lease and in compliance with the Management Agreement and all Legal Requirements. All Inventory, to the extent not owned by the Manager pursuant to the Management Agreement, shall be the property of Lessee, subject to Lessee’s obligations under Section 5.2(b). Lessee may (and shall as provided hereinbelow), at its expense, but subject to the Management Agreement, install, affix or assemble or place on any parcels of the Land or in any of the Leased Improvements, any items of personal property (including Inventory) owned by Lessee (collectively, the “Lessee’s Personal Property”). Lessee may, subject to the second sentence of this Section 5.2(a) and the conditions set forth in Section 5.2(b) below, remove any of Lessee’s Personal Property set forth on such list at any time during the Term or upon the expiration or any prior termination of the Term. All of Lessee’s Personal Property, other than Inventory, not removed by Lessee within thirty (30) days following the expiration or earlier termination of the Term shall be considered abandoned by Lessee and may be appropriated, sold, destroyed or otherwise disposed of by Lessor without first giving Notice thereof to Lessee, without any payment to Lessee and without any obligation to account therefor. Lessee will, at its expense, restore the Leased Property to the condition required by Section 8.1(c), including repair of all damage to the Leased Property caused by the removal of Lessee’s Personal Property, whether effected by Lessee or Lessor.

(b) Lessor and Lessee agree that the transfer of Consumable Supplies and Initial Nonconsumable Inventory from Lessor to Lessee upon commencement of the Term shall be treated as a sale of the Initial Nonconsumable Inventory for the fair market value thereof (the “Purchase Price”). The Purchase Price, plus interest thereon at the applicable federal rate published pursuant to Section 1274(d) of the Code, shall be payable in equal monthly installments over the Term and shall be credited against amounts of Base Rent and Percentage Rent payable under this Lease. Nothing in this Section 5.2(b) shall be interpreted to give rise to any obligation of Lessee to make any payment to Lessor, but instead this Section 5.2(b) is intended to characterize payments otherwise denominated as Rent as payments of the Purchase Price and interest thereon. Lessor and Lessee shall determine the Purchase Price in their joint inventory of the Facility to be conducted within fifteen (15) days of the date hereof.

Section 5.3. Equipment Lease Property. Personal property utilized at the Facility which is leased pursuant to equipment leases and which expire on or before the termination of this Lease shall, at the option of Lessor, become the property of Lessor without the payment of additional consideration by Lessor except for any consideration which must be paid to the equipment lessor on expiration of the equipment lease to acquire title thereto. Lessee shall cooperate with Lessor to assume the transfer of title to such leased property to Lessor and shall give Notice to Lessor of any such leases and of the expiration dates thereof. Lessor shall, at Lessor’s cost, acquire title to or replace such leased property with funds other than the Capital Expenditures Reserve when the leases for such leased property expire and make such property or replacement property available to Lessee hereunder during the Term of this Lease.

Article VI - Condition, Use

Section 6.1. Condition of the Leased Property. Lessee acknowledges receipt and delivery of possession of the Leased Property. Lessee has examined and otherwise has knowledge of the condition of the Leased Property and has found the same to be satisfactory for its purposes hereunder. Lessee is leasing the Leased Property “as is”, “with all faults”, and in its present condition. Except as otherwise specifically provided herein, Lessee waives any claim or action against Lessor in respect of the condition of the Leased Property. LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT.

Section 6.2. Use of the Leased Property.

(a) Lessee covenants that it will, or will cause Manager to, obtain and maintain, all permits, licenses and approvals, including liquor licenses, needed to use and operate the Leased Property and the Facility under applicable local, state and federal law and the Management Agreement.

(b) Lessee shall use or cause to be used the Leased Property only as a hotel facility, and for such other uses as may be necessary or incidental to such use, or such other use as otherwise approved by Lessor (the “Primary Intended Use”). Lessee shall not use the Leased Property or any portion thereof for any other use without the prior written consent of Lessor. No use shall be made or permitted to be made of the Leased Property, and no acts shall be done, which will cause the cancellation of any insurance policy covering the Leased Property or any part thereof (unless another adequate policy satisfactory to Lessor is available and Lessee pays any premium increase), nor shall Lessee sell or permit to be kept, used or sold in or about the Leased Property any article which is prohibited by law or fire underwriter’s regulations. Lessee shall comply, and shall cause Manager to comply, with all of the requirements pertaining to the Leased Property of any insurance board, association, organization or company necessary for the maintenance of insurance, as herein provided, covering the Leased Property and Lessee’s Personal Property, which compliance shall be performed at Lessee’s sole cost, except to the extent such compliance requires performance of a Capital Improvement that is the Lessor’s obligation hereunder.

(c) Subject to the provisions of Articles XIII and XIV, Lessee covenants and agrees that during the Term it will (1) continuously operate and cause the Manager to continuously operate the Leased Property as a hotel facility, (2) keep in full force and effect and comply in all material respects with all the provisions of the Management Agreement and cause the Manager to comply in all material respects with all of the provisions of the Management Agreement, (3) not enter into, terminate or amend in any respect any Management Agreement without the consent of Lessor, (4) maintain or cause to be maintained, appropriate certifications and licenses for such use and (5) keep Lessor advised of the status of any litigation affecting the Leased Property.

(d) Lessee shall not commit or suffer to be committed any waste on the Leased Property, or in the Facility, nor shall Lessee cause or permit any nuisance thereon.

(e) Lessee shall neither suffer nor permit the Leased Property or any portion thereof, or Lessee’s Personal Property, to be used in such a manner as (1) might reasonably tend to impair Lessor’s (or Lessee’s, as the case may be) title thereto or to any portion thereof, or (2) may reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or of implied dedication of the Leased Property or any portion thereof.

(f) Lessee acknowledges and agrees that all employees involved in the use and operation of the Leased Property shall be employees of Manager or one of its Affiliates and not of Lessor or any of its Affiliates. Lessee, the Manager, and their respective Affiliates shall fully comply with all Legal Requirements and all collective bargaining and other agreements applicable to such employees. Subject to the terms of the Owner Agreement, upon the expiration or earlier termination of this Lease, all such employees shall be terminated or retained by Lessee, Manager or their respective Affiliates, as applicable, and Lessee, Manager or their respective Affiliates, as applicable, shall provide any required notices or other rights to such employees, all without liability to Lessor or the Leased Property, or any other owner, lessee or manager of the Leased Property. Payment of all costs and expenses associated with accrued but unpaid salary, earned but unpaid vacation pay, accrued but unearned vacation pay, pension and welfare benefits, COBRA benefits, employee fringe benefits, employee termination payments or any other employee benefits due to such employees, shall be the sole responsibility and obligation of and shall be paid when due by Lessee, Manager or their respective Affiliates, as applicable. Upon the expiration or earlier termination of this Lease, any owner, manager or lessee of the Leased Property shall have the right, but not the obligation, to extend offers of employment to some or all of such employees on such terms and conditions as are determined solely in such party’s discretion; and Lessee shall, and shall cause Manager to, use reasonable efforts to assist such party in its efforts to secure satisfactory employment arrangements with such employees. Lessee, Manager or their respective Affiliates, as applicable, shall provide any notices, coverages or other rights as shall be required to comply with the medical coverage continuation requirements of COBRA to any persons who are entitled to such rights by virtue of the maintenance of any group health plan by Lessee, Manager or their respective Affiliates, as applicable, and shall maintain, or cause an affiliate company to maintain, a group health plan that such person shall be entitled to participate in for the maximum period required by COBRA. Lessee shall indemnify, defend and hold harmless Lessor, the Leased Property, and any other owner, lessee or manager of the Leased Property, from and against any and all claims, causes of action, proceedings, judgments, damages, penalties, liabilities, costs and expenses (including reasonable attorney’s fees and disbursements) arising out of the employment or termination of employment of or failure to offer employment to any employee or prospective employee by Lessee, Manager or

their respective Affiliates, including claims of discrimination, sexual harassment, breaches of employment or collective bargaining agreements, or the failure of Lessee, Manager or any of their Affiliates to comply with the provisions of this section. The indemnification rights and obligations provided for in this section shall survive the termination of this Lease.

Article VII - Legal Requirements

Section 7.1. Compliance with Legal and Insurance Requirements. Subject to Sections 7.2 and 7.3 and Article XI relating to permitted contests, Lessee, at its expense, will promptly (a) comply with all applicable Legal Requirements and Insurance Requirements in respect of the use, operation, maintenance, repair and restoration of the Leased Property, and (b) procure, maintain and comply, or cause Manager to procure, maintain and comply, with all appropriate licenses and other authorizations required for any use of the Leased Property and Lessee’s Personal Property then being made, and for the proper erection, installation, operation and maintenance of the Leased Property or any part thereof.

Section 7.2. Legal Requirement Covenants. Subject to Section 7.3, Lessee covenants and agrees that (i) the Leased Property and Lessee’s Personal Property shall not be used for any unlawful purpose, and that Lessee shall not permit or suffer to exist any unlawful use of the Leased Property by others, (ii) Lessee shall or shall cause Manager to acquire and maintain all appropriate licenses, certifications, permits and other authorizations and approvals needed to operate the Leased Property in its customary manner for the Primary Intended Use, and any other lawful use conducted on the Leased Property as may be permitted from time to time hereunder and (iii) Lessee’s use of the Leased Property and maintenance, alteration, and operation of the same, and all parts thereof, shall at all times conform to all Legal Requirements, unless the same are finally determined by a court of competent jurisdiction to be unlawful (and Lessee shall cause all such sub-tenants, invitees or others (including Manager) to so comply with all Legal Requirements).

Section 7.3. Environmental Covenants. Lessor and Lessee (in addition to, and not in diminution of, Lessee’s covenants and undertakings in Sections 7.1 and 7.2 hereof) covenant and agree as follows:

(a) At all times hereafter until Lessee completely vacates the Leased Property and surrenders possession of the same to Lessor, Lessee shall fully comply with all Environmental Laws applicable to the Leased Property and the operations thereon, except to the extent that such compliance would require the remediation of Environmental Liabilities for which Lessee has no indemnity obligations under Section 7.3(b). Lessee agrees to give Lessor prompt written notice of (1) all Environmental Liabilities; (2) all pending, threatened or anticipated Proceedings, and all notices, demands, requests or investigations, relating to any Environmental Liability or relating to the issuance, revocation or change in any Environmental Authorization required for operation of the Leased Property; (3) all Releases at, on, in, under or in any way affecting the Leased Property, or any Release known by Lessee at, on, in or under any property adjacent to the Leased Property; and (4) all facts, events or conditions that could reasonably lead to the occurrence of any of the above-referenced matters.

(b) LESSEE WILL PROTECT, INDEMNIFY, HOLD HARMLESS AND DEFEND LESSOR INDEMNIFIED PARTIES FROM AND AGAINST ANY AND ALL ENVIRONMENTAL LIABILITIES TO THE EXTENT PERMITTED BY LAW INCLUDING THOSE RESULTING FROM A LESSOR INDEMNIFIED PARTIES’ OWN NEGLIGENCE except to the extent that the same (i) are caused by the intentionally wrongful acts or grossly negligent failures to act of Lessor, or (ii) result from conditions existing at the Leased Property at the date of this Lease (an “Existing Condition”) or from Releases or other violations of Environmental Laws originating on adjacent property but affecting the Leased Property (a “Migration”), provided that in either case such exclusions shall not apply to the extent that the Existing Condition or the Migration has been exacerbated by Lessee’s act or negligent failure to act.

(c) Lessor hereby agrees to defend, indemnify and save harmless any and all Lessee Indemnified Parties from and against any and all Environmental Liabilities to the extent that the same were caused by the intentionally wrongful acts or grossly negligent failures to act of Lessor.

(d) If any Proceeding is brought against any Indemnified Party in respect of an Environmental Liability with respect to which such Indemnified Party may claim indemnification under either Section 7.3(b) or (c), the Indemnifying Party, upon request, shall at its sole expense resist and defend such Proceeding, or cause the same to be resisted and defended by counsel designated by the Indemnifying Party and approved by the Indemnified Party, which approval shall not be unreasonably withheld or delayed; provided, however, that such approval shall not be required in the case of defense by counsel designated by any insurance company undertaking such defense pursuant to any applicable policy of insurance. Each Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel will be at the sole expense of such Indemnified Party unless a conflict of interest prevents representation of such Indemnified Party by the counsel selected by the Indemnifying Party and such separate counsel has been approved by the Indemnifying Party, which approval shall not be unreasonably withheld or delayed. The Indemnifying Party shall not be liable for any settlement of any such Proceeding made without its consent, which shall not be unreasonably withheld or delayed, but if settled with the consent of the Indemnifying Party, or if settled without its consent (if its consent shall be unreasonably withheld), or if there be a final, nonappealable judgment for an adversary party in any such Proceeding, the Indemnifying Party shall indemnify and hold harmless the Indemnified Parties from and against any liabilities incurred by such Indemnified Parties by reason of such settlement or judgment.

Article VIII - Maintenance And Repairs

Section 8.1. Maintenance and Repair.

(a) Except as provided in Section 8.1(b), Lessee will, or will cause the Manager to, keep the Leased Property and all parts thereof, including all private roadways, sidewalks, curbs and other appurtenances thereto that are under Lessee’s control, and including windows and plate glass, parking lots, HVAC, mechanical, electrical and plumbing systems and equipment (including conduit and ductware), in good order and repair and, if applicable, in compliance with the standards of the Management Agreement (whether or not the need for such repairs occurred as a result of Lessee’s use, any prior use, the elements or the age of the Leased Property or any portion thereof) ordinary wear and tear excepted and, except as otherwise provided in Section 8.1(b), Article XIII or Article XIV. All repairs shall, to the extent reasonably achievable, be at least equivalent in quality to the original work. Lessee will not take or omit to take any action, the taking or omission of which might materially impair the value or the usefulness of the Leased Property or any part thereof for its Primary Intended Use. If Lessee fails to make any required repairs or replacements after fifteen (15) days notice from Lessor, or after such longer period as may be reasonably required provided that Lessee at all times diligently proceeds with such repair or replacement, then Lessor shall have the right, but shall not be obligated, to make such repairs or replacements on behalf of and for the account of Lessee. In such event, such work shall be paid for in full by Lessee as Additional Charges.

(b) Notwithstanding Lessee’s obligations under Section 8.1(a) above but subject to the limitations set forth in Article XXXIII, unless caused by Lessee’s negligence or willful misconduct or that of its employees, contractor or agents, Lessor shall be responsible to pay and (subject to the Management Agreement) perform or cause to be performed all Capital Improvements that may be necessary or desirable at the Leased Property. Except as set forth in the preceding sentence, Lessor shall not under any circumstances be required to build or rebuild any improvement on the Leased Property, or to make any Capital Improvements to the Leased Property, whether ordinary or extraordinary, foreseen or unforeseen.

(c) Lessee will, upon the expiration or prior termination of the Term, vacate and surrender the Leased Property to Lessor in the condition in which the Leased Property was originally received from Lessor, except as repaired, rebuilt, restored, altered or added to as permitted or required by the provisions of this Lease and except for ordinary wear and tear (subject to the obligation of Lessee to maintain the Leased Property in good order and repair in accordance with Section 8.1(a) above, as would a prudent owner of comparable property, during the entire Term) or damage by casualty or Condemnation (subject to the obligation of Lessee to restore or repair as set forth in this Lease.)

Article IX - Alterations

Section 9.1. Alterations. Subject to first obtaining the written approval of Lessor (except only as and to the extent, if any, that Manager has the right to make alterations pursuant to the Management Agreement without first obtaining Lessee’s approval), Lessee may, but shall not be obligated to, make such additions, modifications or improvements to the Leased Property from time to time as Lessee deems desirable for its permitted uses and purposes, provided that such action will not alter the character or purposes of the Leased Property or detract from the value or operating efficiency thereof and will not impair the revenue-producing capability of the Leased Property or adversely affect the ability of the Lessee or Lessor to comply with the provisions of this Lease. All such work shall be performed in a first class manner in accordance with all applicable governmental rules and regulations and after receipt of all required permits and licenses. If required by Lessor all such work shall be covered by performance bonds issued by bonding companies reasonably acceptable to Lessor. The cost of such additions, modifications or improvements to the Leased Property shall be paid by Lessee, and all such additions, modifications and improvements shall, without payment by Lessor at any time, be included under the terms of this Lease and upon expiration or earlier termination of this Lease shall pass to and become the property of Lessor.

Section 9.2. Salvage. All materials which are scrapped or removed in connection with the making of repairs required by Articles VIII or IX shall be or become the property of Lessor or Lessee depending on which party is paying for or providing the financing for such work.

Section 9.3. Lessor Alterations. Lessor shall have the right, without Lessee’s consent, to make or cause to be made alterations and additions to the Leased Property required in connection with (i) Emergency Situations, (ii) Legal Requirements, and (iii) the performance by Lessor of its obligations under this Lease. Without Lessee’s consent, Lessor shall further have the right, but not the obligation, to make such other additions to the Leased Property as it may reasonably deem appropriate during the Term of this Lease. All such work unless necessitated by Lessee’s acts or omissions or unless otherwise required to be performed by Lessee under this Lease (in which event work shall be paid for by Lessee) shall be performed at Lessor’s expense, in compliance with all Legal Requirements, in a good and workmanlike manner and shall be done after reasonable notice to and coordination with Lessee, so as to minimize any disruptions or interference with the operation of the Facility.

Article X - Liens

Section 10.1. Liens. Subject to the provision of Article XI relating to permitted contests, Lessee will not directly or indirectly create or allow to remain and will promptly discharge at its expense any lien, encumbrance, attachment, title retention agreement or claim upon the Leased Property resulting from the action or inaction of Lessee, or any attachment, levy, claim or encumbrance in respect of the Rent, excluding, however, (a) this Lease, (b) the matters, if any, included as exceptions or insured against in the title policy insuring Lessor’s interest in the Leased Property, (c) restrictions, liens and other encumbrances which are consented to in writing by Lessor, (d) liens for those taxes which Lessee is not required to pay hereunder, (e) subleases permitted by Article XX hereof, (f) liens for Impositions or for sums

resulting from noncompliance with Legal Requirements to the extent Lessee is responsible hereunder for such compliance so long as (l) the same are not yet delinquent or (2) such liens are in the process of being contested as permitted by Article XI, (g) liens of mechanics, laborers, suppliers or vendors for sums either disputed or not yet due provided that any such liens for disputed sums are in the process of being contested as permitted by Article XI hereof, and (h) any liens which are the responsibility of Lessor pursuant to the provisions of this Lease.

Article XI - Permitted Contests

Section 11.1. Permitted Contests. Lessee shall have the right to contest the amount or validity of any Impositions or Legal Requirement to be satisfied by Lessee hereunder or any lien, attachment, levy, encumbrance, charge or claim (any such Imposition, Legal Requirement, lien, attachment, levy, encumbrance, charge or claim herein referred to as “Claims”) not otherwise permitted by Article X, by appropriate legal proceedings in good faith and with due diligence (but this shall not be deemed or construed in any way to relieve, modify or extend Lessee’s covenants to pay or its covenants to cause to be paid any such charges at the time and in the manner as in this Article provided), on condition, however, that such legal proceedings shall not operate to relieve Lessee from its obligations hereunder and shall not cause the sale or risk the loss of any portion of the Leased Property, or any part thereof, or cause Lessor or Lessee to be in default under any mortgage, deed of trust, security deed or other agreement encumbering the Leased Property or any interest therein. Upon the request of Lessor, as security for the payment of such Claims, Lessee shall either (a) provide a bond or other assurance reasonably satisfactory to Lessor (and satisfactory to any Holder, if approval thereof is required by such Holder’s Mortgage) that all Claims which may be assessed against the Leased Property together with interest and penalties, if any, thereon and legal fees anticipated to be incurred in connection therewith will be paid, or (b) deposit within the time otherwise required for payment with a bank or trust company designated by Lessor as trustee upon terms reasonably satisfactory to Lessor, or with any Holder upon terms satisfactory to such Holder, money in an amount sufficient to pay the same, together with interest and penalties thereon and legal fees anticipated to be incurred in connection therewith, as to all Claims which may be assessed against or become a Claim on the Leased Property, or any part thereof, in said legal proceedings. Lessee shall furnish Lessor and any Holder with reasonable evidence of such deposit within five days of the same. Lessor agrees to join in any such proceedings if the same be required to legally prosecute such contest of the validity of such Claims; provided, however, that Lessor shall not thereby be subjected to any liability for the payment of any costs or expenses in connection with any proceedings brought by Lessee; and Lessee covenants to indemnify and save harmless Lessor from any such costs or expenses. Lessee shall be entitled to any refund of any Claims and such charges and penalties or interest thereon which have been paid by Lessee or paid by Lessor and for which Lessor has been fully reimbursed. In the event that Lessee fails to pay any Claims when due or to provide the security therefor as provided in this paragraph and to diligently prosecute any contest of the same, Lessor may, upon ten days advance Notice to Lessee, pay such charges together with any interest and penalties and the same shall be repayable by Lessee to Lessor as Additional Charges upon the next due payment of Base Rent under this Lease; provided, however, that should Lessor reasonably determine that the giving of such Notice would risk loss to the Leased Property or cause damage to Lessor, then Lessor shall only give such Notice as is practical under the circumstances. Lessor reserves the right to contest any of the Claims at its expense not pursued by Lessee. Lessor and Lessee agree to cooperate in coordinating the contest of any Claims.

Article XII - Insurance

Section 12.1. General Insurance Requirements.

(a) Coverages. During the Term of this Lease, the Leased Property shall at all times be insured with the kinds and amounts of insurance described below. This insurance shall be written by companies authorized to issue insurance in the State. The policies must name the party obtaining the policy as the insured and the other party as an additional named insured, and the Manager and if required by Lessor’s Mortgage Documents, any Holder shall also be named as an additional insured under the coverages described in Sections 12.1(a)(iii) through (xi). Losses shall be payable to Lessor or Lessee as provided in this Lease or to the Holder as provided in Lessor’s Mortgage Documents. Any loss adjustment for coverages insuring both parties shall require the written consent of Lessor and Lessee, each acting reasonably and in good faith. Evidence of insurance shall be deposited with Lessor. As long as affiliate of Marriott International, Inc. is the Manager and Lessee participates in Manager’s insurance programs, there then exists no default under the Management Agreement, then Lessee shall strictly enforce the insurance and damage, destruction and condemnation requirements and obligations set forth in the Management Agreement. Unless and until an affiliate of Marriott International, Inc. is no longer managing the Property pursuant to the terms and provisions of the Management Agreement, then Lessor acknowledges and agrees that the insurance requirements set forth in the Management Agreement shall govern and control over any inconsistent provisions set forth in this Article XII. The policies on the Leased Property, including the Leased Improvements, Fixtures and Lessee’s Personal Property, shall at all times satisfy the requirements of the Lessor’s Mortgage Documents and the Management Agreement and at a minimum shall include:

(i) Insurance covering the building of which the Leased Premises is a part, Fixtures and FF&E on an “all risk,” broad form basis, against such risks as are customarily covered by such insurance (including boiler and machinery insurance and damage resulting from flood, but excluding damage resulting from earthquake, war and nuclear energy), in aggregate amounts which shall not be less than full replacement cost of such building;

(ii) Business interruption insurance covering loss of gross revenue for a minimum period of twelve (12) months resulting from interruption of business caused by the occurrence of any of the risks insured against under “all-risk” policy referred to in Section 12.1(a)(i);

(iii) Commercial general liability insurance with a combined single limit of not less than $1,000,000 for each occurrence and $2,000,000 in the general aggregate with a per location aggregate limit, together with umbrella liability insurance with limits of not less than $40,000,000 per occurrence and

$40,000,000 in the aggregate, including for liability for (i) bodily injury, (ii) death, (iii) property damage, (iv) assault and battery, (v) false arrest, detention or imprisonment or malicious prosecution, (vi) libel, slander, defamation or violation of the right of privacy, or (vii) wrongful entry or eviction;

(iv) Workers’ compensation insurance or insurance required by similar employee benefit acts having a minimum per occurrence limit as Lessee may deem advisable against all claims which may be brought for personal injury or death of Facility employees, but in any event not less than amounts prescribed by applicable state law and employers liability insurance with limits of not less than $100,000 for each occurrence and $500,000 for disease claim policy limit and $100,000 for disease claim per employee;

(v) Employment Practices Liability Insurance (“Employment Insurance”) with limits of $2,000,000 for each claim and $2,000,000 in the aggregate;

(vi) Crime insurance with a $500,000 Employee Dishonesty limit;

(vii) Commercial general liability insurance, with contractual indemnity endorsement, with amounts not less than $1,000,000 combined single limit for each occurrence and $2,000,000 for the aggregate of all occurrences within each policy year, as well as excess liability (umbrella) insurance with limits of at least $50,000,000 per occurrence, covering each of the following: bodily injury, death, or property damage liability per occurrence, personal injury, general aggregate, products and completed operations with respect to Lessee, and “all risk legal liability” (including liquor law or “dram shop” liability, if liquor or alcoholic beverages are served on the Leased Property) with respect to Lessor and Lessee;

(viii) Fidelity bonds or blanket crime policies with limits and deductibles as may be reasonably determined by Lessor, covering Lessee’s employees in job classifications normally bonded under prudent hotel management practices in the United States or otherwise required by law;

(ix) Auto Liability insurance with a $1,000,000 bodily injury limit and a $1,000,000 property damage limit, or a $2,000,000 combined single limit;

(x) Liquor Liability insurance with limits of $1,000,000 for each common cause and $1,000,000 in the aggregate;

(xi) Innkeepers Legal Liability and Safe Deposit Box Liability insurance with a $25,000 limit; and

(xii) Insurance covering such other hazards (such as plate glass or other common risks) and in such amounts as may be (A) required by a Holder,

or (B) customary for comparable properties in the area of the Leased Property and is available from insurance companies, insurance pools or other appropriate companies authorized to do business in the State at rates which are economically practicable in relation to the risks covered as may be reasonably determined by Lessor.

