Commitments and Contingencies

Litigation

The nature of the operations of the Company's hotels exposes those hotels, the Company and the Operating Partnership to the risk of claims and litigation in the normal course of their business. IHM is currently a defendant in two (2) related class action lawsuits pending in the Santa Clara County Superior Court. The first class action lawsuit was filed on October 21, 2016 under the title Ruffy, et al, v. Island Hospitality Management, LLC, et al. Case No. 16-CV-301473 and the second class action was filed on March 21, 2018 under the title Doonan, et al, v. Island Hospitality Management, LLC, et al. Case No. 18-CV-325187. The class actions relate to hotels operated by IHM in the state of California and owned by affiliates of the Company and the NewINK JV, and/or certain third parties. The complaints allege various wage and hour law violations based on alleged misclassification of certain hotel managerial staff and violation of certain California statutes regarding incorrect information contained on employee paystubs. The plaintiffs seek injunctive relief, money damages, penalties, and interest. None of the potential classes has been certified and we are defending our case vigorously. As of March 31, 2018, included in accounts payable is $0.2 million which represents an estimate of the Company’s total exposure to the litigation and is also its estimated maximum possible loss that the Company may incur.

Hotel Ground Rent

The Courtyard Altoona hotel is subject to a ground lease with an expiration date of April 30, 2029 with an extension option by the Company of up to 12 additional terms of five years each. Monthly payments are determined by the quarterly average room occupancy of the hotel. Rent is currently equal to approximately $8,000 per month when monthly occupancy is less than 85% and can increase up to approximately $20,000 per month if occupancy is 100%, with minimum rent increased by two and one-half percent (2.5%) on an annual basis.

The Residence Inn Gaslamp hotel is subject to a ground lease with an expiration date of January 31, 2065 with an extension option by the Company of up to three additional terms of ten years each. Monthly payments are currently approximately $40,000 per month and increase 10% every five years. The hotel is subject to annual supplemental rent payments calculated as 5% of gross revenues during the applicable lease year, minus 12 times the monthly base rent scheduled for the lease year.

The Residence Inn New Rochelle is subject to an air rights lease and garage lease that each expire on December 1, 2104. The lease agreements with the City of New Rochelle cover the space above the parking garage that is occupied by the hotel as well as 128 parking spaces in a parking garage that is attached to the hotel. The annual base rent for the garage lease is the hotel’s proportionate share of the city’s adopted budget for the operations, management and maintenance of the garage and established reserves to fund for the cost of capital repairs. Aggregate rent for 2018 is approximately $26,000 per quarter.

The Hilton Garden Inn Marina del Rey hotel is subject to a ground lease with an expiration date of December 31, 2067. Minimum monthly payments are currently approximately $47,500 per month and a percentage rent payment equal to 5% to 25% of gross income based on the type of income less the minimum rent is due in arrears.

Office Lease

The Company entered into a new corporate office lease in September 2015. The lease is for a term of 11 years and includes a 12-month rent abatement period and certain tenant improvement allowances. The Company has a renewal option of up to two successive terms of five years each. The Company shares the space with related parties and is reimbursed for the pro-rata share of rentable space occupied by the related parties.

Future minimum rental payments under the terms of all non-cancellable operating ground leases and the office lease under which the Company is the lessee are expensed on a straight-line basis regardless of when payments are due. The following is a schedule of the minimum future payments required under the ground, air rights, garages leases and office lease as of March 31, 2018, for the remainder of 2018 and for each of the next five calendar years and thereafter (in thousands):



	Other Leases⁽¹⁾		Office Lease
	Amount
2018 (remaining nine months)	$	953	$	581
2019	1,273		792
2020	1,320		812
2021	1,326		832
2022	1,329		853
2023	1,332		873
Thereafter	69,225		2,436
Total	$	76,758	$	7,179

(1) Other leases includes ground, garage and air rights leases at our hotels.

Management Agreements

The management agreements with IHM have an initial term of five years and automatically renew for two five-year periods unless IHM provides written notice to us no later than 90 days prior to the then current term’s expiration date of their intent not to renew. The IHM management agreements provide for early termination at the Company’s option upon sale of any IHM-managed hotel for no termination fee, with six months advance notice. The IHM management agreements may be terminated for cause, including the failure of the managed hotel to meet specified performance levels. Base management fees are calculated as a percentage of the hotel's gross room revenue. If certain financial thresholds are met or exceeded, an incentive management fee is calculated as 10% of the hotel's net operating income less fixed costs, base management fees and a specified return threshold. The incentive management fee is capped at 1% of gross hotel revenues for the applicable calculation.

The company renewed six management agreements in 2017. The updated agreements are summarized as follows:



Property	Homewood Suites Billerica			Homewood Suites Bloomington			Homewood Suites Maitland			Homewood Suites Dallas			Homewood Suites Brentwood			Homewood Suites Farmington

Renewal Date	4/1/2017			4/1/2017			5/1/2017			5/1/2017			6/1/2017			8/1/2017
Original Management Fee	2.0		%	2.0		%	2.0		%	2.0		%	2.0		%	2.0		%
Amended Management Fee	3.0		%	3.0		%	3.0		%	3.0		%	3.0		%	3.0		%
Original Monthly Accounting Fee	$	1,000		$	1,000		$	1,000		$	1,000		$	1,000		$	1,000
Amended Monthly Accounting Fee	$	1,200		$	1,200		$	1,200		$	1,200		$	1,200		$	1,200
Original Monthly Revenue Management Fee	$	550		$	550		$	550		$	550		$	550		$	550
Amended Monthly Revenue Management Fee	$	1,000		$	1,000		$	1,000		$	1,000		$	1,000		$	1,000

Management fees totaled approximately $2.4 million and $2.2 million, respectively, for the three months ended March 31, 2018 and 2017, respectively.

Franchise Agreements

The fees associated with the franchise agreements are calculated on the specified percentage of the hotel's gross room revenue. Franchise and marketing fees totaled approximately $5.5 million and $5.3 million, respectively, for the three months ended March 31, 2018 and 2017.