NOTE 13 - COMMITMENTS AND CONTINGENCIES

Ground Leases

We lease land for two hotel properties in Fort Smith, AR under the terms of operating ground lease agreements expiring August 2022 and May 2030. We have options to renew these leases for periods that range from 5-30 years. We lease land for one hotel property in Duluth, GA under the terms of an operating ground lease agreement expiring April 1, 2069. We also have a prepaid land lease for two hotel properties in Portland, OR which expires in June 2084 and had a remaining prepaid balance of $3.5 million at December 31, 2012 and 2011. Total rent expense for these leases for 2012, 2011 and 2010 was $0.4 million, $0.4 million and $0.2 million, respectively.

Future minimum rental payments for noncancelable operating leases with a remaining term in excess of one year are (in thousands):

2013	$	439
2014		449
2015		460
2016		471
2017		482
Thereafter		34,621

	$	36,922

In addition, we lease land for one hotel property in Garden City, NY under a PILOT (payment in lieu of taxes) lease. We pay a reduced amount of property tax each year of the lease as rent. The lease expires on December 31, 2019. Upon expiration of the lease, we expect to exercise our right to acquire a fee simple interest in the hotel for nominal consideration.

Franchise Agreements

All of our hotel properties, except for our independent hotel, operate under franchise agreements with major hotel franchisors. The terms of our franchise agreements generally range from 10 to 20 years with various extension provisions. Each franchisor receives franchise fees ranging from 2% to 6% of each hotel property’s gross revenue, and some agreements require that we pay marketing fees of up to 4% of gross revenue. In addition, some of these franchise agreements require that we deposit a percentage of the hotel property’s gross revenue, generally not more than 5%, into a reserve fund for capital expenditures. In 2012, 2011 and 2010, we expensed fees related to our franchise agreements of $20.7 million, $15.2 million and $14.0 million, respectively.

Management Agreements

Our hotel properties operate pursuant to management agreements with various third-party management companies. The terms of our management agreements range from three to 25 years with various extension provisions. Each management company receives a base management fee, generally a percentage of total hotel property revenues. In some cases there are also monthly fees for certain services, such as accounting, based on number of rooms. Generally there are also incentive fees based on attaining certain financial thresholds. In 2012 and 2011, we expensed fees related to our hotel management agreements of $9.2 million and $5.9 million, respectively. Our predecessor did not use third-party management companies, therefore, there was no expense related to managements agreements in 2010.

Pending Hotel Property Acquisitions

At December 31, 2012, we had purchase agreements for a Holiday Inn Express & Suites in Minneapolis (Minnetonka), MN and a Hilton Garden Inn in Minneapolis (Eden Prairie), MN that have not been closed as of the issuance of these financial statements. The aggregated purchase prices of these hotel properties is $17.1 million, which includes debt to be assumed of $10.3 million. These acquisitions are contingent upon customary closing conditions and approval of the debt assumptions, therefore, there is no assurance that they will be completed.

Litigation

We are involved from time to time in litigation arising in the ordinary course of business; however, we are not currently aware of any actions against us that we believe would have a significant impact on our financial condition or results of operations.

In March and June 2011, Choice Hotels International, Inc. (“Choice”) terminated the franchise agreements on 11 of our hotel properties. We filed an arbitration action against Choice claiming wrongful termination of our franchise agreements. In response to our arbitration action, Choice made counterclaims of fraudulent inducement, negligent misrepresentation, breach of contract, and trademark infringement. The parties agreed to litigate all claims in the arbitration action. The arbitration hearings were held in December 2011 and January 2012. In April 2012, the arbitration panel determined, among other things, that Choice improperly terminated the 11 franchise agreements, that Choice is not entitled to recover liquidated damages in connection with the 11 hotel properties, and that we did not make any materially false or misleading statements to Choice or omit any material information. The panel awarded us damages in the amount of $0.3 million as full settlement of all claims submitted in the arbitration. We received these funds on April 30, 2012. Neither party was entitled to recover attorney’s fees.

Following the termination of the 11 franchise agreements with Choice, we entered into new license or franchise agreements for all 11 hotel properties. On April 6, 2011, we entered into a license agreement with Holiday Hospitality Franchising, Inc. for the Holiday Inn in Boise, ID. On April 15, 2011, we entered into franchise agreements with AmericInn International, LLC for five hotels in Salina, KS; Missoula, MT; Golden, CO; Twin Falls, ID; and Fort Smith, AR. On May 17, 2011, we entered into a license agreement with Carlson Inc. for the Country Inn & Suites in San Antonio, TX. On June 24, 2011, we entered into a franchise agreement with Marriott International, Inc. for the SpringHill Suites in Bloomington, MN. On August 5, 2011, we entered into a franchise agreement with Hilton Worldwide for the DoubleTree in Baton Rouge, LA. On August 22, 2011, we entered into a franchise agreement with Marriott for the Fairfield Inn & Suites in Fort Worth, TX, upon completion of certain capital improvements, which were completed in the second quarter of 2012. On August 24, 2011, we entered into a franchise agreement with InterContinental for the Holiday Inn Express in Charleston, WV.