(b) Responsibility for Insurance. Lessee shall pay the premiums for the coverages described in Sections 12.1(a)(iii) through (xi), and Lessor shall pay the premiums for the coverages described in Sections 12.1(a)(i) and (ii). Insurance required by Section 12.1(a)(xii) shall be obtained and paid for by Lessor to the extent that it relates to risks of the type covered by the insurance obtained pursuant to Sections 12.1(a)(i) and (ii), and obtained and paid for by Lessee if it relates to risks of the type covered by the insurance obtained pursuant to Sections 12.1(a)(iii) through (xi). The party responsible for the premium for any insurance coverage shall also be responsible for any and all deductibles and self-insured retentions in connection with such coverages. In addition to the rights set forth in Sections 16.1 and 34.1, if any party responsible for obtaining and maintaining the insurance required under this Lease fails to do so or fails to obtain renewals or substitutions therefor at least fifteen (15) days before such insurance will lapse, the other party may obtain such insurance and the defaulting party shall reimburse the party obtaining such insurance for the cost thereof promptly upon demand, together with interest thereon at the Overdue Rate until such cost is repaid by the defaulting party.

Section 12.2. Replacement Cost. The term “full replacement cost” as used herein shall mean the 100% replacement cost of the Leased Property, without allowance for depreciation and exclusive of cost of excavations, foundations, footings, and value of land, as determined by Lessor or any Holder from time to time.

Section 12.3. Waiver of Subrogation. Lessor and Lessee each waive any and all rights of recovery against the other (and against the partners, officers, employees and agents of the other party) for loss of or damage to such waiving party or its property or the property of others under its control, to the extent such loss or damage is covered by, or in the event the responsible party fails to maintain the required insurance hereunder, would have been covered by, the insurance required to be obtained by such waiving party under Sections 12.1(a)(i) through (iii); provided, however, that this waiver does not apply to any rights that either party may have to insurance proceeds from their respective insurance policies at the time of such loss or damage. In obtaining policies of property insurance on their respective interests in the personal property and improvements located in the Leased Property, Lessor and Lessee shall give notice to their respective insurance carriers that the foregoing mutual waiver of subrogation is contained in this Lease; and Lessor and Lessee shall each obtain from their insurance carriers a consent to such waiver.

Section 12.4. Form Satisfactory, etc. All of the policies of insurance referred to in this Article XII shall be written in a form, with deductibles and by insurance companies satisfactory to Lessor and shall satisfy the requirements of any ground lease, mortgage, security agreement or other financing lien, if any, on the Leased Property and of the Management Agreement. The party responsible for obtaining any policy shall pay all of the premiums therefor, and deliver

copies of such policies or certificates thereof to the other party prior to their effective date (and, with respect to any renewal policy, thirty (30) days prior to the expiration of the existing policy), and in the event of the failure of the responsible party either to effect such insurance as herein called for or to pay the premiums therefor, or to deliver such policies or certificates thereof to the other party at the times required, such other party shall be entitled, but shall have no obligation, after ten (10) days’ Notice to the responsible party (or after less than ten (10) days’ Notice if required to prevent the expiration of any existing policy), to effect such insurance and pay the premiums therefor, and to be reimbursed for any such premiums upon written demand therefor. Each insurer mentioned in this Article XII shall agree, by endorsement to the policy or policies issued by it, or by independent instrument furnished to the party not responsible hereunder for obtaining such policy, that it will give to such party thirty (30) days’ written notice before the policy or policies in question shall be materially altered, allowed to expire or canceled.

Section 12.5. Increase in Limits. If either Lessor or Lessee at any time deems the limits of the personal injury or property damage under the comprehensive public liability insurance then carried to be either excessive or insufficient, Lessor and Lessee shall endeavor in good faith to agree on the proper and reasonable limits for such insurance to be carried and such insurance shall thereafter be carried with the limits thus agreed on until further change pursuant to the provisions of this Section. If the parties fail to agree on such limits, the matter shall be referred to arbitration as provided for in Section 35.1. However, in no event shall such limits fail to satisfy the requirements of the Management Agreement and of Lessor’s Mortgage Documents.

Section 12.6. Blanket Policy. Notwithstanding anything to the contrary contained in this Article XII, Lessee or Lessor may bring the insurance provided for herein within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Lessee or Lessor; provided, however, that the coverage afforded to Lessor and Lessee will not be reduced or diminished or otherwise be different from that which would exist under a separate policy meeting all other requirements of this Lease by reason of the use of such blanket policy of insurance, and provided further that the requirements of this Article XII are otherwise satisfied.

Section 12.7. Separate Insurance. Neither Lessor nor Lessee shall on its own initiative or pursuant to the request or requirement of any third party, take out separate insurance concurrent in form or contributing in the event of loss with that required in this Article to be furnished, or increase the amount of any then existing insurance by securing an additional policy or additional policies, unless all parties having an insurable interest in the subject matter of the insurance, including in all cases Lessor, are included therein as additional insureds, and the loss is payable under such additional separate insurance in the same manner as losses are payable under this Lease. Each party shall immediately notify the other party that it has obtained any such separate insurance or of the increasing of any of the amounts of the then existing insurance.

Section 12.8. Reports On Insurance Claims. Lessee shall promptly investigate and make a complete and timely written report to the appropriate insurance company as to all accidents, all claims for damage relating to the ownership, operation, and maintenance of the Facility, and any damage or destruction to the Facility and the estimated cost of repair thereof and shall prepare any and all reports required by any insurance company in connection therewith. All such reports shall be timely filed with the insurance company as required under the terms of the insurance policy involved, and a copy of all such reports shall be furnished to Lessor.

Article XIII - Damage And Reconstruction

Section 13.1. Insurance Proceeds. As long as an affiliate of Marriott International, Inc. is the Manager, the damage and destruction provisions of the Management Agreement shall take precedence over this Article XIII. If such Management Agreement is no longer in full force and effect, the provisions set forth in Lessor’s Mortgage Documents shall control. Otherwise, all proceeds of the insurance contemplated by Sections 12.1(a)(i) and (ii) payable by reason of any loss or damage to the Leased Property, or any portion thereof, and insured under any policy of insurance required by Article XII of this Lease shall be paid to Lessor and made available, if applicable, for reconstruction or repair, as the case may be, of any damage to or destruction of the Leased Property or any portion thereof, and, if applicable, shall be paid out by Lessor from time to time for the reasonable costs of such reconstruction or repair upon satisfaction of reasonable terms and conditions specified by Lessor. Any excess proceeds of insurance remaining after the completion of the restoration or reconstruction of the Leased Property shall be paid to Lessor. If neither Lessor nor Lessee is required or elects to repair and restore, and the Lease is terminated as described in Section 13.2, all such insurance proceeds shall be retained by Lessor except for any amount thereof paid with respect to Lessee’s Personal Property. All salvage resulting from any risk covered by insurance shall belong to Lessor, except to the extent of salvage relating to Lessee’s Personal Property.

Section 13.2. Reconstruction in the Event of Damage or Destruction Covered by Insurance.

(a) If during the Term the Leased Property is totally or partially destroyed by a risk covered by the insurance described in Article XIII and the Facility thereby is rendered Unsuitable or Uneconomic for its Primary Intended Use, this Lease shall (if and to the extent the Management Agreement may be terminated pursuant to the terms thereof) terminate as of the date of the casualty and neither Lessor nor Lessee shall have any further liability hereunder except for any liabilities which have arisen prior to or which survive such termination, and Lessor shall be entitled to retain all insurance proceeds except for any amount thereof paid with respect to Lessee’s Personal Property.

(b) If during the Term the Leased Property is partially destroyed by a risk covered by the insurance described in Article XII, but the Facility is not thereby rendered Unsuitable or Uneconomic for its Primary Intended Use, Lessor or, at the election of Lessor, Lessee shall restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of this Lease, and this Lease shall not terminate as a result of such damage or destruction. If Lessee restores the Facility, the insurance proceeds shall be paid out by Lessor from time to time for the reasonable costs of such restoration upon satisfaction of terms and conditions specified by Lessor, and any excess proceeds remaining after such restoration shall be paid to Lessor except for any amount thereof paid with respect to Lessee’s Personal Property.

(c) If the Facility is to be restored in accordance with the provisions of Section 13.2(b) or otherwise and if the cost of the repair or restoration exceeds the amount of proceeds received by Lessor from the insurance required under Article XII,

Lessor shall agree to contribute any excess amounts needed to restore the Facility prior to requiring Lessee to commence such work. Such difference shall be made available by Lessor, together with any other insurance proceeds, for application to the cost of repair and restoration in accordance with the provisions of Section 13.2(b).

Section 13.3. Reconstruction in the Event of Damage or Destruction Not Covered by Insurance. If during the Term the Facility is totally or materially damaged or destroyed by a risk not covered by the insurance described in Article XII, or if the Holder will not make the proceeds of such insurance available to Lessor for restoration of the Facility, unless in either event such damage or destruction renders the Facility Unsuitable or Uneconomic for its Primary Intended Use, Lessor at its option shall either, (a) at Lessor’s sole cost and expense, restore the Facility to substantially the same condition it was in immediately before such damage or destruction and this Lease shall not terminate as a result of such damage or destruction, or (b) terminate the Lease and neither Lessor nor Lessee shall have any further liability thereunder except for any liabilities which have arisen or occurred prior to such termination and those which expressly survive termination of this Lease. If such damage or destruction is determined by Lessor not to be material, Lessor may, at Lessor’s sole cost and expense, restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of the Lease, and this Lease shall not terminate as a result of such damage or destruction.

Section 13.4. Lessee’s Property and Business Interruption Insurance. All insurance proceeds payable by reason of any loss of or damage to any of Lessee’s Personal Property and the business interruption insurance maintained for the benefit of Lessee shall be paid to Lessee; provided, however, no such payments shall diminish or reduce the insurance payments otherwise payable to or for the benefit of Lessor hereunder.

Section 13.5. Abatement of Rent. Any damage or destruction due to casualty notwithstanding, this Lease shall remain in full force and effect and Lessee’s obligation to pay Rent required by this Lease shall remain unabated by any damage or destruction which does not result in a reduction of Revenues. If and to the extent that any damage or destruction results in a reduction of Revenues which would otherwise be realizable from the operation of the Facility, then Lessor shall receive all loss of income insurance and Lessee shall have no obligation to pay Rent in excess of the amount of Percentage Rent, if any, realizable from Revenues generated by the operation of the Leased Property during the existence of such damage or destruction; provided, however, that if such damage or destruction was caused by Lessee’s gross negligence or willful misconduct, Lessee shall remain liable for the amount of Rent which would have been payable hereunder at a rate equal to the average Rent during the last three preceding 12-month Fiscal Years (or if three 12-month Fiscal Years shall not have elapsed, the average during the preceding 12-month Fiscal Years or if one Fiscal Year has not elapsed, the amount derived by annualizing the Percentage Rent from the Commencement Date of this Lease) as if such damage or destruction had not occurred.

Article XIV - Condemnation

Section 14.1. Definitions.

(a) “Condemnation” means a Taking resulting from (1) the exercise of any governmental power, whether by legal proceedings or otherwise, by a Condemnor, and (2) a voluntary sale or transfer by Lessor to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending.

(b) “Date of Taking” means the date the Condemnor has the right to possession of the property being condemned.

(c) “Award” means all compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation.

(d) “Condemnor” means any public or quasi-public authority, or private corporation or individual, having the power of Condemnation.

Section 14.2. Parties’ Rights and Obligations.

As long as an affiliate of Marriott International, Inc. is the Manager, the condemnation provisions of the Management Agreement shall take precedence over this Article XIV. If such Management Agreement is no longer in full force and effect, the provisions set forth in Lessor’s Mortgage Documents shall control. To the extent that neither the Management Agreement nor the Mortgage Documents shall control, the rights and obligations of Lessor and Lessee shall be determined by this Article XIV.

Section 14.3. Total Taking. If title to the fee of the whole of the Leased Property is condemned by any Condemnor, this Lease shall cease and terminate as of the Date of Taking by the Condemnor. If title to the fee of less than the whole of the Leased Property is so taken or condemned, which nevertheless renders the Leased Property Unsuitable or Uneconomic for its Primary Intended Use, then either Lessee or Lessor shall have the option, by notice to the other, at any time prior to the Date of Taking, to terminate this Lease as of the Date of Taking. Upon such date, if such Notice has been given, this Lease shall thereupon cease and terminate. All Base Rent, Percentage Rent and Additional Charges paid or payable by Lessee hereunder shall be apportioned as of the Date of Taking, and Lessee shall promptly pay Lessor such amounts.

Section 14.4. Allocation of Award. The total Award made with respect to the Leased Property or for loss of rent, or for Lessor’s loss of business beyond the Term, shall be solely the property of and payable to Lessor. Any Award made for loss of Lessee’s business during the remaining Term, if any, for the taking of Lessee’s Personal Property, or for removal and relocation expenses of Lessee in any such proceedings shall be the sole property of and payable to Lessee. In any Condemnation proceedings Lessor and Lessee shall each seek its Award in conformity herewith, at its respective expense; provided, however, neither Lessor nor Lessee shall initiate, prosecute or acquiesce in any proceedings that may result in a diminution of any Award payable to the other.

Section 14.5. Partial Taking.

(a) If title to less than the whole of the Leased Property is condemned, and the Leased Property is not Unsuitable or Uneconomic for its Primary Intended Use, or if Lessor and Lessee are entitled but elect not to terminate this Lease as provided in

Section 14.3, then Lessor or, at Lessor’s election, Lessee shall, with all reasonable dispatch and to the extent that the Holder permits the application of the Award therefor and the Award to be contributed to restoration as provided in this Section 14.5(a) is sufficient therefor, restore the untaken portion of any Leased Improvements so that such Leased Improvements constitute a complete architectural unit of the same general character and condition (as nearly as may be possible under the circumstances) as the Leased Improvements existing immediately prior to the Condemnation. Lessor and Lessee shall each contribute to the cost of restoration that part of its Award specifically allocated to such restoration, if any, together with severance and other damages awarded for the taken Leased Improvements; provided, however, that the amount of such contribution shall not exceed such cost.

(b) In the event of a partial Taking as described in Section 14.5(a) which does not result in a termination of this Lease by Lessor, the Base Rent shall be abated in the manner and to the extent that is fair, just and equitable to both Lessee and Lessor, taking into consideration, among other relevant factors, the number of usable rooms, the amount of square footage, or the revenues affected by such partial Taking. If Lessor and Lessee are unable to agree upon the amount of such abatement within thirty (30) days after such partial Taking, the matter shall be submitted to arbitration as provided for in Section 35.2 hereof.

Section 14.6. Temporary Taking. If the whole or any part of the Leased Property or of Lessee’s interest under this Lease is condemned by any Condemnor for its temporary use or occupancy, this Lease shall not terminate by reason thereof, and Lessee shall continue to pay, in the manner and at the times herein specified, the full amounts of Base Rent, Percentage Rent and Additional Charges realizable from Revenues generated by the Leased Property during such period, together with additional amounts of Rent, if any, to the extent of the remaining balance, if any, of the Award made to Lessee for such Condemnation allocable to the Term (after payment of Base Rent and Additional Charges), Lessee shall pay Percentage Rent at a rate equal to the average Percentage Rent during the last three preceding 12-month Fiscal Years (or if three 12-month Fiscal Years shall not have elapsed, the average during the preceding 12-month Fiscal Years). Except only to the extent that Lessee may be prevented from so doing pursuant to the terms of the order of the Condemnor, Lessee shall continue to perform and observe all of the other terms, covenants, conditions and obligations hereof on the part of the Lessee to be performed and observed, as though such Condemnation had not occurred. In the event of any Condemnation as in this Section 14.6 described, the entire amount of any Award made for such Condemnation allocable to the Term of this Lease, whether paid by way of damages, rent or otherwise, shall be paid (a) directly to Lessee if the Award is payable by the Condemnor on a monthly basis, or (b) if payable by the Condemnor less frequently than on a monthly basis, the Award shall be paid to an institutional trustee designated by Lessor or to the Holder of a Mortgage, if any, and made available to Lessee on terms reasonably satisfactory to Lessor or such Holder for application pursuant to the provisions of this Section 14.6. Lessee covenants that upon the termination of any such period of temporary use or occupancy it will, to the extent that its Award is sufficient therefor and subject to Lessor’s contribution as set forth below, restore the Leased Property as nearly as may be reasonably possible to the condition in which the same was immediately prior to such Condemnation, unless such period of temporary use or occupancy extends beyond the expiration of the Term, in which case Lessee shall not be required

to make such restoration. If restoration is required hereunder, Lessor shall contribute to the cost of such restoration that portion of its entire Award that is specifically allocated to such restoration in the judgment or order of the court, if any.

Article XV - Defaults

Section 15.1. Events of Default. Any one or more of the following events shall constitute an “Event of Default” (herein so called) hereunder:

(a) if Lessee fails to make any payment of Base Rent or Percentage Rent within ten (10) days after receipt by the Lessee of Notice from Lessor that the same has become due and payable; or

(b) if Lessee fails to make any payment of Additional Charges within ten (10) days after receipt by Lessee of Notice from Lessor that the same has become due and payable; or

(c) if Lessee fails to observe or perform any other term, covenant or condition of this Lease and such failure is not curable, or if curable is not cured by Lessee within a period of thirty (30) days after receipt by the Lessee of Notice thereof from Lessor, unless such failure is curable but cannot with due diligence be cured within a period of thirty (30) days, in which case it shall not be deemed an Event of Default if (i) Lessee, within such thirty (30) day period, proceeds with due diligence to cure the failure and thereafter diligently completes the curing thereof within 120 days of Lessor’s Notice to Lessee, which 120-day period shall cease to run during any period that a cure of such failure is prevented by an Unavoidable Delay and shall resume running upon the cessation of such Unavoidable Delay, and (ii) the failure does not result in a notice or declaration of default under any material contract or agreement to which Lessor, the Company, or any Affiliate of either of them is a party or by which any of their assets are bound; or

(d) if Lessee shall (i) be generally not paying its debts as they become due, (ii) file, or consent by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, (iii) make an assignment for the benefit of its creditors, (iv) consent to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its assets, (v) be adjudicated insolvent, or (vi) take corporate action for the purpose of any of the foregoing; or if a court or governmental authority of competent jurisdiction shall enter an order appointing, without consent by Lessee, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its assets, or if an order for relief shall be entered in any case or proceeding for liquidation or reorganization or otherwise to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Lessee, or if any petition for any such relief shall be filed against Lessee and such petition shall not be dismissed within sixty (60) days; or

(e) if Lessee is liquidated or dissolved, or begins proceedings toward such liquidation or dissolution, or, in any manner, ceases to do business or permits the sale or divestiture of substantially all of its assets; or

(f) if the estate or interest of Lessee in the Leased Property or any part thereof is voluntarily or involuntarily transferred, assigned, conveyed, levied upon or attached in any Proceeding; or

(g) if, except as a result of and to the extent required by damage, destruction, Condemnation or Unavoidable Delay, Lessee ceases operations on the Leased Property; or

(h) if notice of a default or an event of default has been given by the Manager under the Management Agreement with respect to the Facility on the Leased Property as a result of any action or failure to act by the Lessee or any Person with whom the Lessee contracts at the Facility, which default or event of default is not cured within applicable cure periods and does not arise solely from Lessor’s breach of any of its obligations under this Lease which are required to maintain the Management Agreement in effect.

Notwithstanding anything to the contrary contained in Section 15.1(c), the cure periods set forth in Section 15.1(c) shall not apply to (i) any intentional failure by Lessee to observe or perform any term, covenant or condition of this Lease, or (ii) any failure by Lessee to perform any term, covenant or condition for which a different grace or cure period is expressly set forth in any other provision of this Lease, and in either of the foregoing events such failure shall, after the expiration of any other grace or cure period expressly set forth elsewhere herein, constitute an immediate Event of Default.

If litigation is commenced with respect to any alleged default under this Lease, the prevailing party in such litigation shall receive, in addition to its damages incurred, such sum as the court shall determine as its reasonable attorneys’ fees, and all costs and expenses incurred in connection therewith.

Section 15.2. Remedies. Upon the occurrence of an Event of Default, Lessor shall have the right, at Lessor’s option, to elect to do any one or more of the following without further notice or demand to Lessee: (a) terminate this Lease, in which event Lessee shall immediately surrender the Leased Property to Lessor, and, if Lessee fails to so surrender, Lessor shall have the right, without notice, to enter upon and take possession of the Leased Property and to expel or remove Lessee and its effects without being liable for prosecution or any claim for damages therefor; and Lessee shall, and hereby agrees to, indemnify Lessor for all loss and damage which Lessor suffers by reason of such termination, including damages in an amount equal to the total of (1) the reasonable costs of recovering the Leased Property in the event that Lessee does not promptly surrender the Leased Property, and all other reasonable expenses incurred by Lessor in connection with Lessee’s default; (2) the unpaid Rent earned as of the date of termination, plus

interest at the Overdue Rate accruing after the due date until such sums are paid by Lessee to Lessor; (3) the total Rent (including Percentage Rent as determined below) which Lessor would have received under this Lease for the remainder of the Term, but discounted to the then present value at a rate of fifteen percent (15%) per annum, less the fair market rental value of the balance of the Term as of the time of such default discounted to the then present value at a rate of fifteen percent (15%) per annum; and (4) all other sums of money and damages owing by Lessee to Lessor; or (b) enter upon and take possession of the Leased Property without terminating this Lease and without being liable for prosecution or any claim for damages therefor, and, if Lessor elects, relet the Leased Property on such terms as Lessor deems advisable, in which event Lessee shall pay to Lessor on demand the reasonable costs of repossessing and reletting the Leased Property and any deficiency between the Rent payable hereunder (including Percentage Rent as determined below) and the rent paid under such reletting; provided, however, that Lessee shall not be entitled to any excess payments received by Lessor from such reletting and Lessor’s failure to relet the Leased Property shall not release or affect Lessee’s liability for Rent or for damages; or (c) enter the Leased Property without terminating this Lease and without being liable for prosecution or any claim for damages therefor and maintain the Leased Property and repair or replace any damage thereto or do anything for which Lessee is responsible hereunder. Lessee shall reimburse Lessor immediately upon demand for any expense which Lessor incurs in thus effecting Lessee’s compliance under this Lease, and Lessor shall not be liable to Lessee for any damages with respect thereto. Notwithstanding anything herein to the contrary, Lessee shall not be liable to Lessor for consequential, punitive or exemplary damages.

The rights granted to Lessor in this Section 15.2 shall be cumulative of every other right or remedy provided in this Lease or which Lessor may otherwise have at law or in equity or by statute, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies or constitute a forfeiture or waiver of Rent or damages accruing to Lessor by reason of any Event of Default under this Lease.

Percentage Rent for the purposes of this Section 15.2 shall be a sum equal to (i) the average of the annual amounts of the Percentage Rent for the three 12-month Fiscal Years immediately preceding the Fiscal Year in which the termination, re-entry or repossession takes place, or (ii) if three 12-month Fiscal Years shall not have elapsed, the average of the Percentage Rent during the preceding 12-month Fiscal Years during which the Lease was in effect, or (iii) if one Fiscal Year has not elapsed, the amount derived by annualizing the Percentage Rent from the effective date of this Lease.

Section 15.3. Waiver. Each party waives, to the extent permitted by applicable law, any right to a trial by jury in any proceedings brought by either party to enforce the provisions of this Lease, including proceedings to enforce the remedies set forth in this Article XV, and Lessee waives the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt.

Section 15.4. Application of Funds. Any payments received by Lessor under any of the provisions of this Lease during the existence or continuance of any Event of Default shall be applied to Lessee’s obligations in the order that Lessor may determine or as may be prescribed by the laws of the State.

Article XVI - Lessor’s Right To Cure

Section 16.1. Lessor’s Right to Cure Lessee’s Default. If Lessee fails to make any payment or to perform any act required to be made or performed under this Lease including Lessee’s failure to comply with the terms of any Management Agreement and fails to cure the same within the relevant time periods, if any, provided in Section 15.1 or elsewhere in this Lease, Lessor, without waiving or releasing any obligation of Lessee, and without waiving or releasing any obligation or default, may (but shall be under no obligation to) at any time thereafter upon Notice to Lessee make such payment or perform such act for the account and at the expense of Lessee, and may, to the extent permitted by law, enter upon the Leased Property for such purpose and, subject to Section 15.2, take all such action thereon as, in Lessor’s opinion, may be necessary or appropriate therefor. No such entry shall be deemed an eviction of Lessee. All sums so paid by Lessor and all costs and expenses (including reasonable attorneys’ fees and expenses, in each case to the extent permitted by law) so incurred, together with a late charge thereon (to the extent permitted by law) at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessor until such sums or expenses are paid by Lessee to Lessor, shall constitute Additional Charges and shall be paid by Lessee to Lessor on demand. The obligations of Lessee and rights of Lessor contained in this Article shall survive the expiration or earlier termination of this Lease.

Article XVII - Limitations

Section 17.1. Personal Property Limitation. Anything contained in this Lease to the contrary notwithstanding, the rent attributable to the personal property leased under, or in connection with, this Lease for each calendar year shall not exceed fifteen percent (15%) of the total rent for the taxable year attributable to both the real and personal property leased under or in connection with this Lease, as determined under Code Section 856(d)(1) and the Treasury Regulations thereunder (the “Personal Property Limitation”). Lessor and Lessee shall at all times cooperate in good faith and use their best efforts to permit Lessor to comply with the Personal Property Limitation, which compliance may include, by way of example only and not by way of limitation or obligation, the purchase by Lessee at fair market value of personal property in excess of the Personal Property Limitation. All such compliance shall be effected in a manner which has no material net economic detriment to Lessee and will not jeopardize the Company’s status as a REIT. This Section 17.1 is intended to ensure that the Rent qualifies as “rents from real property,” within the meaning of Section 856(d) of the Code, or any similar or successor provisions thereto, and shall be interpreted in a manner consistent with such intent.

Section 17.2. Sublease Rent Limitation. Anything contained in this Lease to the contrary notwithstanding, Lessee shall not sublet the Leased Property or enter into any licenses or concessions or enter into any similar arrangement on any basis such that the rental or other amounts to be paid by the sublessee thereunder would be based, in whole or in part, on either (a) the net income or profits derived by the business activities of the sublessee, licensee or concessionaire, or any other Person, or (b) any other formula such that any portion of the Rent would fail to qualify as “rents from real property” within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto.

Section 17.3. Sublease Lessee Limitation. Anything contained in this Lease to the contrary notwithstanding, Lessee shall not sublease the Leased Property to, or enter into any license, concession or similar arrangement with, any Person in which the Company owns, directly or indirectly, a 10% or more interest, within the meaning of Section 856(d)(2)(B) of the Code.

Section 17.4. Compliance with Exception to Related-Party Tenant Rules. Lessee shall at all times qualify as a taxable REIT subsidiary, within the meaning of Code Section 856(l) with respect to the Company.

Article XVIII - Holding Over

Section 18.1. Holding Over. If Lessee for any reason remains in possession of the Leased Property after the expiration or earlier termination of the Term, such possession shall be as a tenant at sufferance during which time Lessee shall pay as rental each month two times the aggregate of (a) one-twelfth of the aggregate Base Rent and Percentage Rent payable with respect to the last Lease Year of the Term, (b) all Additional Charges accruing during the applicable month and (c) all other sums, if any, payable by Lessee under this Lease with respect to the Leased Property. During such period, Lessee shall be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenancies at sufferance, to continue its occupancy and use of the Leased Property. Nothing contained herein shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease.

Article XIX - Indemnities

Section 19.1. Indemnification.

(a) LESSEE WILL PROTECT, INDEMNIFY, HOLD HARMLESS AND DEFEND LESSOR INDEMNIFIED PARTIES FROM AND AGAINST ALL LIABILITIES, OBLIGATIONS, CLAIMS, DAMAGES, PENALTIES, CAUSES OF ACTION, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS’ FEES AND EXPENSES), TO THE EXTENT PERMITTED BY LAW, INCLUDING THOSE RESULTING FROM A LESSOR INDEMNIFIED PARTY’S OWN NEGLIGENCE but excluding those resulting from a Lessor Indemnified Party’s gross negligence or willful misconduct, imposed upon or incurred by or asserted against Lessor Indemnified Parties by reason of: (a) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Leased Property or adjoining sidewalks, during the Term or while the Leased Property is in the possession or control of Lessee including any claims under liquor liability, “dram shop” or similar laws, (b) any past, present or future use, misuse, non-use, condition, management, operation, maintenance or repair by Lessee or any of its agents, employees, contractors or invitees of the Leased Property or Lessee’s Personal Property, or any litigation, proceeding or claim by governmental entities or other third parties to which a Lessor Indemnified Party is made a

party or participant related to such use, misuse, non-use, condition, management, operation, maintenance, or repair thereof by Lessee or any of its agents, employees, contractors or invitees, including any failure of Lessee or any of its agents, employees, contractors or invitees to perform any obligations under this Lease or imposed by applicable law (other than arising out of Condemnation proceedings), (c) any Impositions that are the obligations of Lessee pursuant to the applicable provisions of this Lease, (d) any failure on the part of Lessee to perform or comply with any of the terms of this Lease, and (e) the nonperformance by Lessee or any of its agents, employees or contractors of any of the terms and provisions of any and all existing and future subleases of the Leased Property to be performed by the landlord thereunder.

(b) Lessor shall indemnify, save harmless and defend Lessee Indemnified Parties from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses imposed upon or incurred by or asserted against Lessee Indemnified Parties as a result of (a) the gross negligence or willful misconduct of Lessor arising in connection with this Lease or (b) any failure on the part of Lessor to perform or comply with any of the terms of this Lease.

(c) Any amounts that become payable by an Indemnifying Party under this Section shall be paid within ten (10) days after liability therefor on the part of the Indemnifying Party is determined by litigation or otherwise, and if not timely paid, shall bear a late charge (to the extent permitted by law) at the Overdue Rate from the date of such determination to the date of payment. Any such amounts shall be reduced by insurance proceeds received and any other recovery (net of costs) obtained by the Indemnified Party. An Indemnifying Party, upon request, shall at its sole expense resist and defend any Proceeding, claim or action, or cause the same to be resisted and defended by counsel designated by the Indemnified Party and approved by the Indemnifying Party, which approval shall not be unreasonably withheld; provided, however, that such approval shall not be required in the case of defense by counsel designated by any insurance company undertaking such defense pursuant to any applicable policy of insurance. Each Indemnified Party shall have the right to employ separate counsel in any such Proceeding, claim or action and to participate in the defense thereof, but the fees and expenses of such counsel will be at the sole expense of such Indemnified Party unless a conflict of interest prevents representation of such Indemnified Party by the counsel selected by the Indemnified Party and such separate counsel has been approved by the Indemnifying Party, which approval shall not be unreasonably withheld. The Indemnifying Party shall not be liable for any settlement of any such Proceeding, claim or action made without its consent, which consent shall not be unreasonably withheld, but if settled with the consent of the Indemnifying Party, or if settled without its consent (if its consent shall be unreasonably withheld), or if there be a final, non-appealable judgment for an adversary party in any such Proceeding, claim or action, the Indemnifying Party shall indemnify and hold harmless the Indemnified Party from and against any liabilities incurred by such Indemnified Party by reason of such settlement or judgment. Nothing herein shall be construed as indemnifying a Lessor Indemnified Party against its own grossly negligent acts or omissions or willful misconduct.

(d) Lessee’s and Lessor’s obligations under the provisions of this Article shall survive any termination of this Lease.

Article XX - Subletting And Assignment

Section 20.1. Subletting and Assignment. Subject to the provisions of Article XVII and Sections 20.2 and 20.3 and any other express consents, conditions, limitations or other provisions set forth herein, Lessee shall not assign this Lease or hereafter sublease all or any part of the Leased Property without first obtaining the written consent of Lessor. In the case of a permitted subletting, the sublessee shall comply with the provisions of Sections 17.2, 17.3, 17.4, 20.2 and 20.3, and in the case of a permitted assignment, the assignee shall assume in writing and agree to keep and perform all of the terms of this Lease on the part of Lessee to be kept and performed and shall be, and become, jointly and severally liable with Lessee for the performance thereof. In case of either an assignment or subletting made during the Term, Lessee shall remain primarily liable, as principal rather than as surety, for the prompt payment of the Rent and for the performance and observance of all of the covenants and conditions to be performed by Lessee hereunder. An original counterpart of each such sublease and assignment and assumption, duly executed by Lessee and such sublessee or assignee, as the case may be, in form and substance satisfactory to Lessor, shall be delivered promptly to Lessor.

Section 20.2. Attornment. Lessee shall insert in each future sublease permitted under Section 20.1 provisions to the effect that (a) such sublease is subject and subordinate to all of the terms and provisions of this Lease and to the rights of Lessor hereunder, (b) if this Lease terminates before the expiration of such sublease, the sublessee thereunder will, at Lessor’s option, attorn to Lessor and waive any right the sublessee may have to terminate the sublease or to surrender possession thereunder as a result of the termination of this Lease, and (c) if the sublessee receives a written Notice from Lessor or Lessor’s assignees, if any, stating that an uncured Event of Default exists under this Lease, the sublessee shall thereafter be obligated to pay all rentals accruing under said sublease directly to the party giving such Notice, or as such party may direct. All rentals received from the sublessee by Lessor or Lessor’s assignees, if any, as the case may be, shall be credited against the amounts owing by Lessee under this Lease.

Section 20.3. Management Agreement. Lessee shall not enter into any management or agency agreement relating to the management or operation of the Facility or any modifications to such management or agency agreement without Lessor’s prior written approval of the terms and conditions thereof and of the identity of any manager of the Facility. Lessor hereby approves the Management Agreement. To the extent any of the provisions of the Management Agreement impose a greater obligation on Lessee than the corresponding provisions of this Lease, then Lessee shall be obligated to comply with, and to take all reasonable actions necessary to prevent breaches or defaults under, the provisions of the Management Agreement. It is the intent of the parties hereto that Lessee shall comply in every respect with the provisions of the Management Agreement so as to avoid any default thereunder during the term of this Agreement. Lessee shall not terminate or enter into any modification of the Management Agreement without in each instance first obtaining Lessor’s written consent. Lessor and Lessee agree to cooperate fully with each other in the event it becomes necessary to obtain a management extension or modification or a new franchise for the Leased Property, and in any transfer of the Management

Agreement to Lessor or any Affiliate thereof or any other successor to Lessee upon the termination of this Lease. Any management or agency agreement other than the Management Agreement shall provide, among other things, that (i) upon termination of this Lease or termination of Lessee’s right to possession of the Leased Property for any reason whatsoever, the Management Agreement may be terminated by Lessor without liability for any payment due or to become due to the Manager, and (ii) all fees and other amounts payable by Lessee to the Manager shall be fully subordinate to Rent and other amounts payable by Lessee to Lessor hereunder. Lessee shall not enter into any franchise or license agreement without the prior written consent of Lessor and shall, upon Lessor’s written request, cooperate fully with Lessor in entering into and establishing a franchise or license agreement relating to the Leased Property.

Article XXI - Estoppel Certificates

Section 21.1. Officer’s Certificates; Financial Statements; Lessor’s Estoppel Certificates and Covenants.

(a) At any time and from time to time upon not less than ten (10) days Notice by Lessor, Lessee will furnish to Lessor an Officer’s Certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, whether to the knowledge of Lessee there is any existing default or Event of Default hereunder by Lessor or Lessee, and such other information as may be reasonably requested by Lessor. Any such certificate furnished pursuant to this Section may be relied upon by Lessor, any lender, any underwriter and any prospective purchaser of the Leased Property.

(b) Lessee will furnish to Lessor with reasonable promptness, such other information respecting the financial condition, operations and affairs of the Leased Property (A) as Lessor or the Company may be required or may deem desirable in its reasonable discretion to submit to any other Person, all in the form, and either audited or unaudited, as Lessor may request in Lessor’s reasonable discretion, (B) as may be reasonably necessary to confirm compliance by Lessee and its Affiliates with the requirements of this Lease, and (C) as may be required or requested by any existing, potential or future Holder;

(c) At any time and from time to time upon not less than ten (10) days notice by Lessee, Lessor will furnish to Lessee or to any person designated by Lessee an estoppel certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which Rent has been paid, whether to the knowledge of Lessor there is any existing default or Event of Default on Lessee’s or Lessor’s part hereunder, and such other information as may be reasonably requested by Lessee. Any such certificate furnished pursuant to this Section may be relied upon by Lessee, any lender, any underwriter and any purchaser of the assets of Lessee.

(d) Lessee covenants to cause its officers and employees, its auditors and Manager (to the maximum extent permitted under the Management Agreement) to cooperate fully and promptly with Lessor and the Company and with the auditors for Lessor and the Company in connection with the timely preparation and filing of Lessor’s and the Company’s filings, reports and returns under applicable federal, state and other governmental securities, blue sky and tax laws and regulations.

(e) Lessee shall from time to time, upon not less than ten (10) days notice from Lessor, provide all information in Lessee’s control that is required for Lessor to comply with the requirements of Lessor’s Mortgage Documents.

Article XXII - Meeting and Inspections

Section 22.1. Regular Meetings; Lessor’s Right to Inspect.

(a) Lessee agrees that if requested by Lessor (if and to the extent agreed by Manager), the general manager, the controller, the director of marketing, the asset manager and, if specifically requested by Lessor, the chief engineer for the Facility will meet at the Facility with Lessor and its representatives on a monthly basis throughout each Lease Year in order to discuss all aspects of the management, maintenance and operation of the Facility.

(b) Lessee shall permit Lessor and its representatives as frequently as reasonably requested by Lessor to inspect the Leased Property and Lessee’s accounts and records pertaining thereto and make copies thereof, during usual business hours upon reasonable advance notice, subject only to any business confidentiality requirements reasonably requested by Lessee. In conducting such inspections Lessor shall not unreasonably interfere with the conduct of Lessee’s business at the Leased Property.

Article XXIII - No Waiver

Section 23.1. No Waiver. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of full or partial payment of Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. To the extent permitted by law, no waiver of any breach shall affect or alter this Lease, which shall continue in full force and effect with respect to any other then existing or subsequent breach.

Article XXIV - Cumulative Remedies

Section 24.1. Remedies Cumulative. To the extent permitted by law but subject to Article XXXIV and any other provisions of this Lease expressly limiting the rights, powers and remedies of either Lessor or Lessee, each legal, equitable or contractual right, power and remedy of Lessor or Lessee now or hereafter provided either in this Lease or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power and remedy

and the exercise or beginning of the exercise by Lessor or Lessee of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Lessor or Lessee of any or all of such other rights, powers and remedies.

Article XXV - Surrender

Section 25.1. Acceptance of Surrender. No surrender to Lessor of this Lease or of the Leased Property or any part thereof, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Lessor and no act by Lessor or any representative or agent of Lessor, other than such a written acceptance by Lessor, shall constitute an acceptance of any such surrender.

Article XXVI - No Merger

Section 26.1. No Merger of Title. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same person or entity may acquire, own or hold, directly or indirectly: (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate and (b) the fee estate in the Leased Property.

Article XXVII - Conveyance By Lessor

Section 27.1. Conveyance by Lessor. Lessor shall have the unrestricted right to mortgage or otherwise convey the Leased Property to a Holder. If Lessor conveys the Leased Property in accordance with the terms hereof other than to a Holder, and the grantee or transferee of the Leased Property expressly assumes all obligations of Lessor hereunder arising or accruing from and after the date of such conveyance or transfer, Lessor shall thereupon be released from all future liabilities and obligations of Lessor under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Leased Property and all such future liabilities and obligations shall thereupon be binding upon the new owner. If Lessee is not reasonably satisfied that the new owner is a capable, reliable and qualified Person of good reputation and character, Lessee may terminate this Lease upon sixty (60) days’ Notice to Lessor given within thirty (30) days after Lessee receives Notice of such conveyance.

Section 27.2. Lessor May Grant Liens.

(a) Without the consent of Lessee, Lessor may from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement upon the Leased Property, or any portion thereof or interest therein, or upon Lessor’s interest in this Lease, whether to secure any borrowing or other means of financing or refinancing. This Lease and Lessee’s interest hereunder shall at all times be subject and subordinate to the lien and security title of any deeds to secure debt, deeds of trust, mortgages, or other interests heretofore or hereafter granted by Lessor or which otherwise encumber or affect the Leased Property and to any and all advances to be made thereunder and to all renewals, modifications, consolidations, replacements, substitutions,

and extensions thereof (all of which are herein called the “Mortgage”), provided that the Mortgage and all security agreements delivered by Lessor in connection therewith shall be subject to Lessee’s rights under this Lease to receive all Revenues of the Facility prior to the earlier of the occurrence of an Event of Default or the date that this Lease is terminated by the Holder of the Mortgage in the exercise of its remedies thereunder. In confirmation of such subordination, however, Lessee shall, at Lessor’s request, promptly execute, acknowledge and deliver any instruments which may be required to evidence subordination to any Mortgage and to the Holder thereof and the assignment of this Lease and Lessor’s rights and interests thereunder to such Holder. In the event of Lessee’s failure to deliver such instruments and if the Mortgage and such instruments do not change materially and adversely any term of this Lease, Lessor may, in addition to any other remedies for breach of covenant hereunder, execute, acknowledge, and deliver the instrument as the agent or attorney-in-fact of Lessee, and Lessee hereby irrevocably constitutes Lessor its attorney-in-fact for such purpose, Lessee acknowledging that the appointment is coupled with an interest and is irrevocable.

(b) Lessee shall, upon the request of Lessor or any existing, potential or future Holder, (i) provide Lessor or such Holder with copies of all licenses, permits, occupancy agreements, operating agreements, leases, contracts, inspection reports, studies, appraisals, assessments, default or other notices and similar materials reasonably requested in connection with any existing or proposed financing of the Leased Property, and (ii) execute and/or cause the Manager to execute, as applicable, such estoppel agreements and collateral assignments with respect to the Facility’s liquor license, the Management Agreement and any of the other aforementioned agreements as Holder may reasonably request in connection with any such financing, provided that no such estoppel agreement or collateral assignment shall in any way affect the Term or affect adversely in any material respect any rights of Lessee under this Lease.

(c) No act or failure to act on the part of Lessor which would entitle Lessee under the terms of this Lease, or by law, to be relieved of any of Lessee’s obligations hereunder (including its obligation to pay Rent) or to terminate this Lease, shall result in a release or termination of such obligations of Lessee or a termination of this Lease unless: (i) Lessee shall have first given written notice of Lessor’s act or failure to act to any Holder of whom Lessee has been given written notice of such Holder’s status as a Holder, specifying the act or failure to act on the part of Lessor which would give basis to Lessee’s rights; and (ii) the Holder, after receipt of such notice, shall have failed or refused to correct or cure the condition complained of within a reasonable time thereafter (in no event less than sixty (60) days), which shall include a reasonable time for such Holder to obtain possession of the Leased Property, if possession is reasonably necessary for the Holder to correct or cure the condition, or to foreclose such Mortgage, and if the Holder notifies the Lessee of its intention to take possession of the Leased Property or to foreclosure such Mortgage, and correct or cure such condition. If such Holder is prohibited by any process or injunction issued by any court or by reason of any action by any court having jurisdiction or any bankruptcy, debtor rehabilitation or insolvency proceedings involving Lessor from commencing or prosecuting foreclosure or other appropriate proceedings in the nature thereof, provided, however, that this Lease shall continue to be in full force and effect, the times for commencing or prosecuting such foreclosure or other proceedings shall be extended for the period of such prohibition.

(d) Lessee shall deliver by notice delivered in the manner provided in Article XXIX to any Holder who gives Lessee written notice of its status as a Holder, at such Holder’s address stated in the Holder’s written notice or at such other address as the Holder may designate by later written notice to Lessee, a duplicate copy of any and all notices regarding any default which Lessee may from time to time give or serve upon Lessor pursuant to the provisions of this Lease. Copies of such notices given by Lessee to Lessor shall be delivered to such Holder simultaneously with delivery to Lessor. No such notice by Lessee to Lessor hereunder shall be deemed to have been given unless and until a copy thereof has been mailed to such Holder as provided above.

(e) At any time, and from time to time, upon not less than ten (10) days’ notice by a Holder to Lessee, Lessee shall deliver to such Holder an estoppel certificate certifying as to the information required in Section 21.1(c), and such other information as may be reasonably requested by such Holder. Any such certificate may be relied upon by such Holder.

(f) Lessee shall cooperate in all reasonable respects, and as generally described in Section 36.2 of this Lease, with any transfer of the Leased Property to a Holder that succeeds to the interest of Lessor in the Leased Property (including in connection with the transfer of any management, franchise, license, lease, permit, contract, agreement, or similar item to such Holder or such Holder’s designee necessary or appropriate to operate the Leased Property). Lessor and Lessee shall cooperate in (i) including in this Lease by suitable amendment from time to time any provision which may be requested by any proposed Holder, or may otherwise be reasonably necessary, to implement the provisions of this Article and (ii) entering into any further agreement with or at the request of any Holder which may be reasonably requested or required by such Holder in furtherance or confirmation of the provisions of this Article; provided, however, that any such amendment or agreement shall not in any way affect the Term nor affect adversely in any material respect any rights of Lessor or Lessee under this Lease.

(g) [Lessee acknowledges that it has received a copy of the Current Loan Documents, including the Current Mortgage. Lessee shall not take any action which would result in a default by the Lessor under the Current Loan Documents. In addition, Lessee agrees to the following: (i) with respect to the insurance it is required to maintain hereunder, such insurance shall in any event comply with the requirements of the Current Loan Documents, (ii) Lessee shall maintain or cause the Manager to maintain its books and records with respect to the operations of the Leased Property in accordance with the requirements of the Current Loan Documents and shall furnish Lessor and the Holder of the Current Loan with such information and reports with respect to the operations of the Leased Property in such time and in such form so as to allow Lessor to comply with the financial reporting requirements set forth in the Current Loan Documents, and (ii) Lessee shall cooperate with the Holder of the Current Mortgage in the event of a default by Lessor of its obligations under the Current Loan Documents in accordance with any applicable requirements of the Current Mortgage.]

Article XXVIII - Quiet Enjoyment

Section 28.1. Quiet Enjoyment. So long as Lessee pays all Rent as the same becomes due and complies with all of the terms of this Lease and performs its obligations hereunder, in each case within the applicable grace and/or cure periods, if any, Lessee shall peaceably and quietly have, hold and enjoy the Leased Property for the Term hereof, free of any claim or other action by Lessor or anyone claiming by, through or under Lessor and not claiming by, through or under Lessee, but subject to all liens and encumbrances subject to which the Leased Property was conveyed to Lessor or hereafter consented to by Lessee or provided for herein. Lessee shall have the right by separate and independent action to pursue any claim it may have against Lessor as a result of a breach by Lessor of the covenant of quiet enjoyment contained in this Section.

Article XXIX - Notices

Section 29.1. Notices. All notices, demands, requests, consents approvals and other communications (“Notice” or “Notices”) hereunder shall be in writing and personally served or mailed (by express mail, courier, or registered or certified mail, return receipt requested and postage prepaid), (i) if to Lessor at 10400 Fernwood Road, Suite 300, Bethesda, MD 20817 and (ii) if to Lessee at 10400 Fernwood Road, Suite 300, Bethesda, MD 20817, or to such other address or addresses as either party may hereafter designate. Personally delivered Notice shall be effective upon receipt, and Notice given by mail shall be complete at the time of deposit in the U.S. Mail system, but any prescribed period of Notice and any right or duty to do any act or make any response within any prescribed period or on a date certain after the service of such Notice given by mail shall be extended five days.

Article XXX - Appraisals

Section 30.1. Appraisers. If it becomes necessary to determine the fair market value or fair market rental of the Leased Property for any purpose of this Lease, then, except as otherwise expressly provided in this Lease, the party required or permitted to give Notice of such required determination shall include in the Notice the name of a person selected to act as appraiser on its behalf. Within ten (10) days after Notice, Lessor (or Lessee, as the case may be) shall by Notice to Lessee (or Lessor, as the case may be) appoint a second person as appraiser on its behalf. The appraisers thus appointed, each of whom must be a member of the American Institute of Real Estate Appraisers (or any successor organization thereto) with at least five years experience in the State appraising property similar to the Leased Property, shall, within ten (10) days after the date of the Notice appointing the second appraiser, proceed to appraise the Leased Property to determine the fair market value or fair market rental thereof as of the relevant date (giving effect to the impact, if any, of inflation from the date of their decision to the relevant date); provided, however, that if only one appraiser shall have been so appointed, then the determination of such appraiser shall be final and binding upon the parties. If two appraisers are appointed and if the difference between the amounts so determined does not exceed 5% of the lesser of such amounts, then the fair market value or fair market rental shall be an amount equal to 50% of the sum of the amounts so determined. If the difference between the amounts so determined exceeds 5% of the lesser of such amounts, then such two appraisers shall have ten (10) days to appoint a third appraiser. If no such appraiser shall have been appointed within such ten (10) days or within

sixty (60) days of the original request for a determination of fair market value or fair market rental, whichever is earlier, either Lessor or Lessee may apply to any court having jurisdiction to have such appointment made by such court. Any appraiser appointed by the original appraisers or by such court shall be instructed to determine the fair market value or fair market rental within thirty (30) days after appointment of such appraiser. The determination of the appraiser which differs most in the terms of dollar amount from the determinations of the other two appraisers shall be excluded, and 50% of the sum of the remaining two determinations shall be final and binding upon Lessor and Lessee as the fair market value or fair market rental of the Leased Property, as the case may be. This provision for determining by appraisal shall be specifically enforceable to the extent such remedy is available under applicable law, and any determination hereunder shall be final and binding upon the parties except as otherwise provided by applicable law. Lessor and Lessee shall each pay the fees and expenses of the appraiser appointed by it and each shall pay one-half of the fees and expenses of the third appraiser and one-half of all other costs and expenses incurred in connection with each appraisal.

Article XXXI - Lessor’s Option to Terminate

Section 31.1. Lessor’s Option to Terminate Lease.

(a) In the event (i) Lessor consummates a bona fide contract to sell the Leased Property to a non-Affiliate, (ii) of a Tax Law Change resulting in Lessor’s determination to terminate this Lease, or (iii) of a Tax Structure Change, then in any of such events Lessor may terminate this Lease by (1) giving not less than thirty (30) days prior Notice to Lessee of Lessor’s election to terminate this Lease upon the closing under such contract, or (2) upon a date specified by Lessor which is on or after the effective date of the Tax Law Change or an election of Lessor to terminate this Lease under (iii) above, whichever is applicable. Effective upon such date, this Lease shall terminate and be of no further force and effect except as to any obligations of the parties existing as of such date that survive termination of this Lease and all Rent including Percentage Rent and Additional Charges shall be adjusted as of the termination date.

(b) As compensation for the early termination of its leasehold estate under this Article XXXI because of a Tax Law Change, Lessor shall within ninety (90) days of such termination, pay to Lessee the lesser of (i) [One Hundred Thousand Dollars ($100,000.00], or (ii) fair market value of Lessee’s leasehold estate hereunder for the twelve (12) month period commencing on the date of such termination (or, if shorter, the remaining term of the Lease).

(c) As compensation for the early termination of its leasehold estate under this Article XXXI because of a Tax Structure Change, Lessor shall within ninety (90) days after the termination of this Lease pay to Lessee the lesser of (i) [One Hundred Thousand Dollars ($100,000.00)], or (ii) fair market value of Lessee’s leasehold estate hereunder for the twelve (12) month period commencing on the date of such termination (or, if shorter, the remaining term of the Lease).

(d) For the purposes of this Section, fair market value of the leasehold estate means, as applicable, an amount equal to the price that a willing buyer not compelled to buy would pay a willing seller not compelled to sell for Lessee’s leasehold estate under this Lease or an offered replacement leasehold estate assuming that the remaining term of the Lease is the lesser of (i) the actual remaining term or (ii) twelve (12) months. In computing fair market value of a leasehold estate and a new Management Agreement, the appraiser shall discount all future income, expenses and fees to the then present value at a rate of fifteen percent (15%) per annum.

Article XXXII - Lessor’s Rights

Section 32.1. Lessor’s Rights. Notwithstanding anything to the contrary contained herein or in the Management Agreement, any event or other circumstance requiring Lessee’s consent under the Management Agreement shall not be granted or withheld by Lessee unless and until Lessee shall have consulted with Lessor in connection with such consent or disapproval.

Article XXXIII - Capital Expenditures

Section 33.1. Capital Expenditures.

(a) Commencing upon the Commencement Date, Lessor shall maintain the Capital Expenditures Reserve (to the extent such reserve is not maintained by Manager pursuant to the Management Agreement). Upon written request by Lessee to Lessor stating the specific use to be made and subject to the reasonable approval thereof by Lessor, such funds shall be made available by Lessor to Lessee for Capital Expenditures if and to the extent specifically approved by Lessor (or permitted to be made under the Management Agreement without Lessee consent); provided, however, that no Capital Expenditures shall be used to purchase property (other than “real property” within the meaning of Treasury Regulations Section 1.856-3(d)), to the extent that doing so would cause Lessor to recognize income other than “rents from real property” as defined in Section 856(d) of the Code. Lessor’s obligation shall be cumulative, but not compounded, and any amounts that have accrued hereunder shall be payable in future periods for such uses and in accordance with the procedures set forth herein. Lessee shall have no interest in the Capital Expenditure Reserve. All Capital Improvements shall be owned by Lessor subject to the provisions of this Lease. Lessee shall promptly notify Lessor of any Capital Expenditures made in accordance with the Management Agreement.

(b) Lessor’s obligation to make Capital Expenditures in respect to Capital Improvements shall be limited to amounts available in the Capital Expenditures Reserve and such additional amounts as Lessor may agree to make available in its sole discretion; provided, however, that if additional Capital Expenditures are required to meet Emergency Situations, Lessee shall have the right to make such Capital Improvements and shall be reimbursed by Lessor.

(c) Lessor shall, subject to Manager’s applicable rights, if any, under the Management Agreement, have sole authority with respect to the implementation of all Capital Improvements. Such authority shall extend both to the plans and specifications (including matters of design and decor) and to the contracting and purchasing of all labor, services and materials.

Article XXXIV - Lessor’s Default

Section 34.1. Lessor’s Default.

(a) It shall be a breach of this Lease if Lessor fails to observe or perform any term, covenant or condition of this Lease on its part to be performed and such failure continues for a period of thirty (30) days after Notice thereof from Lessee, unless such failure cannot with due diligence be cured within a period of thirty (30) days, in which case such failure shall not be deemed a breach if Lessor proceeds within such thirty (30) day period, with due diligence, to cure the failure and thereafter diligently completes the curing thereof. The time within which Lessor shall be obligated to cure any such failure also shall be subject to extension of time due to the occurrence of any Unavoidable Delay. If Lessor does not cure any such failure within the applicable time period as aforesaid, Lessee may declare the existence of a “Lessor Default” by a second Notice to Lessor.

(b) Notwithstanding anything to the contrary contained in this Lease, for the enforcement of any judgment (or other judicial decree) requiring the payment of money by Lessor to Lessee by reason of any default by Lessor under this Lease or otherwise, Lessee shall look solely to the estate and property of Lessor in the Leased Property and any insurance proceeds under any policies of insurance maintained by Lessor in accordance with this Lease which are paid on account of the same circumstances as led to Lessee’s judgment, it being intended that no other assets of Lessor or any of Lessor’s Affiliates shall be subject to levy, execution, attachment or any other legal process for the enforcement or satisfaction of any judgment (or other judicial decree) obtained by Lessee against Lessor, except in the following cases: (i) any liability of Lessor for its own gross negligence, willful misconduct or Environmental Liabilities caused by affirmative actions of Lessor, (ii) any liability of Lessor for repayment to Lessee upon the termination of this Lease of any excess payments of Percentage Rent or Additional Charges for the last Lease Year or part thereof, and (iii) in the case of a final award of damages against Lessor payable to Lessee, Lessee may offset the amount of such judgment or award against the Percentage Rent next coming due under this Lease.

Article XXXV - Arbitration

Section 35.1. Arbitration. Except as set forth in Section 35.2, in each case specified in this Lease in which it shall become necessary to resort to arbitration, such arbitration shall be determined as provided in this Section 35.1. The party desiring such arbitration shall give Notice to that effect to the other party, and an arbitrator shall be selected by mutual agreement of

the parties, or if they cannot agree within thirty (30) days of such notice, by appointment made by the American Arbitration Association (“AAA”) from among the members of its panels who are qualified and who have experience in resolving matters of a nature similar to the matter to be resolved by arbitration.

Section 35.2. Alternative Arbitration. In each case specified in this Lease for a matter to be submitted to arbitration pursuant to the provisions of this Section 35.2, Lessor shall be entitled to designate any nationally recognized accounting firm with a hospitality division of which Lessor or an Affiliate of Lessor is not a significant client to serve as arbitrator of such dispute within fifteen (15) days after written demand for arbitration is received or sent by Lessor. In the event Lessor fails to make such designation within such fifteen (15) day period, Lessee shall be entitled to designate any nationally recognized accounting firm with a hospitality division of which Lessee or an Affiliate of Lessee is not a significant client to serve as arbitrator of such dispute within fifteen (15) days after Lessor fails to timely make such designation. In the event no nationally recognized accounting firm satisfying such qualifications is available and willing to serve as arbitrator, the arbitration shall instead be administered as set forth in Section 35.1.

Section 35.3. Arbitration Procedures. In any arbitration commenced pursuant to Sections 35.1 or 35.2, a single arbitrator shall be designated and shall resolve the dispute. The arbitrator’s decision shall be binding on all parties and shall not be subject to further review or appeal except as otherwise allowed by applicable law. Upon the failure of either party (the “non-complying party”) to comply with his decision, the arbitrator shall be empowered, at the request of the other party, to order such compliance by the non-complying party and to supervise or arrange for the supervision of the non-complying party’s obligation to comply with the arbitrator’s decision, all at the expense of the non-complying party. To the maximum extent practicable, the arbitrator and the parties, and the AAA if applicable, shall take any action necessary to insure that the arbitration shall be concluded within ninety (90) days of the filing of such dispute. The fees and expenses of the arbitrator shall be shared equally by Lessor and Lessee except as otherwise specified above in this Section 35.3. Unless otherwise agreed in writing by the parties or required by the arbitrator or AAA, if applicable, arbitration proceedings hereunder shall be conducted in the State. Notwithstanding formal rules of evidence, each party may submit such evidence as each party deems appropriate to support its position and the arbitrator shall have access to and right to examine all books and records of Lessee and Lessor regarding the Facility during the arbitration.

Article XXXVI - Miscellaneous

Section 36.1. Miscellaneous. Anything contained in this Lease to the contrary notwithstanding, all claims against, and liabilities of, Lessee or Lessor arising prior to any date of termination of this Lease shall survive such termination. If any term or provision of this Lease or any application thereof is invalid or unenforceable, the remainder of this Lease and any other application of such term or provisions shall not be affected thereby. If any late charges or any interest rate provided for in any provision of this Lease are based upon a rate in excess of the maximum rate permitted by applicable law, the parties agree that such charges shall be fixed at and limited to the maximum permissible rate. Neither this Lease nor any provision hereof may

be changed, waived, discharged or terminated except by a written instrument in recordable form signed by Lessor and Lessee. All the terms and provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The headings in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Lease shall be governed by and construed in accordance with the laws of the State, but not including its conflicts of laws rules. If any payment required to be made pursuant to this Lease shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day.

Section 36.2. Transition Procedures. Lessee shall and shall cause Manager to cooperate in good faith to provide access and information to any prospective purchaser or lessee of the Leased Property which may acquire the Leased Property or lease it upon the expiration or termination of the Term. Upon any expiration or termination of the Term, Lessor and Lessee shall do the following and, in general, shall cooperate in good faith to effect an orderly transition of the lease of the Facility. The provisions of this Section 36.2 shall survive the expiration or termination of this Lease until they have been fully performed. Nothing contained herein shall limit Lessor’s rights and remedies under this Lease if such termination occurs as the result of an Event of Default.

(a) Transfer of Licenses. Upon the expiration or earlier termination of the Term, Lessee shall use its best efforts (i) to transfer to Lessor or Lessor’s designee all licenses, operating permits and other governmental authorizations and all contracts, including contracts with governmental or quasi-governmental entities, in each instance to the extent held in the name of Lessee, that may be necessary for the operation of the Facility (collectively, “Licenses”), or (ii) if such transfer is prohibited by law or Lessor otherwise elects, to cooperate with Lessor or Lessor’s designee in connection with the processing by Lessor or Lessor’s designee of any applications for all Licenses, including Lessee or Manager continuing to operate the liquor operations under its licenses with Lessor or its designee agreeing to indemnify and hold Lessee harmless as a result thereof except for the gross negligence or willful misconduct of Lessee; provided, in either case, that the costs and expenses of any such transfer or the processing of any such application shall be paid by Lessor or Lessor’s designee.

(b) Leases and Concessions. Lessee shall assign to Lessor or Lessor’s designee simultaneously with the termination of this Agreement, and the assignee shall assume all leases, contracts, concession agreements and agreements (including the Management Agreement) in effect with respect to the Facility then in Lessee’s name, unless Lessor rejects one or more of such leases, contracts, concession agreements or other agreements (other than the Management Agreement) in writing within thirty (30) days following the date of termination of this Agreement in which event the agreement or agreements so rejected shall be deemed reassigned and shall remain the property and responsibility of Lessee.

(c) Books and Records. To the extent that Lessor has not already received copies thereof, a copy of all books and records (including computer records) for the Facility kept by Lessee pursuant to Section 3.6 shall be promptly delivered to Lessor or Lessor’s designee.

(d) Receivables and Payables, etc. Lessor shall be entitled to retain all cash, bank accounts and house banks on the termination date. Lessee shall be entitled to collect all Revenues and accounts receivable accrued through the termination date. Lessee shall be responsible for the payment of Rent, all operating expenses of the Facility and all other obligations of Lessee accrued under this Lease as of the termination date, and Lessor shall be responsible for all operating expenses of the Facility accruing after the termination date. Lessee shall surrender the Leased Property with an amount and quality of Nonconsumable Inventory equal to the Initial Nonconsumable Inventory, and Lessor shall have no obligation to purchase such Nonconsumable Inventory or any other items of Lessee’s Personal Property.

Section 36.3. Waiver of Presentment, etc. Lessee waives all presentments, demands for payment and for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance and waives all notices of the existence, creation, or incurring of new or additional obligations, except as expressly granted herein.

Section 36.4. Action for Damages. In any suit or other claim brought by either party seeking damages against the other party for breach of its obligations under this Lease, the party against whom such claim is made shall be liable to the other party only for actual damages and not for consequential, punitive or exemplary damages.

Section 36.5. No Third Party Rights. This Agreement is intended solely for the benefit of the parties hereto (and for purposes of Section 7.3(d) and Article XIX hereof only, the Indemnified Parties) and is not intended (nor shall it be deemed) to confer any benefits upon, or create any rights in favor of, any Person other than the parties hereto (and for the purposes described above only, the Indemnified Parties).

Article XXXVII - Option to Extend

Section 37.1. Option to Extend. Provided that this Lease is then in full force and effect and provided that there exists no Event of Default hereunder at the time of exercise of this option and at the time of the commencement of any Extended Term, Lessee shall have the option to extend the original Term for two (2) additional periods of three (3) years (each an “Extended Term”). Lessee may exercise this option by giving written notice (“Extension Notice”) to Lessor at least one year prior to the then current Term. Time shall be of the essence in this Article XXXVII. Each Extended Term shall be on the same terms and conditions as this Lease, except that Base Rent shall be adjusted as follows:

Section 37.2. Determination of Base Rent for the Extension Term The Base Rent for each Extended Term shall equal the greater of the following:

(a) the amount of the Base Rent for the immediately preceding Lease Year, or

(b) the Market Rent.

Section 37.3. Market Rent. The term “Market Rent” shall mean the estimated fair market rental value of the Leased Property for the Extended Term, based on the length of the Extension Term, and the value of comparable hotel space in the city where the Leased Property is located, after adjustment for the then current operating expenses, Percentage Rent and other amounts payable by Lessee and taking into account the other provisions of this Lease. Market Rent shall be calculated on the then “as is” condition of the Leased Property. The Market Rent shall be determined as follows:

(a) Lessor shall reasonably determine Market Rent and shall set forth its determination in a notice given to Lessee within sixty days after Lessee gives the Extension Notice.

(b) If Lessee accepts Lessor’s determination, Lessee shall accept Lessor’s determination within ten days by written notice to Lessor. If Lessee in good faith disagrees with Lessor’s determination, Lessee shall within ten days after the receipt of Lessor’s notice give Lessor written notice of disagreement detailing Lessee’s basis for disagreement. If Lessee fails to give Lessor a notice during the ten-day period, it shall be deemed that Lessee irrevocably accepted the Lessor’s determination.

(c) In the event that Lessee gives such notice of disagreement, and Lessor and Lessee do not resolve by negotiation the Market Rent within thirty days after Lessee gives said notice of disagreement, the Market Rent shall be determined by appraisal as provided below.

(d) If Market Rent is to be determined by appraisal, then within ten days after the expiration of the thirty-day negotiation period referred to in subsection (c) above, Lessor and Lessee shall each appoint as an appraiser a real estate broker experienced in leasing space similar to the Leased Property in comparable locations or a similarly qualified real estate appraiser, and give notice of such appointment to the other party. If either Lessor or Lessee shall not so appoint such an appraiser, then the appointed appraiser shall select the second appraiser within ten days after the failure of Lessor or Lessee, as the case may be, to appoint. Such two appraisers shall, within thirty days after the appointment of the latter of them to be appointed complete their determination of the Market Rent based on the standards set forth in this Section and submit their appraisal reports separately in writing to each of Lessor and Lessee. If their valuations vary by five percent or less from their arithmetic average, the Market Rent shall be the arithmetic average of the two valuations. If the valuations vary by more than five percent from their arithmetic average, the two appraisers shall, within ten days after submission of the last submitted appraisal report, appoint a third appraiser who shall be similarly qualified. If the two appraisers are unable to agree timely on the selection of the third appraiser, then either appraiser, on behalf of both, may request such appointment from the District of Columbia office of the American Arbitration Association. Within thirty days after the appointment of the third appraiser, the third appraiser shall determine Market Rent and give notice to Lessor and Lessee of such determination together with a copy of the appraisal report. The Market Rent shall be as determined by the third appraiser,

(y) unless it is less than the valuation set forth in the lower of the first two appraisals previously obtained, in which case the valuation set forth in the lower appraisals shall be controlling, or (z) unless it is greater than the valuation set forth in the higher of the first two appraisals previously obtained, in which case the valuation set forth in the higher of the first two appraisals shall be controlling.

(e) If the three appraisers have not established the Market Rent before the end of the then current Term, then the Base Rent for the Extension Term shall be calculated under Section 37.2(a), until the Market Rate is determined by the appraisers, and then the parties shall adjust for over or under-payments within ten days after notice of the decision of the appraisers finally establishing the Market Rent is given to Lessee and Lessor.

IN WITNESS WHEREOF, the parties have executed this Lease by their duly authorized representatives as of the date first above written.


LESSOR:

DIAMONDROCK [ ] OWNER, LLC

By:	DIAMONDROCK HOSPITALITY LIMITED PARTNERSHIP,
	its Manager

	By:	DIAMONDROCK HOSPITALITY COMPANY
		its General Partner

By:
Name:
Title:

LESSEE:

DIAMONDROCK [ ] TENANT, LLC

By:	BLOODSTONE TRS, INC.,
	its Manager

By:
Name:
Title:

Exhibit A

PROPERTY DESCRIPTION

EXHIBIT 10.6

EXHIBIT 10.6

RESTRICTED STOCK AWARD AGREEMENT

(FOR SENIOR EXECUTIVES)

UNDER THE DIAMONDROCK HOSPITALITY COMPANY

2004 STOCK OPTION AND INCENTIVE PLAN

Name of Grantee:

No. of Shares:

Purchase Price per Share:

Grant Date:

Final Acceptance Date:

Pursuant to the DiamondRock Hospitality Company 2004 Stock Option and Incentive Plan (the “Plan”) DiamondRock Hospitality Company (the “Company”) hereby grants a Restricted Stock Award (an “Award”) to the Grantee named above. Upon acceptance of this Award, the Grantee shall receive the number of shares of Common Stock, par value $0.01 per share (the “Stock”) of the Company specified above, subject to the restrictions and conditions set forth herein and in the Plan (the “Restricted Stock”).

1. Acceptance of Award. The Grantee shall have no rights with respect to this Award unless he or she shall have accepted this Award prior to the close of business on the Final Acceptance Date specified above by (i) making payment to the Company by certified or bank check or other instrument acceptable to the Administrator (as defined in Section 2 of the Plan) of the Purchase Price per Share, if any, times the number of shares to be accepted, and (ii) signing and delivering to the Company a copy of this Award Agreement. Upon acceptance of this Award by the Grantee, the shares of Stock underlying this Award shall be issued and delivered to, or otherwise registered in book entry in the name of, the Grantee, and the Grantee’s name shall be entered as the stockholder of record on the books of the Company. Thereupon, the Grantee shall have all the rights of a shareholder with respect to such shares of Stock, including voting and dividend rights, subject, however, to the restrictions and conditions specified in Paragraph 2 below.

2. Restrictions and Conditions.

(a) Any certificates evidencing the shares of Stock granted herein shall bear an appropriate legend, as determined by the Administrator in its sole discretion, to the effect that such shares are subject to restrictions as set forth herein and in the Plan.

(b) Shares of Restricted Stock granted herein may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of by the Grantee prior to vesting.

(c) If the Grantee’s employment with the Company and its Subsidiaries is voluntarily or involuntarily terminated for any reason prior to vesting of the Stock granted herein, the Company shall have the right, at the discretion of the Administrator, to repurchase such shares from the Grantee or the Grantee’s legal representative at their purchase price. The Company must exercise such right of repurchase or forfeiture by written notice to the Grantee or

the Grantee’s legal representative not later than 60 days following such termination of employment.

3. Investment Representations. In connection with the purchase and sale of the shares of Restricted Stock contemplated herein, the Grantee hereby represents and warrants to the Company as follows:

(i) The Grantee is purchasing the Stock for the Grantee’s own account for investment only, and not for resale or with a view to the distribution thereof.

(ii) The Grantee has had such an opportunity as he or she has deemed adequate to obtain from the Company such information as is necessary to permit him or her to evaluate the merits and risks of the Grantee’s investment in the Company and has consulted with the Grantee’s own advisers with respect to the Grantee’s investment in the Company.

(iii) The Grantee has sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the purchase of the Stock and to make an informed investment decision with respect to such purchase.

(iv) The Grantee can afford a complete loss of the value of the Stock and is able to bear the economic risk of holding such Stock for an indefinite period.

(v) The Grantee understands that the Stock is not registered under the Securities Act of 1933, as amended (the “Act”) (it being understood that the Stock is being issued and sold in reliance on the exemption provided in Rule 701 of the Act) or any applicable state securities or “blue sky” laws and may not be sold or otherwise transferred or disposed of in the absence of an effective registration statement under the Act and under any applicable state securities or “blue sky” laws (or exemptions from the registration requirements thereof). The Grantee further acknowledges that certificates representing the Stock will bear restrictive legends reflecting the foregoing.

4. Vesting of Restricted Stock. The restrictions and conditions in Paragraph 2 of this Agreement shall lapse on the Vesting Date or Dates specified in the following schedule. If a series of Vesting Dates is specified, then the restrictions and conditions in Paragraph 2 shall lapse only with respect to the number of shares of Stock specified as vested on such date.


Vesting Date	Percentage of Shares Becoming Vested	Cumulative Percentage Vested

,	%	%

,	%	%

,	%	%

Subsequent to such Vesting Date or Dates, the shares of Stock on which all restrictions and conditions have lapsed shall no longer be deemed Restricted Stock. The Administrator may

at any time accelerate the vesting schedule specified in this Paragraph 4, provided, however, that the restrictions and conditions in Paragraph 2 shall automatically lapse upon (i) the termination of the Grantee’s employment with the Company due to the Grantee’s death or Disability (as such term is defined in the Employment Agreement, dated June 4, 2004, between the Company and the Grantee, as such agreement may be amended from time to time (the “Employment Agreement”)); (ii) the termination of the Grantee’s employment by the Company without Cause (as such term is defined in the Employment Agreement); (iii) the termination of the Grantee’s employment with the Company by the Grantee for Good Reason (as such term is defined in the Employment Agreement); and (iv) a Change in Control (as such term is defined in the Employment Agreement). In the event of the Grantee’s termination of employment with the Company (i) by the Grantee without Good Reason or (ii) by the Company for Cause, the Restricted Stock shall no longer vest and shall be forfeited.

5. Dividends. Dividends on the Stock shall be paid currently to the Grantee.

6. Incorporation of Plan. Notwithstanding anything herein to the contrary, this Agreement shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

7. Transferability. This Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. None of the shares of Stock now owned or hereafter acquired shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of or encumbered, whether voluntarily or by operation of law, unless such transfer is in compliance with all applicable securities laws (including, without limitation, the Act), and such disposition is in accordance with the terms, conditions and limitations of the Company’s Amended and Restated Charter and such disposition does not cause the Company to become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. In connection with any transfer of Stock, the Company may require the transferor to provide at the Grantee’s own expense an opinion of counsel to the transferor, satisfactory to the Company, that such transfer is in compliance with all foreign, federal and state securities laws (including, without limitation, the Act). Any attempted disposition of Stock not in accordance with the terms and conditions of this Section 7 shall be null and void, and the Company shall not reflect on its records any change in record ownership of any shares of Stock as a result of any such disposition, shall otherwise refuse to recognize any such disposition and shall not in any way give effect to any such disposition of any shares of Stock. Certain but not all restrictions on transfer shall terminate upon the closing of the Company’s Initial Public Offering.

8. Tax Withholding. The Grantee shall, not later than the date as of which the receipt of this Award becomes a taxable event for Federal income tax purposes, pay to the Company or make arrangements satisfactory to the Administrator for payment of any Federal, state, and local taxes required by law to be withheld on account of such taxable event. The Grantee may elect to have the required minimum tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from shares of Stock to be issued, or (ii) transferring to the Company, a number of shares of Stock with an aggregate Fair Market Value that would satisfy the withholding amount due.

9. Miscellaneous.

(a) Notice hereunder shall be given to the Company at its principal place of business, and shall be given to the Grantee at the address set forth below, or in either case at such other address as one party may subsequently furnish to the other party in writing.

(b) This Agreement does not confer upon the Grantee any rights with respect to continuation of employment by the Company or any Subsidiary.

(c) The Grantee and any transferee agree, if requested by the Company and any underwriter engaged by the Company, not to sell or otherwise transfer or dispose of any securities of the Company (including, without limitation pursuant to Rule 144 under the Act (or any successor or similar exemptive rule hereafter in effect)) held by them for such period following the effective date of any registration statement of the Company filed under the Act as the Company or such underwriter shall specify reasonably and in good faith, which period shall not exceed, in the case of the June 2004 Offering, the time period specified in the offering memorandum relating to the June 2004 Offering or 180 days in the case of the Company’s Initial Public Offering.


						DIAMONDROCK HOSPITALITY COMPANY

						By:
								Title:

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned.



Dated:
						Optionee’s Signature

						Optionee’s name and address:

RESTRICTED STOCK AWARD AGREEMENT

UNDER THE

DIAMONDROCK HOSPITALITY COMPANY

2004 STOCK OPTION AND INCENTIVE PLAN

Name of Grantee:

No. of Shares:

Purchase Price per Share:

Grant Date:

Final Acceptance Date:

Pursuant to the DiamondRock Hospitality Company 2004 Stock Option and Incentive Plan (the “Plan”) as amended through the date hereof, DiamondRock Hospitality Company (the “Company”) hereby grants a Restricted Stock Award (an “Award”) to the Grantee named above. Upon acceptance of this Award, the Grantee shall receive the number of shares of Common Stock, par value $0.01 per share (the “Stock”) of the Company specified above, subject to the restrictions and conditions set forth herein and in the Plan.

1. Acceptance of Award. The Grantee shall have no rights with respect to this Award unless he or she shall have accepted this Award prior to the close of business on the Final Acceptance Date specified above by (i) making payment to the Company by certified or bank check or other instrument acceptable to the Administrator (as defined in Section 2 of the Plan) of the Purchase Price per Share, if any, times the number of shares to be accepted, and (ii) signing and delivering to the Company a copy of this Award Agreement. Upon acceptance of this Award by the Grantee, the shares of Restricted Stock underlying the Award shall be issued and delivered to, or otherwise registered in book entry in the name of, the Grantee, and the Grantee’s name shall be entered as the stockholder of record on the books of the Company. Thereupon, the Grantee shall have all the rights of a shareholder with respect to such shares, including voting and dividend rights, subject, however, to the restrictions and conditions specified in Paragraph 2 below.

2. Restrictions and Conditions.

(a) Any certificates evidencing the shares of Restricted Stock granted herein shall bear an appropriate legend, as determined by the Administrator in its sole discretion, to the effect that such shares are subject to restrictions as set forth herein and in the Plan.

(b) Shares of Restricted Stock granted herein may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of by the Grantee prior to vesting.

(c) If the Grantee’s employment with the Company and its Subsidiaries is voluntarily or involuntarily terminated for any reason (including death) prior to vesting of shares of Restricted Stock granted herein, the Company shall have the right, at the discretion of the Administrator, to repurchase such shares from the Grantee or the Grantee’s legal representative at their purchase price. The Company must exercise such right of repurchase or forfeiture by

written notice to the Grantee or the Grantee’s legal representative not later than 60 days following such termination of employment.

3. Vesting of Restricted Stock. The restrictions and conditions in Paragraph 2 of this Agreement shall lapse on the Vesting Date or Dates specified in the following schedule. If a series of Vesting Dates is specified, then the restrictions and conditions in Paragraph 2 shall lapse only with respect to the number of shares of Restricted Stock specified as vested on such date.


Number of Shares of Restricted Stock Vested		Vesting Date

( %)

( %)

( %)

( %)

( %)

4. Dividends. Dividends on Shares of Restricted Stock shall be paid currently to the Grantee.

5. Incorporation of Plan. Notwithstanding anything herein to the contrary, this Agreement shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

6. Transferability. This Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution.

7. Tax Withholding. The Grantee shall, not later than the date as of which the receipt of this Award becomes a taxable event for Federal income tax purposes, pay to the Company or make arrangements satisfactory to the Administrator for payment of any Federal, state, and local taxes required by law to be withheld on account of such taxable event. The Grantee may elect to have the required minimum tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from shares of Stock to be issued, or (ii) transferring to the Company, a number of shares of Stock with an aggregate Fair Market Value that would satisfy the withholding amount due.

8. Miscellaneous.

(b) This Agreement does not confer upon the Grantee any rights with respect to continuation of employment by the Company or any Subsidiary.


						DIAMONDROCK HOSPITALITY COMPANY

						By:
								Title:

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned.



Dated:
						Optionee’s Signature

						Optionee’s name and address:

EXHIBIT 10.7

EXHIBIT 10.7

INCENTIVE STOCK OPTION AGREEMENT

UNDER THE

DIAMONDROCK HOSPITALITY COMPANY

2004 STOCK OPTION AND INCENTIVE PLAN

Name of Optionee:

No. of Option Shares:

Option Exercise Price per Share:

Grant Date:

Expiration Date:

[up to 10 years (5 if a 10% owner)]

Pursuant to the DiamondRock Hospitality Company Stock Option and Incentive Plan (the “Plan”) as amended through the date hereof, DiamondRock Hospitality Company (the “Company”) hereby grants to the Optionee named above an option (the “Stock Option”) to purchase on or prior to the Expiration Date specified above all or part of the number of shares of Common Stock, par value $0.01 per share (the “Stock”) of the Company specified above at the Option Exercise Price per Share specified above subject to the terms and conditions set forth herein and in the Plan.

1. Exercisability Schedule. No portion of this Stock Option may be exercised until such portion shall have become exercisable. Except as set forth below, and subject to the discretion of the Administrator (as defined in Section 2 of the Plan) to accelerate the exercisability schedule hereunder, this Stock Option shall be exercisable with respect to the following number of Option Shares on the dates indicated:


Number of Option Shares Exercisable		Exercisability Date

( %)

( %)

( %)

( %)

( %)

* Max. of $100,000 per yr.

Once exercisable, this Stock Option shall continue to be exercisable at any time or times prior to the close of business on the Expiration Date, subject to the provisions hereof and of the Plan.

2. Manner of Exercise.

(a) The Optionee may exercise this Stock Option only in the following manner: from time to time on or prior to the Expiration Date of this Stock Option, the Optionee may give written notice to the Administrator of his or her election to purchase some or all of the Option Shares purchasable at the time of such notice. This notice shall specify the number of Option Shares to be purchased.

Payment of the purchase price for the Option Shares may be made by one or more of the following methods: (i) in cash, by certified or bank check or other instrument acceptable to the Administrator; (ii) through the delivery (or attestation to the ownership) of shares of Stock that have been purchased by the Optionee on the open market or that have been beneficially owned by the Optionee for at least six months and are not then subject to any restrictions under any Company plan; (iii) by the Optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the option purchase price, provided that in the event the Optionee chooses to pay the option purchase price as so provided, the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure; or (iv) a combination of (i), (ii) and (iii) above. Payment instruments will be received subject to collection.

The delivery of certificates representing the Option Shares will be contingent upon the Company’s receipt from the Optionee of full payment for the Option Shares, as set forth above and any agreement, statement or other evidence that the Company may require to satisfy itself that the issuance of Stock to be purchased pursuant to the exercise of Stock Options under the Plan and any subsequent resale of the shares of Stock will be in compliance with applicable laws and regulations. In the event the Optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the Optionee upon the exercise of the Stock Option shall be net of the shares attested to.

(b) Certificates for the shares of Stock purchased upon exercise of this Stock Option shall be issued and delivered to the Optionee upon compliance to the satisfaction of the Administrator with all requirements under applicable laws or regulations in connection with such issuance and with the requirements hereof and of the Plan. The determination of the Administrator as to such compliance shall be final and binding on the Optionee. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Stock subject to this Stock Option unless and until this Stock Option shall have been exercised pursuant to the terms hereof, the Company shall have issued and delivered the shares to the Optionee, and the Optionee’s name shall have been entered as the stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such shares of Stock.

(c) The minimum number of shares with respect to which this Stock Option may be exercised at any one time shall be 100 shares, unless the number of shares with respect to which this Stock Option is being exercised is the total number of shares subject to exercise under this Stock Option at the time.

(d) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock Option shall be exercisable after the Expiration Date hereof.

3. Termination of Employment. If the Optionee’s employment by the Company or a Subsidiary (as defined in the Plan) is terminated, the period within which to exercise the Stock Option may be subject to earlier termination as set forth below.

(a) Termination Due to Death. If the Optionee’s employment terminates by reason of death, any Stock Option held by the Optionee shall become fully exercisable and may thereafter be exercised by the Optionee’s legal representative or legatee for a period of 12 months from the date of death or until the Expiration Date, if earlier.

(b) Termination Due to Disability. If the Optionee’s employment terminates by reason of disability (as determined by the Administrator), any Stock Option held by the Optionee shall become fully exercisable and may thereafter be exercised by the Optionee for a period of 12 months from the date of termination or until the Expiration Date, if earlier. The death of the Optionee during the 12-month period provided in this Section 3(b) shall extend such period for another 12 months from the date of death or until the Expiration Date, if earlier.

(c) Termination for Cause. If the Optionee’s employment terminates for Cause, any Stock Option held by the Optionee shall terminate immediately and be of no further force and effect. For purposes hereof, “Cause” shall mean a vote by the Board resolving that the Optionee shall be dismissed as a result of (i) any material breach by the Optionee of any agreement between the Optionee and the Company; (ii) the conviction of or plea of nolo contendere by the Optionee to a felony or a crime involving moral turpitude; or (iii) any material misconduct or willful and deliberate non-performance (other than by reason of disability) by the Optionee of the Optionee’s duties to the Company.

(d) Other Termination. If the Optionee’s employment terminates for any reason other than death, disability, or Cause, and unless otherwise determined by the Administrator, any Stock Option held by the Optionee may be exercised, to the extent exercisable on the date of termination, for a period of three months from the date of termination or until the Expiration Date, if earlier. Any Stock Option that is not exercisable at such time shall terminate immediately and be of no further force or effect.

The Administrator’s determination of the reason for termination of the Optionee’s employment shall be conclusive and binding on the Optionee and his or her representatives or legatees.

4. Incorporation of Plan. Notwithstanding anything herein to the contrary, this Stock Option shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

5. Transferability. This Agreement is personal to the Optionee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. This Stock Option is exercisable, during the Optionee’s

lifetime, only by the Optionee, and thereafter, only by the Optionee’s legal representative or legatee.

6. Status of the Stock Option. This Stock Option is intended to qualify as an “incentive stock option” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), but the Company does not represent or warrant that this Stock Option qualifies as such. The Optionee should consult with his or her own tax advisors regarding the tax effects of this Stock Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period requirements. If the Optionee intends to dispose or does dispose (whether by sale, gift, transfer or otherwise) of any Option Shares within the one-year period beginning on the date after the transfer of such shares to him or her, or within the two-year period beginning on the day after the grant of this Stock Option, he or she will notify the Company within 30 days after such disposition.

7. Tax Withholding. The Optionee shall, not later than the date as of which the exercise of this Stock Option becomes a taxable event for Federal income tax purposes, pay to the Company or make arrangements satisfactory to the Administrator for payment of any Federal, state, and local taxes required by law to be withheld on account of such taxable event. The Optionee may elect to have the minimum required tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from shares of Stock to be issued, or (ii) transferring to the Company, a number of shares of Stock with an aggregate Fair Market Value that would satisfy the withholding amount due.

8. Miscellaneous.

(a) Notice hereunder shall be given to the Company at its principal place of business, and shall be given to the Optionee at the address set forth below, or in either case at such other address as one party may subsequently furnish to the other party in writing.

(b) This Stock Option does not confer upon the Optionee any rights with respect to continuance of employment by the Company or any Subsidiary.


						DIAMONDROCK HOSPITALITY COMPANY

						By:
								Title:

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned.



Dated:
						Optionee’s Signature

						Optionee’s name and address:

EXHIBIT 10.8

EXHIBIT 10.8

NON-QUALIFIED STOCK OPTION AGREEMENT

FOR COMPANY EMPLOYEES

UNDER THE

DIAMONDROCK HOSPITALITY COMPANY

2004 STOCK OPTION AND INCENTIVE PLAN

Name of Optionee:

No. of Option Shares:

Option Exercise Price per Share:

Grant Date:

Expiration Date:

Pursuant to the DiamondRock Hospitality Company 2004 Stock Option and Incentive Plan (the “Plan”) as amended through the date hereof, DiamondRock Hospitality Company (the “Company”) hereby grants to the Optionee named above an option (the “Stock Option”) to purchase on or prior to the Expiration Date specified above all or part of the number of shares of Common Stock, par value $0.01 per share (the “Stock”) of the Company specified above at the Option Exercise Price per Share specified above subject to the terms and conditions set forth herein and in the Plan.


Number of Option Shares Exercisable		Exercisability Date

( %)

( %)

( %)

( %)

( %)

Once exercisable, this Stock Option shall continue to be exercisable at any time or times prior to the close of business on the Expiration Date, subject to the provisions hereof and of the Plan.

2. Manner of Exercise.

(b) Certificates for shares of Stock purchased upon exercise of this Stock Option shall be issued and delivered to the Optionee upon compliance to the satisfaction of the Administrator with all requirements under applicable laws or regulations in connection with such issuance and with the requirements hereof and of the Plan. The determination of the Administrator as to such compliance shall be final and binding on the Optionee. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Stock subject to this Stock Option unless and until this Stock Option shall have been exercised pursuant to the terms hereof, the Company shall have issued and delivered the shares to the Optionee, and the Optionee’s name shall have been entered as the stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such shares of Stock.

(d) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock Option shall be exercisable after the Expiration Date hereof.

(d) Other Termination. If the Optionee’s employment terminates for any reason other than death, disability or Cause, and unless otherwise determined by the Administrator, any Stock Option held by the Optionee may be exercised, to the extent exercisable on the date of termination, for a period of three months from the date of termination or until the Expiration Date, if earlier. Any Stock Option that is not exercisable at such time shall terminate immediately and be of no further force or effect.

The Administrator’s determination of the reason for termination of the Optionee’s employment shall be conclusive and binding on the Optionee and his or her representatives or legatees.

lifetime, only by the Optionee, and thereafter, only by the Optionee’s legal representative or legatee.

6. Tax Withholding. The Optionee shall, not later than the date as of which the exercise of this Stock Option becomes a taxable event for Federal income tax purposes, pay to the Company or make arrangements satisfactory to the Administrator for payment of any Federal, state, and local taxes required by law to be withheld on account of such taxable event. The Optionee may elect to have the minimum required tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from shares of Stock to be issued, or (ii) transferring to the Company, a number of shares of Stock with an aggregate Fair Market Value that would satisfy the withholding amount due.

7. Miscellaneous.

(b) This Stock Option does not confer upon the Optionee any rights with respect to continuance of employment by the Company or any Subsidiary.


						DIAMONDROCK HOSPITALITY COMPANY

						By:
								Title:

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned.



Dated:
						Optionee’s Signature

						Optionee’s name and address:

NON-QUALIFIED STOCK OPTION AGREEMENT

FOR NON-EMPLOYEE DIRECTORS

UNDER THE

DIAMONDROCK HOSPITALITY COMPANY

2004 STOCK OPTION AND INCENTIVE PLAN

Name of Optionee:

No. of Option Shares:

Option Exercise Price per Share:

Grant Date:

Expiration Date:

Pursuant to the DiamondRock Hospitality Company 2004 Stock Option and Incentive Plan (the “Plan”) as amended through the date hereof, DiamondRock Hospitality Company (the “Company”) hereby grants to the Optionee named above, who is a Director of the Company but is not an employee of the Company, an option (the “Stock Option”) to purchase on or prior to the Expiration Date specified above all or part of the number of shares of Common Stock, par value $0.01 per share (the “Stock”) of the Company specified above at the Option Exercise Price per Share specified above subject to the terms and conditions set forth herein and in the Plan.


Number of Option Shares Exercisable		Exercisability Date

( %)

( %)

( %)

( %)

( %)

In the event of the termination of the Optionee’s service as a director of the Company because of death this Stock Option shall become immediately exercisable in full, whether or not exercisable at such time. Once exercisable, this Stock Option shall continue to be exercisable at any time or times prior to the close of business on the Expiration Date, subject to the provisions hereof and of the Plan.

2. Manner of Exercise.

Payment of the purchase price for the Option Shares may be made by one or more of the following methods: (i) in cash, by certified or bank check or other instrument acceptable to the Administrator; (ii) through the delivery (or attestation to the ownership) of shares of Stock that have been purchased by the Optionee on the open market or that have been beneficially owned by the Optionee for at least six months and are not then subject to restrictions under any Company plan; (iii) by the Optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the option purchase price, provided that in the event the Optionee chooses to pay the option purchase price as so provided, the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure; or (iv) a combination of (i), (ii) and (iii) above. Payment instruments will be received subject to collection.

(d) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock Option shall be exercisable after the Expiration Date hereof.

3. Termination as Director. If the Optionee ceases to be a Director of the Company, the period within which to exercise the Stock Option may be subject to earlier termination as set forth below.

(a) Termination For Cause. If the Optionee ceases to be a Director for Cause, any Stock Option held by the Optionee shall immediately terminate and be of no further force and effect. For purposes hereof, “Cause” shall mean a vote by the Board resolving that the Optionee shall be dismissed as a result of (i) any material breach by the Optionee of any agreement between the Optionee and the Company; (ii) the conviction of or plea of nolo contendere by the Optionee to a felony or a crime involving moral turpitude; or (iii) any material misconduct or willful and deliberate non-performance (other than by reason of disability) by the Optionee of the Optionee’s duties to the Company.

(b) Termination by Reason of Death. If the Optionee ceases to be a Director by reason of death, any Stock Option held by the Optionee may be exercised by his or her legal representative or legatee for a period of 12 months from the date of death or until the Expiration Date, if earlier.

(c) Other Termination. If the Optionee ceases to be a Director for any reason other than Cause or death, any Stock Option held by the Optionee may be exercised for a period of six months from the date of termination or until the Expiration Date, if earlier.

6. Miscellaneous.

(b) This Stock Option does not confer upon the Optionee any rights with respect to continuance as a Director.

(c) Pursuant to Section 15 of the Plan, the Committee may at any time amend or cancel any outstanding portion of this Stock Option, but no such action may be taken which adversely affects the Optionee’s rights under this Agreement without the Optionee’s consent.


						DIAMONDROCK HOSPITALITY COMPANY

						By:
								Title:

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned.



Dated:
						Optionee’s Signature

						Optionee’s name and address:

EXHIBIT 10.15

Exhibit 10.15

AMENDED AND RESTATED

RESTRICTED STOCK AWARD AGREEMENT

UNDER THE DIAMONDROCK HOSPITALITY COMPANY

2004 STOCK OPTION AND INCENTIVE PLAN

Name of Grantee: William McCarten

No. of Shares: 225,000

Purchase Price per Share: $0.00

Grant Date: July 7, 2004

Final Acceptance Date: August 7, 2004

Amendment Date: March 18, 2005

The prospective underwriters by engaged DiamondRock Hospitality Company (“Company”) have requested that the employees agree to delay the vesting of the initial grant of restricted shares of Common Stock, par value $0.01 per share, issued by the Company pursuant to the Company’s 2004 Stock Option and Incentive Plan (the “Plan”). The Company hereby amends and restates the grant of a Restricted Stock Award (an “Award”) to the Grantee named above. Upon acceptance of this amendment to the Award, the Award shall have the restrictions and conditions set forth herein and in the Plan (the “Restricted Stock”).

1. Acceptance of Award. The Grantee shall have no rights with respect to this Award unless he or she shall have accepted this Award prior to the close of business on the Final Acceptance Date specified above by (i) making payment to the Company by certified or bank check or other instrument acceptable to the Administrator (as defined in Section 2 of the Plan) of the Purchase per Share, if any, times the number of shares to be accepted, and (ii) signing and delivering to the Company a copy of this Award Agreement. Upon acceptance of this Award by the Grantee, the shares of Stock underlying this Award shall be issued and delivered to, or otherwise registered in book entry in the name of, the Grantee, and the Grantee’s name shall be entered as the stockholder of record on the books of the Company. Thereupon, the Grantee shall have all the rights of a shareholder with respect to such shares of Stock, including voting and dividend rights, subject, however, to the restrictions and conditions specified in Paragraph 2 below.

2. Restrictions and Conditions.

(a) Any certificates evidencing the shares of Stock granted herein shall bear an appropriate legend, as determined by the Administrator in its sole discretion, to the effect that such shares are Subject to restrictions as set forth herein and in the Plan.

(b) Shares of Restricted Stock granted herein may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of by the Grantee prior to vesting.

(c) If the Grantee’s employment with the Company and its Subsidiaries is voluntarily or involuntarily terminated for any reason prior to vesting of the Stock granted

herein, the Company shall have the right, at the discretion of the Administrator, to repurchase such shares from the Grantee or the Grantee’s legal representative at their purchase price. The Company must exercise such right of repurchase or forfeiture by written notice to the Grantee or the Grantee’s legal representative not later than 60 days following such termination of employment.

3. Investment Representations. In connection with the purchase and sale of the shares of Restricted Stock contemplated herein, the Grantee hereby represents and warrants to the Company as follows:

(i) The Grantee is purchasing the Stock for tile Grantee’s own account for investment only, and not for resale or with a view to the distribution thereof.

(ii) The Grantee has had such an opportunity as lie or she has deemed adequate to obtain from tile Company such information as is necessary to permit him or her to evaluate the merits and risks of the Grantee’s investment in the Company and has consulted with the Grantee’s own advisers with respect to the Grantee’s investment in the Company.

(iv) The Grantee can afford a complete loss of the value of the Stock and is able to bear the economic risk of holding such Stock for an indefinite period.

(v) The Grantee understands that the Stock is not registered under the Securities Act of 1933, as amended (the “Act”) (it being understood that the Stock is being issued and sold in reliance oil the exemption provided in Rule 701 of the Act) or any applicable state securities or “blue sky” laws and may not be sold or otherwise transferred or disposed of in the absence of an effective registration statement under the Act and under any applicable state securities or “blue sky” laws (or exemptions from the registration requirements thereof). The Grantee further acknowledges that certificates representing tile Stock will bear restrictive legends reflecting the foregoing.


Vesting Date	Percentage of Shares Becoming Vested	Cumulative Percentage Vested
August 1, 2006	66.6%	66.6%
July 7, 2007	33.4%	100%

Subsequent to such Vesting Date or Dates, the shares of Stock on which all restrictions and conditions have lapsed shall no longer be deemed Restricted Stock. The Administrator may at any time accelerate the vesting schedule specified in this Paragraph 4, provided, however, that the restrictions and conditions in Paragraph 2 shall automatically lapse upon (i) the termination of the Grantee’s employment with the Company due to the Grantee’s death or Disability (as such term is defined in the Employment Agreement, dated June 4, 2004, between the Company and the Grantee, as such agreement may be amended from time to time (the “Employment Agreement”); (ii) the termination of the Grantee’s employment by the Company without Cause (as such term is defined in the Employment Agreement); (iii) the termination of the Grantee’s employment with the Company by the Grantee for Good Reason (as such term is defined in the Employment Agreement); and (iv) a Change in Control (as such term is defined in the Employment Agreement). In the event of the Grantee’s termination of employment with the Company (i) by the Grantee without Good Reason or (ii) by the Company for Cause, the Restricted Stock shall no longer vest and shall be forfeited.

5. Dividends. Dividends on the Stock shall be paid currently to the Grantee.

7. Transferability. This Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. None of the shares of Stock now owned or hereafter acquired shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of or encumbered, whether voluntarily or by operation of law, unless such transfer is in compliance with all applicable securities laws (including, without limitation, the Act), and such disposition is in accordance with the terms, conditions and limitations of the Company’s Amended and Restated Charter and such disposition does not cause the Company to become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. In connection with any transfer of Stock, the Company may require the transferor to provide at the Grantee’s own expense an opinion of counsel to the transferor, satisfactory to the Company, that such transfer is in compliance with all foreign, federal and state securities laws (including, without limitation, the Act). Any attempted disposition of Stock not in accordance with the terms and conditions of this Section 7 shall he null and void, and the Company shall not reflect on its records any change in record ownership of any shares of Stock as a result of any such disposition, shall otherwise refuse to recognize any such disposition and shall not in any way give effect to any such disposition of any shares of Stock. Certain but not all restrictions on transfer shall terminate upon the closing of the Company’s Initial Public Offering.

or in part, by (i) authorizing the Company to withhold from shares of Stock to be issued, or (ii) transferring to the Company, a number of shares of Stock with an aggregate Fair Market Value that would satisfy the withholding amount due.

9. Miscellaneous.

(b) This Agreement does not confer upon the Grantee any rights with respect to continuation of employment by the Company or any Subsidiary.


By:		/s/ Michael D. Schecter
Name:		Michael D. Schecter
Title:		General Counsel

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned.


Dated: March 18, 2005				/s/ William W. McCarten
				Grantee’s Signature

				Grantee’s name and address:

				William McCarten
				2008 Roundhouse Road
				Vienna, Virginia 22181

EXHIBIT 10.16

Exhibit 10.16

AMENDED AND RESTATED

RESTRICTED STOCK AWARD AGREEMENT

UNDER THE DIAMONDROCK HOSPITALITY COMPANY

2004 STOCK OPTION AND INCENTIVE PLAN

Name of Grantee: John Williams

No. of Shares: 210,000

Purchase Price per Share: $0.00

Grant Date: July 7, 2004

Final Acceptance Date: August 7, 2004

Amendment Date: March 18, 2005

1. Acceptance of Award. The Grantee shall have no rights with respect to this Award unless he or she shall have accepted this Award prior to the close of business on the Final Acceptance Date specified above by (i) making payment to the Company by certified or bank check or other instrument acceptable to the Administrator (as defined in Section 2 of the Plan) of the Purchase per Share, if any, times the number of shares to be accepted, and (ii) signing and delivering to the Company a copy of this Award Agreement. Upon acceptance of this Award by the Grantee, the shares of Stock underlying this Award shall be issued and delivered to, or otherwise registered in book entry in the name of, the Grantee, and the Grantee’s name shall be entered as the stockholder of record on the books of the Company. Thereupon, the Grantee shall have all the rights of a shareholder with respect to such shares of Stock, including voting and dividend rights, subject, however, to the restrictions and conditions specified in Paragraph 2 below.

2. Restrictions and Conditions.

(a) Any certificates evidencing the shares of Stock granted herein shall bear an appropriate legend, as determined by the Administrator in its sole discretion, to the effect that such shares are Subject to restrictions as set forth herein and in the Plan.

(b) Shares of Restricted Stock granted herein may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of by the Grantee prior to vesting.

(c) If the Grantee’s employment with the Company and its Subsidiaries is voluntarily or involuntarily terminated for any reason prior to vesting of the Stock granted

3. Investment Representations. In connection with the purchase and sale of the shares of Restricted Stock contemplated herein, the Grantee hereby represents and warrants to the Company as follows:

(i) The Grantee is purchasing the Stock for tile Grantee’s own account for investment only, and not for resale or with a view to the distribution thereof.

(iv) The Grantee can afford a complete loss of the value of the Stock and is able to bear the economic risk of holding such Stock for an indefinite period.

(v) The Grantee understands that the Stock is not registered under the Securities Act of 1933, as amended (the “Act”) (it being understood that the Stock is being issued and sold in reliance oil the exemption provided in Rule 701 of the Act) or any applicable state securities or “blue sky” laws and may not be sold or otherwise transferred or disposed of in the absence of an effective registration statement under the Act and under any applicable state securities or “blue sky” laws (or exemptions from the registration requirements thereof). The Grantee further acknowledges that certificates representing tile Stock will bear restrictive legends reflecting the foregoing.


Vesting Date	Percentage of Shares Becoming Vested	Cumulative Percentage Vested
August 1, 2006	66.6%	66.6%
July 7, 2007	33.4%	100%

5. Dividends. Dividends on the Stock shall be paid currently to the Grantee.

7. Transferability. This Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. None of the shares of Stock now owned or hereafter acquired shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of or encumbered, whether voluntarily or by operation of law, unless such transfer is in compliance with all applicable securities laws (including, without limitation, the Act), and such disposition is in accordance with the terms, conditions and limitations of the Company’s Amended and Restated Charter and such disposition does not cause the Company to become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. In connection with any transfer of Stock, the Company may require the transferor to provide at the Grantee’s own expense an opinion of counsel to the transferor, satisfactory to the Company, that such transfer is in compliance with all foreign, federal and state securities laws (including, without limitation, the Act). Any attempted disposition of Stock not in accordance with the terms and conditions of this Section 7 shall he null and void, and the Company shall not reflect on its records any change in record ownership of any shares of Stock as a result of any such disposition, shall otherwise refuse to recognize any such disposition and shall not in any way give effect to any such disposition of any shares of Stock. Certain but not all restrictions on transfer shall terminate upon the closing of the Company’s Initial Public Offering.

9. Miscellaneous.

(b) This Agreement does not confer upon the Grantee any rights with respect to continuation of employment by the Company or any Subsidiary.


By:		/s/ William W. McCarten
Name:		William McCarten
Title:		Chief Executive Officer

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned.


Dated: March 18, 2005				/s/ John Williams
				Grantee’s Signature

				Grantee’s name and address: John Williams 7013 Heather Hill Road Bethesda, Maryland 20817

EXHIBIT 10.17

Exhibit 10.17

AMENDED AND RESTATED

RESTRICTED STOCK AWARD AGREEMENT

UNDER THE DIAMONDROCK HOSPITALITY COMPANY

2004 STOCK OPTION AND INCENTIVE PLAN

Name of Grantee: Mark Brugger

No. of Shares: 165,000

Purchase Price per Share: $0.00

Grant Date: July 7, 2004

Final Acceptance Date: August 7, 2004

Amendment Date: March 18, 2005

1. Acceptance of Award. The Grantee shall have no rights with respect to this Award unless he or she shall have accepted this Award prior to the close of business on the Final Acceptance Date specified above by (i) making payment to the Company by certified or bank check or other instrument acceptable to the Administrator (as defined in Section 2 of the Plan) of the Purchase per Share, if any, times the number of shares to be accepted, and (ii) signing and delivering to the Company a copy of this Award Agreement. Upon acceptance of this Award by the Grantee, the shares of Stock underlying this Award shall be issued and delivered to, or otherwise registered in book entry in the name of, the Grantee, and the Grantee’s name shall be entered as the stockholder of record on the books of the Company. Thereupon, the Grantee shall have all the rights of a shareholder with respect to such shares of Stock, including voting and dividend rights, subject, however, to the restrictions and conditions specified in Paragraph 2 below.

2. Restrictions and Conditions.

(a) Any certificates evidencing the shares of Stock granted herein shall bear an appropriate legend, as determined by the Administrator in its sole discretion, to the effect that such shares are Subject to restrictions as set forth herein and in the Plan.

(b) Shares of Restricted Stock granted herein may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of by the Grantee prior to vesting.

(c) If the Grantee’s employment with the Company and its Subsidiaries is voluntarily or involuntarily terminated for any reason prior to vesting of the Stock granted

3. Investment Representations. In connection with the purchase and sale of the shares of Restricted Stock contemplated herein, the Grantee hereby represents and warrants to the Company as follows:

(i) The Grantee is purchasing the Stock for tile Grantee’s own account for investment only, and not for resale or with a view to the distribution thereof.

(iv) The Grantee can afford a complete loss of the value of the Stock and is able to bear the economic risk of holding such Stock for an indefinite period.

(v) The Grantee understands that the Stock is not registered under the Securities Act of 1933, as amended (the “Act”) (it being understood that the Stock is being issued and sold in reliance oil the exemption provided in Rule 701 of the Act) or any applicable state securities or “blue sky” laws and may not be sold or otherwise transferred or disposed of in the absence of an effective registration statement under the Act and under any applicable state securities or “blue sky” laws (or exemptions from the registration requirements thereof). The Grantee further acknowledges that certificates representing tile Stock will bear restrictive legends reflecting the foregoing.


Vesting Date	Percentage of Shares Becoming Vested	Cumulative Percentage Vested
August 1, 2006	66.6%	66.6%
July 7, 2007	33.4%	100%

5. Dividends. Dividends on the Stock shall be paid currently to the Grantee.

7. Transferability. This Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. None of the shares of Stock now owned or hereafter acquired shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of or encumbered, whether voluntarily or by operation of law, unless such transfer is in compliance with all applicable securities laws (including, without limitation, the Act), and such disposition is in accordance with the terms, conditions and limitations of the Company’s Amended and Restated Charter and such disposition does not cause the Company to become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. In connection with any transfer of Stock, the Company may require the transferor to provide at the Grantee’s own expense an opinion of counsel to the transferor, satisfactory to the Company, that such transfer is in compliance with all foreign, federal and state securities laws (including, without limitation, the Act). Any attempted disposition of Stock not in accordance with the terms and conditions of this Section 7 shall he null and void, and the Company shall not reflect on its records any change in record ownership of any shares of Stock as a result of any such disposition, shall otherwise refuse to recognize any such disposition and shall not in any way give effect to any such disposition of any shares of Stock. Certain but not all restrictions on transfer shall terminate upon the closing of the Company’s Initial Public Offering.

9. Miscellaneous.

(b) This Agreement does not confer upon the Grantee any rights with respect to continuation of employment by the Company or any Subsidiary.


By:		/s/ William W. McCarten
Name:		William McCarten
Title:		Chief Executive Officer

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned.


Dated: March 18, 2005				/s/ Mark W. Brugger
				Grantee’s Signature

				Grantee’s name and address: Mark Brugger 10813 Hob Nail Court Potomac, Maryland 20854

EXHIBIT 10.18

Exhibit 10.18

AMENDED AND RESTATED

RESTRICTED STOCK AWARD AGREEMENT

UNDER THE DIAMONDROCK HOSPITALITY COMPANY

2004 STOCK OPTION AND INCENTIVE PLAN

Name of Grantee: Michael Schecter

No. of Shares: 75,000

Purchase Price per Share: $0.00

Grant Date: July 7, 2004

Final Acceptance Date: August 7, 2004

Amendment Date: March 18, 2005

1. Acceptance of Award. The Grantee shall have no rights with respect to this Award unless he or she shall have accepted this Award prior to the close of business on the Final Acceptance Date specified above by (i) making payment to the Company by certified or bank check or other instrument acceptable to the Administrator (as defined in Section 2 of the Plan) of the Purchase per Share, if any, times the number of shares to be accepted, and (ii) signing and delivering to the Company a copy of this Award Agreement. Upon acceptance of this Award by the Grantee, the shares of Stock underlying this Award shall be issued and delivered to, or otherwise registered in book entry in the name of, the Grantee, and the Grantee’s name shall be entered as the stockholder of record on the books of the Company. Thereupon, the Grantee shall have all the rights of a shareholder with respect to such shares of Stock, including voting and dividend rights, subject, however, to the restrictions and conditions specified in Paragraph 2 below.

2. Restrictions and Conditions.

(a) Any certificates evidencing the shares of Stock granted herein shall bear an appropriate legend, as determined by the Administrator in its sole discretion, to the effect that such shares are Subject to restrictions as set forth herein and in the Plan.

(b) Shares of Restricted Stock granted herein may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of by the Grantee prior to vesting.

(c) If the Grantee’s employment with the Company and its Subsidiaries is voluntarily or involuntarily terminated for any reason prior to vesting of the Stock granted

3. Investment Representations. In connection with the purchase and sale of the shares of Restricted Stock contemplated herein, the Grantee hereby represents and warrants to the Company as follows:

(i) The Grantee is purchasing the Stock for tile Grantee’s own account for investment only, and not for resale or with a view to the distribution thereof.

(iv) The Grantee can afford a complete loss of the value of the Stock and is able to bear the economic risk of holding such Stock for an indefinite period.

(v) The Grantee understands that the Stock is not registered under the Securities Act of 1933, as amended (the “Act”) (it being understood that the Stock is being issued and sold in reliance oil the exemption provided in Rule 701 of the Act) or any applicable state securities or “blue sky” laws and may not be sold or otherwise transferred or disposed of in the absence of an effective registration statement under the Act and under any applicable state securities or “blue sky” laws (or exemptions from the registration requirements thereof). The Grantee further acknowledges that certificates representing tile Stock will bear restrictive legends reflecting the foregoing.


Vesting Date	Percentage of Shares Becoming Vested	Cumulative Percentage Vested
August 1, 2006	66.6%	66.6%
July 7, 2007	33.4%	100%

5. Dividends. Dividends on the Stock shall be paid currently to the Grantee.

7. Transferability. This Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. None of the shares of Stock now owned or hereafter acquired shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of or encumbered, whether voluntarily or by operation of law, unless such transfer is in compliance with all applicable securities laws (including, without limitation, the Act), and such disposition is in accordance with the terms, conditions and limitations of the Company’s Amended and Restated Charter and such disposition does not cause the Company to become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. In connection with any transfer of Stock, the Company may require the transferor to provide at the Grantee’s own expense an opinion of counsel to the transferor, satisfactory to the Company, that such transfer is in compliance with all foreign, federal and state securities laws (including, without limitation, the Act). Any attempted disposition of Stock not in accordance with the terms and conditions of this Section 7 shall he null and void, and the Company shall not reflect on its records any change in record ownership of any shares of Stock as a result of any such disposition, shall otherwise refuse to recognize any such disposition and shall not in any way give effect to any such disposition of any shares of Stock. Certain but not all restrictions on transfer shall terminate upon the closing of the Company’s Initial Public Offering.

9. Miscellaneous.

(b) This Agreement does not confer upon the Grantee any rights with respect to continuation of employment by the Company or any Subsidiary.


By:		/s/ William W. McCarten
Name:		William McCarten
Title:		Chief Executive Officer

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned.


Dated: March 18, 2005				/s/ Michael D. Schecter
				Grantee’s Signature

				Grantee’s name and address: Michael Schecter 920 Independence Ave., SE Washington, DC 20003

EXHIBIT 10.19

Exhibit 10.19

AMENDED AND RESTATED

RESTRICTED STOCK AWARD AGREEMENT

UNDER THE DIAMONDROCK HOSPITALITY COMPANY

2004 STOCK OPTION AND INCENTIVE PLAN

Name of Grantee: Sean M. Mahoney

No. of Shares: 15,000

Purchase Price per Share: $0.00

Grant Date: July 14, 2004

Final Acceptance Date: August 14, 2004

Amendment Date: March 18, 2005

1. Acceptance of Award. The Grantee shall have no rights with respect to this Award unless he or she shall have accepted this Award prior to the close of business on the Final Acceptance Date specified above by (i) making payment to the Company by certified or bank check or other instrument acceptable to the Administrator (as defined in Section 2 of the Plan) of the Purchase per Share, if any, times the number of shares to be accepted, and (ii) signing and delivering to the Company a copy of this Award Agreement. Upon acceptance of this Award by the Grantee, the shares of Stock underlying this Award shall be issued and delivered to, or otherwise registered in book entry in the name of, the Grantee, and the Grantee’s name shall be entered as the stockholder of record on the books of the Company. Thereupon, the Grantee shall have all the rights of a shareholder with respect to such shares of Stock, including voting and dividend rights, subject, however, to the restrictions and conditions specified in Paragraph 2 below.

2. Restrictions and Conditions.

(a) Any certificates evidencing the shares of Stock granted herein shall bear an appropriate legend, as determined by the Administrator in its sole discretion, to the effect that such shares are Subject to restrictions as set forth herein and in the Plan.

(b) Shares of Restricted Stock granted herein may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of by the Grantee prior to vesting.

(c) If the Grantee’s employment with the Company and its Subsidiaries is voluntarily or involuntarily terminated for any reason prior to vesting of the Stock granted

3. Investment Representations. In connection with the purchase and sale of the shares of Restricted Stock contemplated herein, the Grantee hereby represents and warrants to the Company as follows:

(i) The Grantee is purchasing the Stock for tile Grantee’s own account for investment only, and not for resale or with a view to the distribution thereof.

(iv) The Grantee can afford a complete loss of the value of the Stock and is able to bear the economic risk of holding such Stock for an indefinite period.

(v) The Grantee understands that the Stock is not registered under the Securities Act of 1933, as amended (the “Act”) (it being understood that the Stock is being issued and sold in reliance oil the exemption provided in Rule 701 of the Act) or any applicable state securities or “blue sky” laws and may not be sold or otherwise transferred or disposed of in the absence of an effective registration statement under the Act and under any applicable state securities or “blue sky” laws (or exemptions from the registration requirements thereof). The Grantee further acknowledges that certificates representing tile Stock will bear restrictive legends reflecting the foregoing.


Vesting Date	Percentage of Shares Becoming Vested	Cumulative Percentage Vested
August 1, 2006	66.6%	66.6%
July 7, 2007	33.4%	100%

5. Dividends. Dividends on the Stock shall be paid currently to the Grantee.

7. Transferability. This Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. None of the shares of Stock now owned or hereafter acquired shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of or encumbered, whether voluntarily or by operation of law, unless such transfer is in compliance with all applicable securities laws (including, without limitation, the Act), and such disposition is in accordance with the terms, conditions and limitations of the Company’s Amended and Restated Charter and such disposition does not cause the Company to become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. In connection with any transfer of Stock, the Company may require the transferor to provide at the Grantee’s own expense an opinion of counsel to the transferor, satisfactory to the Company, that such transfer is in compliance with all foreign, federal and state securities laws (including, without limitation, the Act). Any attempted disposition of Stock not in accordance with the terms and conditions of this Section 7 shall he null and void, and the Company shall not reflect on its records any change in record ownership of any shares of Stock as a result of any such disposition, shall otherwise refuse to recognize any such disposition and shall not in any way give effect to any such disposition of any shares of Stock. Certain but not all restrictions on transfer shall terminate upon the closing of the Company’s Initial Public Offering.

9. Miscellaneous.

(b) This Agreement does not confer upon the Grantee any rights with respect to continuation of employment by the Company or any Subsidiary.


By:		/s/ Michael D. Schecter
Name:		Michael D. Schecter
Title:		General Counsel

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned.


Dated: March 18, 2005				/s/ Sean M. Mahoney
				Grantee’s Signature

				Grantee’s name and address: Sean M. Mahoney 3170 Kincross Circle Oak Hill, VA 20171

EXHIBIT 23.2

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

The Board of Directors

DiamondRock Hospitality Company:

We consent to the use of our report dated February 21, 2005, with respect to the consolidated financial statements and schedule of DiamondRock Hospitality Company and subsidiaries (the Company) as of December 31, 2004, and for the period from May 6, 2004 to December 31, 2004; to the use of our report dated January 5, 2005, with respect to the financial statements of Sonoma LLC as of October 8, 2004 and January 2, 2004, and for the periods from April 23, 2004 to October 8, 2004 and from January 3, 2004 to April 23, 2004, and the fiscal years ended January 2, 2004 and January 3, 2003; to the use of our report dated November 19, 2004, with respect to the financial statements of Courtyard by Marriott Midtown East as of October 8, 2004 and January 2, 2004, and for the period from January 3, 2004 to October 8, 2004 and fiscal years ended January 2, 2004 and January 3, 2003; to the use of our report dated December 15, 2004, with respect to the financial statements of Rock Spring Park Hotel Limited Partnership as of October 8, 2004 and January 2, 2004, and for the period from January 3, 2004 to October 8, 2004 and fiscal years ended January 2, 2004 and January 3, 2003; to the use of our report dated January 5, 2005, with respect to the financial statements of Marriott Salt Lake City Downtown as of October 8, 2004 and January 2, 2004, and for the period from January 3, 2004 to October 8, 2004 and fiscal years ended January 2, 2004 and January 3, 2003; to the use of our report dated January 5, 2005, with respect to the financial statements of Torrance Marriott as of October 8, 2004 and January 2, 2004, and for the period from January 3, 2004 to October 8, 2004 and fiscal years ended January 2, 2004 and January 3, 2003; to the use of our report dated January 17, 2005, with respect to the financial statements of Fifth Avenue Associates LLC as of September 30, 2004 and December 31, 2003, and for the period from January 1, 2004 to September 30, 2004 and years ended December 31, 2003 and 2002; to the use of our report dated January 31, 2005, with respect to the financial statements of Marriott Griffin Gate Resort for the period from January 4, 2003 to June 25, 2003 and the fiscal year ended January 3, 2003 and to the use of our report dated January 31, 2005, with respect to the financial statements for MI Griffin Gate Hotel, LLC for the periods from January 3, 2004 to October 8, 2004 and from June 26, 2004 to January 2, 2004, included herein and to the references to our firm under the headings “Summary Selected Financial and Operating Data”, “Selected Financial and Operating Data”, “Unaudited Pro Forma Financial Information” and “Experts” in the prospectus.

/s/ KPMG LLP

McLean, VA

March 31, 2005

EXHIBIT 99.1

EXHIBIT 99.1

CONSENT OF SMITH TRAVEL RESEARCH

We hereby consent to the use of the name of our firm in any Registration Statement on Form S-11 and related prospectus, and any amendments thereto (collectively, the “Registration Statements”), of DiamondRock Hospitality Company for the registration of its initial public offering of its common shares of beneficial interest and the registration of certain of its common shares of beneficial interest held by certain selling shareholders, and the inclusion of market data collected and/or prepared by our firm with respect to our market study for the U.S. lodging industry wherever appearing in the Registration Statements, including but not limited to the references to our firm under the headings “Summary—Hotel Industry Outlook,” “Market Data,” “Our Business—Our Investment Sourcing Relationship with Marriott” and “Hotel Industry Outlook.”


Dated January 27, 2005	SMITH TRAVEL RESEARCH

	By:	/s/ Mark V. Lomanno
		Name: Mark V. Lomanno
		Title: President

RESPONSE LETTER

March 31, 2005

VIA EDGAR AND VIA HAND DELIVERY

Elaine Wolff, Special Counsel

Michael McTiernan, Attorney-Advisor

Division of Corporation Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, DC 20549

Re:	DiamondRock Hospitality Company

Registration Statement on Form S-11 Filed March 1, 2005

Registration No. 333-12305

Dear Ms. Wolff and Mr. McTiernan:

This letter is submitted on behalf of DiamondRock Hospitality Company (the “Company”) in response to comments of the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) with respect to the Company’s Registration Statement on Form S-11 filed with the Commission on March 1, 2005 (the “Registration Statement”), as set forth in your letter, dated March 23, 2005 (the “Comment Letter”), to Mr. William McCarten, Chairman of the Board and Chief Executive Officer of the Company. The Company is concurrently filing Amendment No. 1 to the Registration Statement (“Amendment No. 1”), which includes changes to principally reflect responses to the Staff’s comments. The responses in this letter are based on representations made by the Company to Goodwin Procter LLP for the purpose of preparing this letter. The Company will separately deliver copies of Amendment No. 1, marked to show changes responsive to the Comment Letter, to members of the Staff specified in the Comment Letter.

For reference purposes, the text of the Comment Letter has been reproduced herein with responses below each numbered comment. Unless otherwise indicated, page references in the descriptions of the Staff’s comments refer to the Registration Statement and page references in the responses refer to Amendment No. 1.

General

We note that you have disclosed that certain net proceeds will be used to repay existing indebtedness, purchase and renovate your acquisition properties and renovate your initial properties. Please note that if a significant amount of the net proceeds are not allocated to specific uses, your offering may constitute a “blind-pool program.” Accordingly, in such

Securities and Exchange Commission

Page 2

event, you will be required to provide information substantially similar to the disclosures that would be required under Industry Guide 5, including, among other things, cover page risk factor disclosure, tabular use of proceeds disclosure and prior performance information. See Securities Act Release 33-6900.

Response: In response to the Staff’s comments, the Company hereby confirms its understanding that if a significant amount of the net proceeds of the Company’s offering are not allocated to specific uses, the Company’s offering may constitute a “blind-pool” program. As discussed with the Staff, the Company believes that a significant portion of the net proceeds will be allocated to specific uses and will provide such disclosure in a subsequent pre-effective amendment to the Registration Statement. In support of its belief, the Company advises the Staff that subsequent to the initial filing of the Registration Statement, it has placed five hotel properties under non-binding letters of intent with an aggregate acquisition cost of approximately $377 million. The Company expects to place a significant portion of such properties under contract so as to become probable acquisitions which will be reflected in subsequent pre-effective amendments to the Registration Statement. The Company has revised the Registration Statement to disclose the aggregate acquisition cost of the properties currently under letters of intent on pages 24 and 82 of Amendment No. 1.

2.	Supplementally, please provide us with any pictures, graphics or artwork that will be used in the prospectus.

Response: In response to the Staff’s comment, the Company hereby advises the Staff that it is in the process of selecting the pictures, graphics and/or artwork that will be used in the prospectus. Once these materials are selected, the Company will supplementally provide these materials to the Staff.

Throughout the prospectus you reference and rely on certain demographic and market data. If the demographic and market data upon which you rely has been widely disseminated in non-subscription publications or publications of general circulation like newspapers and magazine, please provide us with copies of the relevant portions of the publications that include the information consistent with the statements in the prospectus. These materials should be appropriately marked and dated and should refer to the page number on which they are cited. Alternatively, if such information is only available to customers or subscribers of the provider, please file a consent from the provider for the use of its name and the information attributed to it and name the provider as an expert in the prospectus.

Response: In response to the Staff’s comments, the Company has filed the consent of Smith Travel Research (“STR”) as Exhibit 99.1. However, the Company respectfully submits that it does not consider Smith Travel Research to be a “named expert” of the type referred to in Section 7(a) of the Securities Act of 1933, as amended (the “Securities Act”) nor to be an “expert” within the meaning of Section 11(b) of the Securities Act or Rule 436. Promptly after the date hereof, the Company will supplementally provide to the Staff copies of the relevant portions of the STR materials that include the data referenced in the Registration Statement.

Securities and Exchange Commission

Page 3

Prospectus Cover Page

4.	We note the disclosure regarding your intention to apply to list the shares on the NYSE. Please refer to the note to Item 202 of Regulation S-K and advise or revise.

Response: In response to the Staff’s comments, the Company hereby advises the Staff that it has received a letter from the NYSE stating that, based upon the NYSE’s review of the Company’s eligibility materials, the NYSE’s Listing and Compliance Committee has cleared the Company to file an Original Listing Application. Based upon a review of the eligibility criteria for listing on the NYSE and the clearance to file an Original Listing Application from the NYSE’s Listing and Compliance Committee, the Company believes that it has reasonable assurance that the common stock being offered by the Company will be acceptable to the NYSE for listing. The Company will file a draft Original Listing Application with the NYSE promptly after the filing of Amendment No. 1. Upon clearance of the draft Original Listing Application by the NYSE and prior to the printing of the preliminary prospectus, the Company will revise the referenced text to read as follows: “Our common stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the Symbol ‘DRH’.”

Prospectus Summary, page 1

We note your statement in the italicized introductory paragraph that “References to “upper upscale,” “upscale,” “full service” and “limited service” are to hotels classified in those categories by Smith Travel Research, Inc.” Please revise the forepart of the summary, in the non-italicized portion, to describe the criteria used to classify hotels in such categories.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 10 of Amendment No. 1.

Please revise the third paragraph to balance your disclosure regarding your sourcing relationship with Marriott with disclosure that other than precluding an agreement with another party to receive investment sourcing information, you have not entered into a binding agreement or commitment setting forth the terms of this sourcing relationship and such relationship may be modified or terminated at any time by either party.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 1 of Amendment No. 1.

Our Competitive Strengths, page 1

7.	Please revise here and on page 61 to disaggregate the years of experience of management.

Response: In response to the Staff’s comments, the Company has deleted the reference to the aggregate years of experience of management and has revised the disclosure on pages 2 and 63 of Amendment No. 1.

Securities and Exchange Commission

Page 4

8.	Please provide supplemental support for your statement that Marriott has provided you more than $1.9 billion of off-market acquisition opportunities.

Response: In response to the Staff’s comments, the Company is hereby providing the Staff, under separate cover, with materials supporting the Company’s statement that Marriott has provided the Company with more than $1.9 billion of off-market acquisition opportunities. These materials are being provided to the Staff on a confidential basis pursuant to Rule 418 under the Securities Act. In accordance with such rule, the Company hereby requests that these materials be returned promptly following completion of the Staff’s review of Amendment No. 1. By separate letter, the Company has requested confidential treatment of these materials pursuant to the provisions of 17 C.F.R. Section 200.83.

9.	Please relocate the summary risk factors so that they appear immediately after the discussion of your competitive strengths.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to relocate the summary risk factors so that they appear immediately after the discussion of the Company’s competitive strengths.

Our Acquisition Properties, page 7

10.

As acquisitions become probable, include their financial statements as required by Rule 3-05 of Regulation S-X and expand the pro forma financial statements to include their effects.

Response: In response to the Staff’s comments, the Company will include, upon acquisitions becoming probable, the financial statements relating to such probable acquisitions and expand the pro forma financial statements to include their effects.

Risk Factors, page 7

11.

Please conform the summary risk factors to changes made in response to our comments to the Risk Factor section.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to conform the summary risk factors to the changes made in response to the Staff’s comments to the Risk Factor section.

Securities and Exchange Commission

Page 5

Restrictions on Ownership of Our Stock, page 11

12.

The definition of “person” in your charter appears to be more restrictive than the requirements of the 5-50 rule as provided in the Code. Consequently, please revise your disclosure that your charter limitations are “due to” the limitations imposed by the Code.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement on page 11 of Amendment No. 1 to clarify that the Company’s charter limitations are not “due to” the limitations imposed by the Code.

Risk Factors, page 18

13.

We note your statement in the introductory paragraph that “additional risks not identified below may materially and adversely affect our business.” Please revise your disclosure to omit the reference to additional risks that are not described in the prospectus. You must disclose all known material risks.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to omit the referenced disclosure.

14.

Some of your risk factors fail to specifically state the risk created by the referenced facts and circumstances. For example:

•

We cannot assure you that we will qualify, or remain qualified, as a REIT, page 18;

•

We place significant reliance on technology, page 28; and

•

Plans should consider ERISA risks of investing in our common stock, page 33.

Please review and revise each of your risk factors to state the specific risk that will result from the facts you describe.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to specifically state the risk for the referenced risk factors.

15.

We note your statement on page 41 that you may retain accumulated earnings of your TRS lessees in those subsidiaries. Please revise to provide disclosure regarding the risk that your decision to retain accumulated earnings in the TRS subsidiaries will cause those amounts to be excluded from the 90% of REIT taxable income that is required to be distributed to shareholders. Additionally, please make conforming disclosure on page 41.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to modify the risk factor under the heading “Our failure to qualify as a REIT under the federal tax laws will result in adverse tax consequences—Failure to make required distributions would subject us to tax” on page 31 of Amendment No. 1 to provide the referenced disclosure. The Company has also made conforming revisions on page 42 of Amendment No. 1.

Securities and Exchange Commission

Page 6

We were formed in May 2004 and commenced operations in July 2004 and have a limited operating history. Our management has no prior experience operating a REIT and limited experience operating a public company and therefore may have difficulty in successfully and profitably operating our business, page 18.

16.

This risk factor discusses multiple risks and should be separated into distinct risks presented under separate captions. Your lack of an operating history makes it difficult for an investor to evaluate your historical performance. Management’s lack of experience operating a REIT and a public company creates risks regarding your ability to execute your business plan.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement by separating the referenced risk factors on page 17 to provide the referenced disclosure under separate captions in Amendment No. 1.

Marriott may encourage us to enter into transactions or hotel management agreements that are not in our best interests, page 20.

17.

Please expand your discussion of this risk to explain why you might agree to enter into transactions or agreements that are not in your best interest.

Response: In response to the Staff’s comment, the Company has revised the Registration Statement to clarify this risk factor on page 19 of Amendment No. 1.

Our results of operations are highly dependent on the management of our hotel properties by third-party hotel management companies, page 21

18.

Please revise to disclose that the management agreements are generally non-terminable.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 20 of Amendment No. 1.

19.

We note your statement that in the event you need to replace any of your management companies, you may be required by the terms of the management agreements to pay substantial termination fees. Please tell us where you have included disclosure that quantifies the substantial termination fees or revise to include it.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement on page 20 of Amendment No. 1 to clarify its disclosure with respect to its hotel management agreements by deleting any reference to termination fees because the Company’s hotel management agreements do not contain termination fee provisions.

We will be subject to certain contractual obligations and covenants that may affect the value of our properties, page 21

Securities and Exchange Commission

Page 7

20.

Please revise to include each of the three risks discussed under separately captioned risk factor headings.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement by separating the referenced risk factor into three separately captioned risk factors on pages 20-21 of Amendment No. 1.

21.

Please revise to quantify your outstanding debt and the percentage of your aggregate property investment and repositioning costs that this represents assuming the application of the net proceeds from this offering to repay outstanding mortgage debt and the acquisition of the hotel properties under contract.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 22 of Amendment No. 1. The Company will provide the specific figures in a subsequent pre-effective amendment to the Registration Statement.

22.

We note your statement that you are currently negotiating with a number of financial institutions to obtain a secured line of credit. Please supplementally tell us the status of any negotiations.

Response: In response to the Staff’s comments, the Company hereby informs the Staff that the Company remains in negotiations with various financial institutions with respect to the revolving credit facility. The material terms of the revolving credit facility have not yet been determined. The Company will disclose in a subsequent pre-effective amendment to the Registration Statement, upon execution of a commitment letter or term sheet, the material terms of a pending credit facility.

Provisions of our charter may limit the ability of a third party to acquire control of our company, page 33.

23.

Please include in your discussion references to the ability of your board of directors to amend the charter to increase your authorized share amount and the advance notice provisions of your bylaws.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure in the Risk Factor section under the heading “Provisions of our charter may limit the ability of a third party to acquire control of our company” on page 33 of Amendment No. 1 and also added a new risk factor under the heading

Securities and Exchange Commission

Page 8

“Certain advance notice provisions of our bylaws may limit the ability of a third party to acquire control of our company” on page 33 of Amendment No. 1.

Use of Proceeds, page 40

24.

Please modify your disclosure to identify each business to be acquired from the proceeds of this offering. In addition, to the extent you require additional funds through mortgage debt or other borrowings to complete these acquisitions, state the amount and sources of such funds for each of the acquisitions. Refer to Item 504 of Regulation S-K.

Response: In response to the Staff’s comments, the Company hereby informs the Staff that it currently has five properties, with an aggregate acquisition cost of $377 million, under non-binding letters of intent. At this time, the Company does not consider these acquisitions probable. Once these acquisitions become probable, the Company will identify each business to be acquired from the net proceeds of this offering and state the amount and sources of such funds for each of the acquisitions (to the extent the Company requires additional funds to complete these acquisitions) in a subsequent pre-effective amendment to the Registration Statement.

25.

Please revise the disclosure to clarify when the net proceeds will be used to repay indebtedness as described. For example, it may not be clear to an investor whether the “prepayable without penalty” dates referenced are the dates on which the operating partnership intends to repay the debt or the dates when it may repay the debt without penalty.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to clarify the referenced disclosure on page 40 of Amendment No 1.

26.

The maturity dates cited for The Lodge at Sonoma and Courtyard Manhattan indebtedness are inconsistent with the table on page 53.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement on page 40 of Amendment No. 1 so that the referenced maturity dates are consistent with the table on page 53.

27.

With respect to the net proceeds to be used for renovations of your acquisition properties and initial properties, please identify the amounts that have already been contributed to escrow accounts for these purposes.

Response: In response to the Staff’s comments, the Company hereby informs the Staff that with respect to the net proceeds to be used for renovations of the Company’s acquisition properties, the Company has not contributed any amounts for such renovations into escrow accounts.

Dividend Policy and Distributions, page 41

28.

Please disclose whether or not you have declared or paid any dividends. Refer to Item 201 of Regulation S-K.

Securities and Exchange Commission

Page 9

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 41 of Amendment No. 1. In addition, the Company has added disclosure on page 41 of Amendment No. 1 regarding the proposed payment of dividends to its stockholders beginning in the third quarter of 2005. In addition, the Company has included in Amendment No. 1 a table that sets forth calculations relating to intended initial distributions based on the Company’s pro forma financial data, including cash available for distributions.

29.

Please disclose that you expect to generally distribute all non-REIT earnings during 2005 in addition to satisfying the REIT distribution requirements and that in your first taxable year ended December 31, 2004, you had approximately $2.3 million of non-REIT earnings and profits.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 41 of Amendment No. 1.

30.

Please revise to state that your cash available for distributions may be less than 90% of your REIT taxable income, which could require you to sell assets or borrow funds in order to make distributions.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 42 of Amendment No. 1.

31.

We note your disclosure that your ability to make distributions to your stockholders will depend, in part, upon your receipt of distributions from your operating partnership, which will depend upon receipt of lease payments from TRS. Please revise your disclosure to indicate whether or not there are any restrictions on the ability of your TRS to make distributions to you.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement on page 41 of Amendment No. 1 to indicate that there are no restrictions on the ability of the Company’s TRS to make distributions to the Company.

Capitalization, page 42

32.

Please clarify whether the adjustments will include any debt incurred with respect to the probable acquisitions.

Response: In response to the Staff’s comments, the Company advises the Staff that the pro forma adjustments will include in a subsequent pre-effective amendment to the Registration Statement any debt incurred with respect to probable acquisitions.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 48

Securities and Exchange Commission

Page 10

Overview, page 48

33.

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section should present an analysis of the company’s business as seen through the eyes of management, including known trends, demands and commitments that may impact future financial condition or operating performance. Please expand your introductory disclosure to provide an analysis of these issues and other items which management believes may have a material impact on your future financial condition or operating performance. For example, please consider discussing industry-wide factors used by management, insight into material opportunities, challenges and risks over both the short and long-term, competitive conditions and any other material trends. For additional guidance, refer to Item 303 of Regulation S-K and Commission Release No. 33-8350 (Dec. 19, 2003)

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on pages 50-51 of Amendment No. 1.

Results of Operations, page 50

34.

We note from your disclosure on page 51 that “hotel operating expenses during the period include $8,371,609 of non-cash ground rent expense”. Please advise us where this is included in your statement of operations on page F-13. If you are referring to your pro forma statements of operations for the year ended December 31, 2004, please revise your disclosure to clarify.

Response: The Company notes that the $8,371,609 consists of $7,180,412 of non-cash ground rent expense and $1,191,197 of annual contractual ground rent. Accordingly, the adjustment included in hotel operating expenses on page 51 represents the pro forma ground rent expense for the year ended December 31, 2004. The disclosure on page 53 of Amendment No. 1 has been revised to reflect this clarification.

Liquidity and Capital Resources, page 52

35.

Please modify your disclosure to include the amounts or ranges involved in connection with your anticipated secured revolving credit facility.

36.

Upon execution of a commitment letter or term sheet with respect to your pending credit facility, please disclose the material covenants.

Securities and Exchange Commission

Page 11

Response: In response to the Staff’s comments, the Company will disclose in a subsequent pre-effective amendment to the Registration Statement, upon execution of a commitment letter or term sheet, the material covenants under a pending credit facility.

Outstanding Debt, page 53

37.

We note your disclosure regarding the prepayment penalties on the Bethesda Marriott debt. Please provide similar disclosure for the Salt Lake City Marriott and Marriott Griffin Gate debt.

Response: In response to the Staff’s comments, the Company has revised the footnotes of the tables on pages 55-56 and 81 of Amendment No. 1 to provide the referenced disclosure.

Hotel Industry, page 57

38.

Please supplementally advise us why you have not provided industry data specific to the chain segments you intend to target.

Response: In response to the Staff’s comments, the Company informs the Staff that it has requested from STR industry data specific to the upper upscale and upscale chain segments. Upon receipt of this data, the Company will evaluate such data and determine whether it should be included in a subsequent pre-effective amendment to the Registration Statement. If the Company determines that inclusion of such data would not contribute to an investor’s understanding of the hotel industry and/or an investor’s understanding of the Company’s investment strategies and objectives, the Company will supplementally advise the Staff of its determination and the specific reasons for such determination.

Our Business, page 61

39.

Please provide disclosure regarding the composition of the different hotel chain segments.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 67 of Amendment No. 1.

40.

Please define “key money.” Please include disclosure on the circumstances, if any, under which you would have to reimburse key money payments. Please provide similar disclosure regarding monetary “contributions” by Marriott for furniture or other items.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 64 of Amendment No. 1.

41.

Please provide the disclosure regarding promoters required by Item 11 of Form S-11, including the names of the promoters and the positions and offices with the registrant now held or intended to be held by each such promoter.

Securities and Exchange Commission

Page 12

Response: In response to the Staff’s comments, the Company respectfully informs the Staff that no promoters were involved with the organization of the Company.

Our Competitive Strengths, page 61

42.

In your discussion of the off-market opportunities provided by Marriott and Marriott’s facilitation of the acquisition of four of your initial seven properties, please disclose the number of properties purchased directly from Marriott.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 64 of Amendment No. 1.

43.

Please revise to further explain how you calculated the RevPAR premium indices. Please disclose a representative sample of the hotels in the competitive set.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to explain the calculation of the RevPAR premium indices on page 65 of Amendment No. 1. The Company hereby informs the Staff that it will supplementally provide the Staff, promptly after the date hereof, with a chart of the competitive set for each of its hotels.

44.

In the discussion of your “proven acquisition capability,” please disclose the source of the investment opportunity and the type of seller in each of your seven property acquisitions.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 66 of Amendment No. 1.

Insurance, page 66

45.

Please disclose whether you maintain terrorism insurance.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 69 of Amendment No. 1, and as applicable, throughout Amendment No. 1 to disclose that the Company maintains terrorism insurance.

Our Properties, page 67

46.

Please modify your summary table on page 67 and 68 to include the effective dates you acquired each of these properties.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on pages 70 and 71 of Amendment No. 1.

47.

We note your reference to net operating income for Torrance Marriott and Courtyard Manhattan/Fifth Avenue. Please remove any reference to net operating income since this is a non-GAAP measure that is not reconcilable to a GAAP measure.

Securities and Exchange Commission

Page 13

Response: In response to the Staff’s comments, the Company has deleted all references to net operating income in Amendment No. 1.

48.

We note that you assumed ground leases associated with your acquisition of Salt Lake City Marriott Downtown, Marriott Griffin Gate Resort, Bethesda Marriott Suites and Courtyard Manhattan/Fifth Avenue. Since this represents a material obligation to you, please expand your disclosure to include the relevant terms of your lease agreements, including details on any favorable buy-out options, and future maturities of your lease obligation with respect to each property.

Response: In response to the comments, the Company has revised the Registration Statement to provide the referenced disclosure on pages 74, 75 and 91 of Amendment No. 1.

49.

Please describe the competitive conditions for each of your properties. We note you have listed the competitor hotels. Refer to Item 14(e) of Form S-11.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on pages 72, 74, 75, 77, 78, 79 and 80 of Amendment No. 1.

50.

Please provide the information required by Item 15(h) of Form S-11 with respect to your individually significant properties.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 82 of Amendment No. 1.

51.

Please provide supplemental support for your statement regarding hotel room supply growth in Los Angeles.

Response: In response to the Staff’s comments, the Company is supplementally providing in Annex C support for its statement regarding hotel room supply growth in Los Angeles.

52.

Please clarify your statement that Marriott key money assisted your bid to purchase the Torrance Marriott and Salt Lake City Marriott from Host Marriott. It may not be clear to an investor how payments by Marriott improved your bid to purchase hotels from Marriott.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 73 of Amendment No. 1.

53.

Please disclose the purpose for the renovation program at the Marriott Griffin Gate.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 76 of Amendment No. 1.

Securities and Exchange Commission

Page 14

Mortgage Debt, page 78

54.

Please conform this table to changes made to the table on page 53.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to conform the mortgage debt table on page 81 of Amendment No. 1 to changes made to the table on page 55 of Amendment No. 1.

Our Acquisition Properties, page 79

55.

In addition to the information proposed to be included in the tables, please provide the additional information required by Item 14 and 15 of Form S-11 with respect to your probable acquisitions.

Response: In response to the Staff’s comments, the Company hereby informs the Staff that it currently has five properties, with an aggregate acquisition cost of $377 million, under non-binding letters of intent. The Company has included this disclosure on pages 24 and 82 of Amendment No. 1. At this time, the Company does not consider these acquisitions probable. Once these acquisitions become probable, the Company will include the disclosure required by Items 14 and 15 of Form S-11 in a subsequent pre-effective amendment to the Registration Statement.

Our Principal Agreements, page 80

Our Ground Lease Agreements, page 88

56.

Please describe the annual rent obligations for each of the ground leases.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to include a chart on page 91 of Amendment No. 1 to provide the referenced disclosure.

Management, page 89

57.

Please provide the most recent five years of business experience for Messrs. Grafton and Ray and Ms. McAvey. Refer to Item 401(e) of Regulation S-K.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement on page 93 of Amendment No. 1 to modify Ms. McAvey’s biography to indicate her work experience for the most recent five years. The Company respectfully notes that both Mr. Grafton and Mr. Ray have been retired since the year 2000. Their business experience in the last five years consists primarily of service on various boards of directors. Other than noting that Mr. Grafton is a retired accountant, the Company respectfully submits that the disclosure is sufficient considering Mr. Grafton and Mr. Ray’s retirement status during the past five years.

Securities and Exchange Commission

Page 15

Liability, Exculpation and indemnification, page 98

58.

Please disclose the director and officer insurance maintained on behalf of your directors and officers.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 102 of Amendment No. 1. The Company supplementally informs the Staff that it expects to enter into an indemnification agreement with each of its directors and executive officers and will disclose the terms of such indemnification agreement in this section in a subsequent pre-effective amendment to the Registration Statement.

Certain Relationships and Related Transactions, page 100

59.

Please disclose, if applicable, the information required by Instruction 5 to Item 404(a) of Regulation S-K with respect to the properties acquired from Marriott.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 103 of Amendment No. 1.

60.

Please revise to disclose the cost to Marriott of the 3 million shares issued in July 2004 and the value of the shares based on the midpoint of the range.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 103 of Amendment No. 1 to the Registration Statement.

61.

Please revise to include disclosure of your principal agreements here rather than cross-referencing them to another section.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on pages 104-105 of Amendment No. 1 to the Registration Statement.

62.

Please revise to disclose the purpose for the space you lease from Marriott.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 105 of Amendment No. 1 to the Registration Statement.

63.

Please revise to disclose the nature of the potential conflicts referenced in the section on your agreements with your senior executive officers and certain directors.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 105 of the Registration Statement.

Securities and Exchange Commission

Page 16

Institutional Trading of our Common Stock, page 106

64.

Please disclose the number of holders of your shares. Refer to Item 201 of Regulation S-K.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 110 of Amendment No. 1.

Selling Stockholders, page 108

65.

We note you have not identified your selling stockholders. With regard to any selling stockholders who are non-natural persons, please identify all selling shareholders who are registered broker-dealers or affiliates of broker-dealers. Additionally, tell us if the broker-dealer received the securities as underwriting compensation. Please note that a registration statement registering the resale of shares being offered by broker-dealers must identify the broker-dealers as underwriters if the shares were not issued as underwriting compensation.

Response: In response to the Staff’s comments, the Company will identify all selling shareholders who are registered broker-dealers or affiliates of broker-dealers in a subsequent pre-effective amendment to the Registration Statement. The Company duly notes that a registration statement registering the resale of shares being offered by broker-dealers must identify the broker-dealers as underwriters if the shares were not issued as underwriting compensation.

66.

Please describe how the selling stockholders acquired their securities.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 113 of Amendment No. 1.

Lock-up Agreements

67.

Please disclose the terms of Mr. Mahoney’s lock-up agreement.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 116 of Amendment No. 1.

68.

Please provide additional disclosure regarding the parties to the lock-up agreements and the ability of the provisions to be waived.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page 116 of Amendment No. 1.

Description of Capital Stock and Certain Material Provisions of Maryland Law, Our Charter and Bylaws, page 112

69.

We note that you state that all shares offered by this prospectus will be duly authorized, fully paid and nonassessable. Since this is a legal conclusion, you do not appear qualified to render such opinion. If based on an opinion of counsel, please revise to so state.

Securities and Exchange Commission

Page 17

Response: In response to the Staff’s comments, the Company has revised the Registration Statement on page 117 of Amendment No. 1 to state that the Company’s conclusion that the shares offered by the prospectus will be duly authorized, fully paid and nonassessable is based on an opinion of Goodwin Procter LLP, the Company’s counsel.

Certain Provisions of Maryland Law and of Our Charter and Bylaws, page 115

70.

Please summarize the advanced notice procedures of your bylaws.

Response: In response to the Staff’s comments, the Company respectfully submits that the advance notice provisions of the Company’s bylaws are summarized on pages 117-118 of the Registration Statement.

Underwriting,

page 140

71.

Please clarify whether the total expenses paid by you in the offering include the amounts reimbursed to the underwriters.

Response: In response to the Staff’s comments, the Company has revised the disclosure on page 147 of Amendment No. 1.

72.

We note that the underwriter has reserved shares for sale directly to your directors, employees and other persons. Supplementally, describe the mechanics of how and when these shares are offered and sold to investors in this directed share program. For example, tell us how you will determine the prospective recipients and number of reserved shares. Tell us how and when you and the underwriters notified the directed share investors, including the types of communication used. Disclose whether the underwriters or the company are using electronic communications or procedures, such as e-mail. Provide us with any materials given to potential purchasers.

Discuss the procedures these investors must follow in order to purchase the offered securities, including how and when the underwriter or the company receives communications or funds. In this regard describe the process for confirmation and settlement of sales to directed share purchasers. Axe directed share purchasers required to establish accounts before the effective time, and if so, what if any funds are put in newly established brokerage accounts before the effective date? What relationship, if any, do any funds deposited into new accounts have to the expected price for the shares being allocated to the directed share purchaser? How do the procedures for the directed share program differ from the procedures for the general offering to the public?

Response: In response to the Staff’s comments, the Company will provide the Staff with the requested information upon filing a subsequent pre-effective amendment to the Registration Statement after the Company determines the specific mechanics.

73.

When known, please revise to identify the members of the underwriting syndicate that will engage in electronic distributions. Supplementally, please confirm that those underwriters

Securities and Exchange Commission

Page 18

have cleared their online offering procedures with the staff. If not, please provide a more detailed description of their online offering procedures, including screen shots and drafts of any communications those underwriters propose to use in the electronic distribution.

74.

Please include a description of the prior relationship between you and the underwriter. Refer to Item 508(a) of Regulation S-K. In addition, please describe any rights to nominate or designate members of the board of directors. Refer to Item 508(f) of Regulation S-K. We note that one of your directors is affiliated with the underwriter.

Response: In response to the Staff’s comments, the Company has revised the disclosure on page 150 of Amendment No. 1. The Company further advises the Staff that no entity has any special rights to nominate or designate members of the Company’s board of directors. The board member of the Company that also sits on the board of directors of Friedman, Billings, Ramsey & Group, Inc., the parent company of Friedman, Billings, Ramsey & Co., Inc. (“FBR”), was chosen by the Company independently and with no input from FBR.

Financial Statements

Unaudited Pro Forma Consolidated Balance Sheets, pages F-5 – F-6

75.

Please revise the pro forma financial statements to present separate columns for each of your probable acquisitions referred to on page 79, if any, and label each column according to the property acquired, or provide detailed, transparent disclosure for each probable acquisition (e.g., in a combining table) in the applicable note that then ties to the aggregated adjustment in the financial statements. Your pro forma adjustments should include your calculation, including any non-cash portion, and allocation of the purchase price and the effects of additional financing necessary to complete the acquisition.

Response: In response to the Staff’s comments, the Company will provide the referenced disclosure in a subsequent pre-effective amendment to the Registration Statement with respect to any probable acquisitions.

Note A, page F-6

76.

Please advise us whether the deferred incentive management fees referred to on page F-43 were assumed in connection with this acquisition.

Response: In response to the Staff’s comments, the Company hereby advises the Staff that no deferred incentive management fees were assumed by the Company in connection with the acquisition of the Torrance Marriott.

Securities and Exchange Commission

Page 19

Unaudited Pro Forma Consolidated Statement of Operations, pages F-7 – F-10

Note D, page F-9

77.

Please modify your disclosure to include the effective dates of each of your acquisitions.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page F-9 of Amendment No. 1.

Note E, page F-9

78.

Please disclose the amortization periods and method used in estimating the additional depreciation and amortization expense.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page F-9 of Amendment No. 1.

Note F, page F-9

79.

The pro forma adjustment to corporate expenses should represent management’s best estimate of what corporate costs would have been had the acquisitions and the offering occurred as of the beginning of the year presented. The information should clarify that it is forward looking and material assumptions should be explained in the note. The limitations of the pro forma information should be explained. The penultimate paragraph on page F-9 should be similarly revised.

Response: In response to the Staff’s comments, and as required under Rule 11 of Regulation S-X, the pro forma adjustment to corporate expenses has been adjusted to reflect management’s best estimate of the factually supportable corporate costs assuming that the acquisitions and the offering occurred as of the beginning of the year. Although the Company’s actual corporate expenses may exceed this amount, the Company has excluded pro forma adjustments for items which are not currently factually supportable, including terminated transaction costs, office supplies and contingency. The Company has also excluded a $4.4 million charge relating to share grants that will be awarded to the executive officers at the completion of the offering due to the one time impact of these awards. The Company has revised the disclosure of the limitations of the pro forma adjustment to corporate expenses in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 53 and Note F on page F-9 as follows, with the necessary changes:

The pro forma 2004 corporate expenses excludes adjustment for costs which are not permitted under the pro forma rules, but which may be incurred subsequent to completion of our initial public offering. Our budgeted 2005 corporate expenses are approximately $13.1 million, which is comprised of approximately $6.3 million of cash corporate expenses and approximately $6.9 million of restricted stock expense. The $6.9 million of restricted stock expense includes a $4.4 million charge relating to share grants that will be awarded to our executive officers in connection with this offering.

Securities and Exchange Commission

Page 20

Note H, page F-9

80.

Please advise us of, and disclose, if you are using current interest rates, or interest rates for which you have a commitment. If actual interest rates in the transaction can vary from those depicted, disclose the effect on income of a ¹/8 percent variance in interest rates. Also, please advise us, and disclose, if management has determined that the interest rate used is reasonable.

Response: The Company hereby advises the Staff that the Company is using the actual interest rates for the fixed rate mortgage debt on the Courtyard Manhattan/Midtown East, Marriott Salt Lake City Downtown, Marriott Griffin Gate Resort and Bethesda Marriott Suites. The Company is using estimated annual interest rates for the variable rate mortgage debt on the Lodge at Sonoma, a Renaissance Resort & Spa, the Courtyard Manhattan/Fifth Avenue and the Torrance Marriott of 4.9%, 5.75% and 5.0%, respectively. The actual interest rates on the variable rate mortgage debt on the Lodge at Sonoma, a Renaissance Resort & Spa, the Courtyard Manhattan/Fifth Avenue and the Torrance Marriott as of December 31, 2004, December 31, 2004 and January 5, 2005 (acquisition date) were 4.74%, 5.04% and 4.94%, respectively. The Company has amended Note H on page
F-10 to disclose the $108,750 annual effect on income of a ¹/8 percent variance in interest rates. The Company has also revised Note H on page F-10 to disclose that the Company’s management has determined that the interest rates used in calculating the pro forma adjustments are reasonable.

Note J, page F-10

81.

Please exclude from the calculation of earnings per share, common shares whose proceeds will be used for general corporate purposes (i.e. working capital).

Response: As discussed with the Staff, and as set forth in greater detail in response to the Staff’s first comment, the Company believes that a significant portion of the net proceeds will be allocated to specific uses and will provide such disclosure in a subsequent pre-effective amendment to the Registration Statement. The Company therefore expects that an immaterial amount of the proceeds from the sale of common shares will be used for general corporate purposes.

DiamondRock Hospitality Company

Financial Statement and Notes, pages F-11 – F-29

Note 6, Income Taxes, pages F-21 – F-22

82.

We note that you plan to record an expense to write-off your deferred tax asset upon REIT status election during the first quarter of 2005. We also note that you purchased the Sonoma hotel from Marriott for 60% of the original construction cost. Clarify to us if the price you paid for this property differed from fair value. If so, tell us what other elements were included in the transfer and how you accounted for them. In addition, please advise us of, and disclose, the amount you plan to record as a deferred tax liability associated with the built-in gain on your properties, if any.

Securities and Exchange Commission

Page 21

Response: The Company has acquired each of its initial hotels at current market value calculated based on a multiple of projected hotel earnings. The Company notes that it acquired the Lodge at Sonoma, a Renaissance Resort & Spa at approximately 60% of the original construction cost. Based on the projected future hotel earnings, the Company’s purchase price of the Lodge at Sonoma, a Renaissance Resort & Spa, reflected the fair value of the hotel on the acquisition date. The Staff should note that Marriott International, Inc. acquired the hotel in 2003 and that Marriott’s cost basis at the Company’s acquisition date was $31.8 million.

Because the Company will elect to be treated as a real estate investment trust effective January 1, 2005, it will become subject to a tax that would be imposed on any “built-in gains” recognized by the Company on the disposition of any assets held by it within 10 years from that effective date. Built-in gain is defined as the excess of the aggregate fair market value of the corporation’s assets held on January 1, 2005 over their aggregate tax bases (that is, the net unrealized gain). However, the Company does not expect to dispose of any assets with a built-in gain in a taxable manner within the 10-year period. Accordingly, the Company will reverse the deferred tax liability associated with such assets as of January 1, 2005.

Note 10, Acquisitions, pages F-27 – F-28

83.

Please modify your disclosure to include the periods, covered by ground leases with respect to each of your properties, as applicable.

Response: The Registration Statement has been revised to reflect the Staff’s comment.

84.

We note on page 73 that your ground lease runs through 2033, with extensions, and contains a favorable buyout right beginning at the end of the current renewal term in 2008 and on any renewal date thereafter. Please advise us how you considered this favorable buyout right in your assessment of paragraph 7(b) of SFAS 13.

Response: The Company notes the Staff’s comment. The Company disclosed that the buyout right constituted a favorable right due to certain non-economic factors relating to the complex nature of complying with certain renewal notifications under the ground lease. In response to the Staff’s comment, the Company will amend the description of the buyout option on page of the Registration Statement to delete the description of the buyout option as favorable.

The Company has the option to purchase the land parcel, consisting of 54.5 acres underlying portions of the Marriott Griffin Gate Resort golf course, for $27,500 per acre, which is equal to $1,498,750. The contractual annual ground rent in 2013 will be $99,828. The purchase option will represent a multiple of fifteen times 2013 ground rent. In addition, the purchase option represents 3.1% of the purchase price of the hotel, including the underlying land. The Company believes that the buyout option represents the fair value of the land relative to the Company’s total acquisition cost paid in December 2004. Accordingly, the Company does not believe that the buyout right constitutes a bargain purchase option, as defined in paragraph 5(d) of SFAS 13.

Securities and Exchange Commission

Page 22

Schedule III - Real Estate and Accumulated Depreciation, page F-29

85.

Please advise us of the principal differences in amounts reported here compared to amounts reported in your balance sheet and in Note 3 on page F-19.

Response: In response to the Staff’s comments, the Company advises the Staff that there are no principal differences between the amounts reported on Schedule III, Real Estate and Accumulated Depreciation, and the amounts reflected on the Company’s consolidated balance sheet and note three to the financial statements. Furniture, fixtures and equipment, while included on the balance sheet, is not required to be included on the schedule.

Courtyard by Marriott Midtown East

Financial Statements and Notes, pages F-30 – F-36

86.

We note that your audited financial statements exclude certain assets, liabilities and expenses and therefore, they are not a complete presentation of the financial position and results of operations of the hotel. Please advise us how you consider these financial statements to meet the requirements of Rule 3-05 of Regulation S-X.

Response: The Company concurs the audited financial statements of the Courtyard by Marriott Midtown East do not comply with the requirements of Rule 3-05 of Regulation S-X. However, the Company received a waiver from the requirements of Rule 3-05 from the Commission with respect to this property pursuant to a letter dated August 20, 2004.

Part II, Information Not Required in Prospectus

Item 33, Recent Sales of Unregistered Securities

87.

The reference to the aggregate proceeds of the private offering is inconsistent with the prior paragraph. Please reconcile. In addition, please specify the amount of shares purchased by Marriott.

Response: In response to the Staff’s comments, the Company has revised the Registration Statement to provide the referenced disclosure on page II-1 of Amendment No. 1.

Exhibits

88.

Please file copies of your legal and tax opinions or provide us with drafts of these opinions so that we have an opportunity to review them. Please also file any material agreements required to be filed under Item 601 of Item S-K.

Response: In response to the Staff’s comments, the Company is supplementally providing draft copies of Exhibit 5.1 to the Registration Statement (legality of the securities being issued) and Exhibit 8.1 to the Registration Statement as Annex A and B, respectively, to this Response Letter. In addition, the Company is filing Exhibits 10.4, 10.15 to 10.19, 23.2 and 99.1 with Amendment No. 1 and will file the remainder of the exhibits in a subsequent pre-effective amendment to the Registration Statement.

Securities and Exchange Commission

Page 23

* * * * *

If you should have any questions regarding Amendment No. 1 or the responses contained in this letter, please do not hesitate to call me at (617) 570-1433 or Suzanne D. Lecaroz at (617) 570-1306.

Sincerely,

/s/ Gilbert G. Menna

Gilbert G. Menna

Enclosures

cc:	William W. McCarten

John L. Williams

Mark W. Brugger

Michael D. Schecter

Sean M. Mahoney

Richard Nadeau

Douglas Sweeney

David C. Wright

Cyane B. Crump

ANNEX A

DRAFT

[Letterhead of Goodwin Procter LLP]

[ ], 2005

DiamondRock Hospitality Company

10400 Fernwood Road, Suite 300

Bethesda, MD 20817

Re: Legality of Securities to be Registered Under Registration Statement on Form S-11

Ladies and Gentlemen:

This opinion is furnished in our capacity as counsel to DiamondRock Hospitality Company, a Maryland corporation (the “Company”), in connection with the Company’s registration statement on Form S-11 (Registration No. 333-123065) (as amended or supplemented, the “Registration Statement”) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”), to register the sale of up to [ ] shares of common stock, par value $.01 per share, of the Company (the “Shares”), including [ ] Shares which the underwriters have the option to purchase solely for the purpose of covering over-allotments.

In connection with rendering this opinion, we have examined (i) the Amended and Restated Articles of Incorporation of the Company, as amended to date, certified as of a recent date by the State Department of Assessments and Taxation of Maryland, (ii) the Amended and Restated Bylaws of the Company, as amended to date, (iii) such records of the corporate proceedings of the Company as we deemed material, (iv) the Registration Statement and the exhibits thereto, and (v) such other certificates, receipts, records and documents as we considered necessary for the purposes of this opinion. In our examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as certified, photostatic or facsimile copies, the authenticity of the originals of such copies and the authenticity of telephonic confirmations of public officials and others. As to facts material to our opinion, we have relied upon certificates or telephonic confirmations of public officials and certificates, documents, statements and other information of the Company or representatives or officers thereof.

We are attorneys admitted to practice in The Commonwealth of Massachusetts. We express no opinion concerning the laws of any jurisdictions other than the laws of the United States of America, the Commonwealth of Massachusetts and the Maryland General Corporation Law, and we express no opinion with respect to the blue sky or securities laws of any state, including, without limitation, Massachusetts and Maryland.

DiamondRock Hospitality Company

[ ], 2005

Page 2

Based upon the foregoing, we are of the opinion that the Shares are validly issued, fully paid and nonassessable under the Maryland General Corporation Law.

This opinion shall be interpreted in accordance with the Legal Opinion Principles issued by the Committee on Legal Opinions of the American Bar Association’s Business Law Section as published in 53 Business Lawyer 831 (May 1998).

The opinions expressed herein are being furnished to you solely for your benefit in connection with the Registration Statement, and may not be used or relied upon by you for any other purpose, nor may this opinion be quoted from, circulated, relied upon or otherwise referred to, by any other person or entity without our prior written consent.

We hereby consent to being named as counsel to the Company in the Registration Statement, to the reference therein to our firm under the caption “Legal Matters” and to the inclusion of this opinion as an exhibit to the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act.

Sincerely,

GOODWIN PROCTER LLP

ANNEX B

DRAFT

As of , 2005

DiamondRock Hospitality Company

10400 Fernwood Road

Bethesda, MD 20817

Friedman, Billings, Ramsey & Co., Inc.

1001 N. Nineteenth Street

Arlington, VA 22209

Citigroup Global Markets Inc.

388 / 390 Greenwich Street

New York, NY 10013

Ladies and Gentlemen:

We have acted as counsel for DiamondRock Hospitality Company, a Maryland corporation (the “Company”), in connection with an offering (the “Offering”) of shares of common stock of the Company, par value $0.01 per share, as described in the registration statement on Form S-11 (Registration No. 333-123065) (as amended or supplemented, the “Registration Statement”) filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), in connection with the Offering. This opinion letter addresses the Company’s qualification as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), and the accuracy of certain matters discussed in the Registration Statement under the heading “Federal Income Tax Considerations.”

In rendering the following opinions, we have reviewed and relied upon the Articles of Amendment and Restatement of Articles of Incorporation and Bylaws of the Company dated as of June 25, 2004, the Limited Partnership Agreement of DiamondRock Hospitality Limited Partnership, a Delaware limited partnership (the “Operating Partnership”), dated as of June 4, 2004, and such other records, certificates, and documents as we have deemed necessary or appropriate for purposes of rendering the opinions set forth herein. For purposes of this opinion letter, we have assumed (i) the genuineness of all signatures on documents we have examined, (ii) the authenticity of all documents submitted to us as originals, (iii) the conformity to the original documents of all documents submitted to us as copies, (iv) the conformity, to the extent relevant to our opinions, of final documents to all documents submitted to us as drafts, (v) the authority and capacity of the individual or individuals who executed any such documents on behalf of any person, and (vi) the accuracy and completeness of all records made available to us.

DiamondRock Hospitality Company

Friedman, Billings, Ramsey & Co., Inc.

Citigroup Global Markets Inc.

As of 2005

Page 2

We also have reviewed and relied upon the representations and covenants of the Company and the Operating Partnership contained in a letter that the Company provided to us in connection with the preparation of this opinion letter (the “REIT Certificate”), and that we have discussed with the Company’s representative, regarding the organization and operations of the Company and the Operating Partnership and other matters affecting the Company’s ability to qualify as a REIT. For purposes of this opinion letter, we assume that each such representation and covenant has been, is and will be true, correct and complete, that the Company, the Operating Partnership and any subsidiaries have been, are and will be owned and operated in accordance with the REIT Certificate and that all representations that speak to the best of the belief and/or knowledge of any person(s) or party(ies), or are subject to similar qualification, have been, are and will continue to be true, correct and complete as if made without such qualification. To the extent such representations and covenants speak to the intended ownership or operations of the Company or the Operating Partnership, we assume that each of the Company and the Operating Partnership will in fact be owned and operated in accordance with such stated intent.

Based upon the foregoing and subject to the limitations set forth herein, we are of the opinion that:

(i) the Company has been and is organized in conformity with the requirements for qualification and taxation as a REIT under the Code and its prior and proposed ownership and operations as described in the REIT Certificate will allow the Company to satisfy the requirements for qualification and taxation as a REIT under the Code commencing with the Company’s taxable year ending December 31, 2005 and for subsequent taxable years; and

(ii) the statements set forth under the heading “Certain Federal Income Tax Considerations” in the Registration Statement, insofar as such statements constitute matters of law, summaries of legal matters, legal documents, contracts or legal proceedings, or legal conclusions, are correct in all material respects and do not omit to state a matter of law necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

* * * * *

We express no opinion other than the opinions expressly set forth herein. Our opinions are not binding on the Internal Revenue Service, and the Internal Revenue Service or a court may disagree with our conclusions. Our opinions are based upon the Code, the Income Tax Regulations and Procedure and Administration Regulations promulgated thereunder and existing administrative and judicial interpretations thereof, all as in effect as of the date of this opinion letter. Changes in applicable law could cause the federal income tax treatment of the Company

DiamondRock Hospitality Company

Friedman, Billings, Ramsey & Co., Inc.

Citigroup Global Markets Inc.

As of 2005

Page 3

to differ materially and adversely from the treatment described above and render the tax discussion in the Registration Statement incorrect or incomplete.

We hereby consent to the filing of this opinion letter as an exhibit to the Registration Statement. We also consent to the references to Goodwin Procter LLP under the caption “Federal Income Tax Considerations” in the Registration Statement. In giving this consent, we do not hereby admit that we are in the category of persons whose consent is required by Section 7 of the Securities Act or the rules and regulations promulgated thereunder by the SEC.

We are rendering this opinion letter to you in connection with the Offering and this opinion letter may not be relied upon by any other person or for any other purpose without our prior written consent.

Very truly yours,

Goodwin Procter LLP

LOGO

Tab 3—Percent Change from Previous Year—Detail by Measure

[STR Logo appears here]

Los Angeles-Long Beach, CA

Job Number: 25668 Staff: AR Created: September 23, 2004


Occupancy
	January	February	March	April	May	June	July	August	September	October	November	December	Total Year	Aug YTD
1988	-5.9	-7.1	1.2	-1.3	-2.3	-0.3	-1.1	-0.5	1.7	0.3	-1.4	-1.8	-1.5	-2.1
1989	-3.4	4.1	-1.4	-1.9	0.0	1.8	-2.4	-0.9	-2.7	-3.1	-3.1	-4.6	-1.5	-0.6
1990	-4.2	-3.3	-2.1	-5.6	-4.7	-4.1	-4.2	-6.2	-2.6	-3.9	-4.9	-4.3	-4.2	-4.3
1991	-5.3	-14.9	-14.3	-7.5	-7.3	-7.5	-6.9	-2.9	-10.5	-4.7	-5.4	-4.3	-7.7	-8.3
1992	-6.2	1.2	-1.8	-3.9	-10.6	-7.0	-5.0	-7.7	-4.3	-8.0	-9.1	-6.4	-5.8	-5.3
1993	3.5	-1.0	-2.0	-7.1	0.8	-3.0	-0.6	2.1	-1.3	-0.3	5.6	3.0	-0.1	-0.9
1994	-0.7	13.5	7.2	10.5	10.6	5.8	9.4	2.4	4.8	11.3	4.0	6.4	7.0	7.1
1995	3.4	-8.6	1.6	-0.4	3.4	-0.4	-3.3	2.6	1.8	-3.0	1.6	-2.1	-0.3	-0.2
1996	-0.9	1.7	3.9	8.9	2.3	7.6	6.7	2.3	5.5	4.8	2.2	7.9	4.3	4.1
1997	5.4	7.2	5.0	0.9	1.8	4.0	0.6	4.7	5.8	3.0	2.0	0.5	3.4	3.6
1998	2.8	0.1	-1.2	3.6	0.0	-1.8	1.1	-2.9	-0.2	3.0	4.3	-1.2	0.6	0.1
1999	-0.5	3.4	0.7	-0.7	1.4	0.7	3.7	0.8	-3.3	0.9	1.0	4.7	1.0	1.2
2000	-1.7	5.6	6.5	5.6	9.0	11.3	1.9	4.1	8.4	5.6	6.6	3.2	5.5	5.3
2001	6.2	-0.8	-0.4	-3.8	-6.3	-6.6	-3.0	-2.3	-20.5	-20.8	-17.0	-12.9	-7.5	-2.3
2002	-8.3	-10.0	-9.9	-5.5	-3.8	-5.4	-4.8	-5.6	9.0	13.9	7.9	6.0	-2.0	-6.6
2003	1.7	3.2	-1.7	-1.7	1.0	-0.5	4.4	3.0	3.1	7.0	7.2	10.8	3.0	1.2
2004	9.4	10.2	10.9	11.6	5.3	7.9	7.1	5.5						8.3

Avg	-0.3	0.3	0.1	0.1	0.0	0.2	0.2	-0.1	-0.3	0.4	0.1	0.3	-0.4	0.0


ADR
	January	February	March	April	May	June	July	August	September	October	November	December	Total Year	Aug YTD
1988	1.0	4.4	5.8	6.0	5.0	4.4	1.9	2.4	1.3	6.2	5.4	4.1	3.9	3.8
1989	6.1	3.2	4.0	3.4	3.0	5.9	6.7	6.2	5.3	2.5	3.8	5.4	4.7	4.9
1990	4.4	7.6	5.3	3.8	4.3	5.4	4.6	1.8	2.6	7.4	5.6	3.9	4.7	4.6
1991	-1.2	-2.9	-1.4	-0.1	-1.3	-2.7	-1.4	-0.8	-1.3	-2.7	-2.2	1.2	-1.5	-1.5
1992	2.1	0.8	-1.0	-0.3	-0.5	0.3	-2.0	-1.8	0.0	-3.2	-0.7	-2.4	-0.7	-0.3
1993	4.7	2.1	-0.4	-3.0	-2.0	-1.7	-1.1	2.2	-3.4	-0.9	0.3	-1.8	-0.3	0.2
1994	-8.1	-3.3	-0.7	1.4	4.9	3.7	15.0	1.0	1.7	9.3	0.8	2.4	2.3	1.7
1995	3.9	2.5	4.2	2.5	3.7	-0.6	-9.5	4.8	4.9	-1.4	2.9	3.6	1.6	1.2
1996	2.4	4.0	5.0	7.4	2.9	6.6	6.2	2.3	5.4	5.8	3.5	6.3	4.7	4.5
1997	7.3	8.9	7.8	5.9	3.8	5.7	7.1	8.8	8.1	4.8	9.3	6.7	7.0	6.9
1998	9.2	8.2	9.2	9.4	12.8	7.5	7.9	5.8	7.6	7.2	4.7	4.8	7.9	8.7
1999	4.6	4.6	1.9	2.9	2.1	4.7	4.2	4.7	-0.6	5.3	4.6	9.7	3.9	3.7
2000	2.0	5.9	3.4	6.1	6.1	6.6	4.8	13.1	7.4	5.7	5.7	-0.1	5.7	6.1
2001	4.0	2.3	3.9	0.2	2.8	1.6	2.6	-5.1	-5.6	-7.0	-7.1	-5.8	-0.8	1.4
2002	-1.7	-3.0	-4.9	-3.1	-2.6	-3.0	-3.6	-4.2	4.1	4.8	1.1	1.0	-1.8	-3.3
2003	-1.7	-3.5	-1.3	-2.4	-1.8	-2.8	-0.9	-1.5	-1.0	-0.7	0.3	1.2	-1.4	-2.0
2004	0.0	9.4	3.9	3.9	3.8	5.8	7.7	9.6						5.6

Avg	2.3	3.0	2.6	2.6	2.8	2.8	3.0	2.9	2.3	2.7	2.4	2.5	2.5	2.7


RevPAR
	January	February	March	April	May	June	July	August	September	October	November	December	Total Year	Aug YTD
1988	-4.9	-3.0	7.0	4.7	2.5	4.1	0.8	1.9	3.0	6.6	3.9	2.2	2.4	1.7
1989	2.5	7.4	2.6	1.4	3.0	7.8	4.2	5.2	2.4	-0.7	0.5	0.5	3.1	4.2
1990	0.0	4.0	3.2	-2.1	-0.6	1.1	0.1	-4.5	0.0	3.2	0.4	-0.6	0.3	0.1
1991	-6.4	-17.4	-15.5	-7.6	-8.6	-10.0	-8.3	-3.6	-11.6	-7.3	-7.4	-3.2	-9.0	-9.7
1992	-4.1	2.0	-2.7	-4.1	-11.1	-6.7	-6.9	-9.4	-4.3	-11.0	-9.7	-8.7	-6.5	-5.6
1993	8.4	1.1	-2.5	-9.9	-1.2	-4.7	-1.6	4.3	-4.7	-1.2	5.9	1.1	-0.4	-0.7
1994	-8.7	9.7	6.4	12.1	16.0	9.7	25.8	3.5	6.6	21.7	4.8	9.0	9.5	8.9
1995	7.5	-6.4	5.8	2.1	7.3	-1.0	-12.4	7.5	6.8	-4.4	4.5	1.4	1.3	1.0
1996	1.5	5.8	9.1	17.0	5.3	14.6	13.4	4.7	11.2	10.9	5.8	14.7	9.3	8.8
1997	13.1	16.8	13.2	6.8	5.7	10.0	7.8	13.9	14.4	7.9	11.4	7.2	10.6	10.8
1998	12.2	8.3	7.8	13.3	12.8	5.6	9.1	2.7	7.4	10.4	9.3	3.6	8.5	8.8
1999	4.1	8.2	2.6	2.2	3.4	5.5	8.1	5.5	-3.9	6.2	5.6	14.9	5.0	4.9
2000	0.2	11.8	10.0	12.1	15.7	18.6	6.8	17.8	16.4	11.6	12.6	3.1	11.6	11.8
2001	10.5	1.4	3.5	-3.6	-3.7	-5.1	-0.4	-7.3	-25.0	-26.3	-22.9	-17.9	-8.2	-1.0
2002	-9.8	-12.6	-14.3	-8.4	-6.3	-8.2	-8.2	-9.5	13.5	19.4	9.1	7.0	-3.7	-9.7
2003	0.0	-0.4	-3.0	-4.1	-0.8	-3.3	3.5	1.4	2.0	6.3	7.5	12.1	1.6	-0.8
2004	9.3	20.6	15.3	15.9	9.2	14.2	15.4	15.7						14.4

Avg	2.1	3.4	2.9	2.8	2.9	3.1	3.4	2.9	2.1	3.3	2.6	2.9	2.2	2.8


Supply
	January	February	March	April	May	June	July	August	September	October	November	December	Total Year	Aug YTD
1988	4.3	3.7	4.0	3.9	4.2	5.0	5.1	5.3	4.9	4.7	4.5	4.7	4.5	4.4
1989	4.9	5.4	5.2	5.7	5.1	4.8	4.1	4.0	4.5	4.4	4.7	4.3	4.7	4.9
1990	5.1	4.8	4.8	4.3	5.1	4.3	4.6	5.0	4.7	4.8	4.7	4.8	4.8	4.8
1991	3.6	3.4	3.0	2.9	2.2	2.4	2.2	1.9	2.1	1.8	1.8	1.9	2.4	2.7
1992	2.7	2.5	2.8	2.9	3.0	2.9	2.9	2.7	2.2	2.2	2.0	2.4	2.6	2.8
1993	1.7	1.8	1.2	0.7	0.1	0.1	0.2	0.2	0.2	0.1	0.0	-0.9	0.4	0.8
1994	-1.4	-1.8	-1.4	-1.0	-0.3	-0.5	-0.7	-0.6	-0.6	-0.5	-0.5	-0.8	-0.8	-0.9
1995	-0.1	0.0	0.1	0.1	-0.2	-0.6	-0.3	-0.3	-0.5	-0.8	-1.0	-0.8	-0.4	-0.1
1996	-0.6	-0.3	-0.7	-0.7	-0.7	0.0	-0.6	-0.6	-0.4	-0.1	0.4	0.5	-0.3	-0.5
1997	0.2	0.4	0.6	0.6	0.6	0.1	0.4	0.4	0.4	0.5	0.2	0.5	0.4	0.4
1998	0.4	0.4	0.4	0.4	0.8	1.3	1.4	1.4	0.9	0.9	0.9	1.3	0.9	0.8
1999	1.5	1.5	1.0	1.0	0.8	0.4	0.4	0.5	0.9	1.2	1.3	0.1	0.9	0.9
2000	-0.4	-0.3	0.4	0.3	0.3	0.2	0.5	0.5	0.8	-0.2	-0.4	0.2	0.2	0.2
2001	0.6	0.5	0.3	0.5	0.3	1.3	0.9	1.0	0.8	1.6	1.4	2.2	0.9	0.7
2002	2.1	2.0	2.1	2.2	2.5	1.6	1.8	1.6	1.4	1.6	1.8	1.1	1.8	2.0
2003	1.1	1.1	1.0	0.8	0.7	0.7	0.8	0.8	1.0	0.5	0.5	0.3	0.8	0.9
2004	0.4	0.3	0.3	0.1	0.2	0.2	-0.1	0.0						0.2

Avg	1.5	1.5	1.5	1.5	1.5	1.4	1.4	1.4	1.5	1.4	1.4	1.4	1.5	1.5


Demand
	January	February	March	April	May	June	July	August	September	October	November	December	Total Year	Aug YTD
1988	-1.8	-3.7	5.2	2.6	1.7	4.7	4.0	4.7	6.7	5.0	3.0	2.8	3.0	2.3
1989	1.4	9.7	3.8	3.7	5.0	6.7	1.6	3.0	1.6	1.2	1.4	-0.5	3.2	4.2
1990	0.8	1.3	2.7	-1.6	0.2	0.1	0.2	-1.5	2.0	0.7	-0.5	0.3	0.4	0.2
1991	-1.9	-12.0	-11.8	-4.7	-5.3	-5.4	-4.9	-1.1	-8.6	-3.0	-3.6	-2.5	-5.4	-5.8
1992	-3.6	3.8	1.0	-1.1	-7.9	-4.3	-2.3	-5.2	-2.2	-6.0	-7.3	-4.2	-3.4	-2.6
1993	5.3	0.8	-0.8	-6.4	0.9	-2.9	-0.4	2.3	-1.2	-0.3	5.6	2.1	0.4	-0.1
1994	-2.0	11.5	5.7	9.4	10.3	5.3	8.7	1.8	4.1	10.7	3.4	5.5	6.1	6.1
1995	3.3	-8.6	1.7	-0.2	3.2	-0.9	-3.6	2.2	1.3	-3.8	0.6	-2.9	-0.6	-0.4
1996	-1.5	1.4	3.2	8.2	1.6	7.5	6.0	1.7	5.0	4.6	2.7	8.5	4.0	3.5
1997	5.6	7.6	5.6	1.5	2.4	4.1	1.0	5.1	6.3	3.5	2.2	1.0	3.8	4.0
1998	3.3	0.5	-0.9	4.0	0.8	-0.5	2.6	-1.5	0.7	3.9	5.2	0.1	1.5	0.9
1999	1.0	4.9	1.7	0.3	2.2	1.2	4.1	1.3	-2.5	2.1	2.3	4.8	1.9	2.1
2000	-2.1	5.4	6.8	5.9	9.3	11.5	2.4	4.6	9.2	5.4	6.1	3.5	5.7	5.5
2001	6.8	-0.3	-0.1	-3.4	-6.0	-5.4	-2.1	-1.3	-19.9	-19.5	-15.8	-10.9	-6.6	-1.7
2002	-6.3	-8.1	-8.0	-3.4	-1.4	-3.9	-3.0	-4.0	10.6	15.7	9.9	7.1	-0.2	-4.8
2003	2.9	4.3	-0.7	-0.8	1.7	0.3	5.3	3.8	4.1	7.5	7.7	11.0	3.8	2.1
2004	9.8	10.5	11.2	11.7	5.4	8.1	7.0	5.5						8.5

Avg	1.2	1.7	1.6	1.5	1.4	1.5	1.6	1.3	1.1	1.7	1.4	1.6	1.1	1.4


Revenue
	January	February	March	April	May	June	July	August	September	October	November	December	Total Year	Aug YTD
1988	-0.8	0.6	11.3	8.8	6.8	9.3	6.0	7.2	8.1	11.5	8.6	7.0	7.1	6.2
1989	7.6	13.2	7.9	7.2	8.2	12.9	8.5	9.4	7.0	3.7	5.3	4.9	8.0	9.3
1990	5.2	9.1	8.2	2.1	4.5	5.4	4.8	0.3	4.7	8.1	5.1	4.2	5.1	4.8
1991	-3.0	-14.6	-13.0	-4.8	-6.6	-7.9	-6.3	-1.8	-9.7	-5.6	-5.7	-1.3	-6.8	-7.3
1992	-1.5	4.6	0.0	-1.4	-8.3	-4.0	-4.2	-6.9	-2.2	-9.0	-7.9	-6.5	-4.1	-2.9
1993	10.3	3.0	-1.2	-9.2	-1.1	-4.6	-1.4	4.6	-4.5	-1.2	5.9	0.2	0.0	0.1
1994	-10.0	7.8	5.0	11.0	15.7	9.2	25.0	2.8	5.9	21.0	4.2	8.1	8.6	7.9
1995	7.4	-6.3	5.9	2.3	7.1	-1.6	-12.7	7.2	6.3	-5.1	3.5	0.6	0.9	0.9
1996	0.8	5.4	8.3	16.2	4.6	14.6	12.6	4.0	10.7	10.7	6.2	15.3	8.9	8.2
1997	13.3	17.2	13.8	7.4	6.3	10.1	8.2	14.3	14.9	8.4	11.6	7.7	11.1	11.2
1998	12.7	8.7	8.2	13.8	13.7	7.0	10.6	4.1	8.4	11.4	10.2	4.9	9.4	9.7
1999	5.6	9.7	3.6	3.2	4.3	6.0	8.4	6.1	-3.1	7.4	7.1	15.0	5.9	5.8
2000	-0.1	11.5	10.4	12.4	16.0	18.8	7.4	18.3	17.3	11.4	12.2	3.4	11.7	12.0
2001	11.1	1.9	3.8	-3.2	-3.4	-3.9	0.5	-6.4	-24.4	-25.1	-21.8	-16.1	-7.3	-0.3
2002	-7.9	-10.9	-12.4	-6.4	-4.0	-6.7	-6.5	-8.0	15.1	21.3	11.1	8.2	-2.0	-7.9
2003	1.1	0.7	-2.0	-3.3	-0.1	-2.6	4.3	2.2	3.0	6.7	8.0	12.4	2.3	0.1
2004	9.8	20.9	15.6	16.0	9.4	14.4	15.3	15.6						14.6

Avg	3.6	4.9	4.3	4.2	4.3	4.5	4.7	4.3	3.6	4.7	4.0	4.3	3.7	4.3

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