Related Party Transactions

Ashford LLC, a subsidiary of Ashford Inc., acts as our advisor, and as a result, we pay advisory fees to Ashford LLC. We are required to pay Ashford LLC a monthly base fee that is 0.70% of our total market capitalization plus the Key Money Asset Management Fee (defined in our advisory agreement as the aggregate gross asset value of all key money assets multiplied by 0.70%), subject to a minimum monthly base fee, as payment for managing our day-to-day operations in accordance with our investment guidelines. Total market capitalization includes the aggregate principal amount of our consolidated indebtedness (including our proportionate share of debt of any entity that is not consolidated but excluding our joint venture partners’ proportionate share of consolidated debt). We are also required to pay Ashford LLC an incentive fee that is earned annually by Ashford LLC in each year that our annual total stockholder return exceeds the average annual total stockholder return for our peer group, subject to the Fixed Charge Coverage Ratio (“FCCR”) Condition, as defined in the advisory agreement. We also reimburse Ashford LLC for certain reimbursable overhead and internal audit, insurance claims advisory and asset management services, as specified in the advisory agreement. We also record equity-based compensation expense for equity grants of common stock and LTIP units awarded to our officers and employees of Ashford LLC in connection with providing advisory services equal to the fair value of the award in proportion to the requisite service period satisfied during the period.

On January 24, 2017, we entered into an amended and restated advisory agreement with Ashford Inc. (the “Fourth Amended and Restated Advisory Agreement”) that amends and restates our advisory agreement discussed herein. On June 9, 2017, our stockholders approved the Fourth Amended and Restated Advisory Agreement which became effective on June 21, 2017. The material terms of the Fourth Amended and Restated Advisory Agreement include:


•	we made a cash payment to Ashford LLC of $5.0 million on June 21, 2017, which is included in “contract modification cost” on our condensed consolidated statements of operations for the nine months ended September 30, 2017, at which time the Fourth Amended and Restated Advisory Agreement became effective;


•	the termination fee payable to Ashford LLC has been amended by eliminating the 1.1x multiplier and tax gross up components of the fee;


•	Ashford Inc. will disclose publicly the revenues and expenses used to calculate “Net Earnings” on a quarterly basis which is used to calculate the termination fee; Ashford LLC will retain an accounting firm to provide a quarterly report to us on the reasonableness of Ashford LLC’s determination of expenses, which will be binding on the parties;


•	the right of Ashford LLC to appoint a “Designated CEO” has been eliminated;


•	the right of Ashford LLC to terminate the advisory agreement due to a change in a majority of the “Company Incumbent Board” (as defined in the current advisory agreement) has been eliminated;

•

we will be incentivized to grow our assets under a “growth covenant” in the Fourth Amended and Restated Advisory Agreement under which we will receive a deemed credit against a base amount of $45.0 million for: 3.75% of the total purchase price of each hotel acquired after the date of the Fourth Amended and Restated Advisory Agreement that was recommended by Ashford LLC, netted against 3.75% of the total sale price of each hotel sold after the date of the Fourth Amended and Restated Advisory Agreement. The difference between $45.0 million and such net credit, if any, is referred to as the “Uninvested Amount.” If the Fourth Amended and Restated Advisory Agreement is terminated, other than due to certain acts by Ashford LLC, we must pay Ashford LLC the Uninvested Amount, in addition to any termination fee payable under the Fourth Amended and Restated Advisory Agreement;


•	the Fourth Amended and Restated Advisory Agreement requires us to maintain a net worth of not less than $390 million plus 75% of the equity proceeds from the sale of securities by us after December 31, 2016 and a covenant prohibiting us from paying dividends except as required to maintain our REIT status if paying the dividend would reduce our net worth below the required minimum net worth;


•	the initial term of the Fourth Amended and Restated Advisory Agreement ends on the 10th anniversary of its effective date, subject to renewal by Ashford LLC for up to seven additional successive 10-year terms;


•	the base management fee payable to Ashford LLC will be fixed at 0.70%, and the fee will be payable on a monthly basis;


•	reimbursements of expenses to Ashford LLC will be made monthly in advance, based on an annual expense budget, with a quarterly true-up for actual expenses;


•	our right to terminate the advisory agreement due to a change of control of Ashford LLC has been eliminated;

•

our rights to terminate the advisory agreement at the end of each term upon payment of the termination fee based on the parties being unable to agree on new market-based fees or advisor’s performance have been eliminated; however, the Fourth Amended and Restated Advisory Agreement provides a mechanism for the parties to renegotiate the fees payable to Ashford LLC at the end of each term based on then prevailing market conditions, subject to floors and caps on the changes;


•	if a Change of Control (as defined in the Fourth Amended and Restated Advisory Agreement) is pending, we have agreed to deposit not less than 50%, and in certain cases 100%, of the applicable termination fee in escrow, with the payment of any remaining amounts owed to Ashford LLC secured by a letter of credit and/or first priority lien on certain assets;


•	our ability to terminate the Fourth Amended and Restated Advisory Agreement due to a material default by Ashford LLC is limited to instances where a court finally determines that the default had a material adverse effect on us and Ashford LLC fails to pay monetary damages in accordance with the Fourth Amended and Restated Advisory Agreement; and


•	if we repudiate the Fourth Amended and Restated Advisory Agreement through actions or omissions that constitute a repudiation as determined by a final non-appealable order from a court of competent jurisdiction, we will be liable to Ashford LLC for a liquidated damages amount.

The following table summarizes the advisory services fee incurred (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
Advisory services fee
Base advisory fee	$	2,300		$	2,103	$	6,579		$	6,334
Reimbursable expenses ⁽¹⁾	462			730		1,541			2,027
Equity-based compensation ⁽²⁾	(948		)	1,134		(2,298		)	3,220
Incentive fee	—			487		—			772
Total	$	1,814		$	4,454	$	5,822		$	12,353

________


⁽¹⁾	Reimbursable expenses include overhead, internal audit, insurance claims advisory and asset management services.


⁽²⁾	Equity-based compensation is associated with equity grants of Ashford Prime’s common stock, PSUs, LTIP units and Performance LTIP units awarded to officers and employees of Ashford LLC.

At December 31, 2016, the balance in “due from Ashford Trust OP, net,” of $488,000 was associated with certain expenses. At September 30, 2017 and December 31, 2016, the balance in “due to Ashford Inc.,” which is primarily associated with advisory services fee payable, was $1.4 million and $5.1 million, respectively. In addition, at December 31, 2016, we held a receivable from the AQUA U.S. Fund of $2.3 million, associated with the hold back from the AQUA U.S. Fund, of which the funds were received during the first quarter of 2017. During the three and nine months ended September 30, 2017, we incurred debt placement fees of $225,000 for services provided by a subsidiary of Ashford Inc. These costs are capitalized as deferred loan costs and presented as a reduction of indebtedness. See note 7.

Certain employees of Remington Lodging, who perform work on behalf of Ashford Prime, were granted approximately 22,000 and 22,000 shares of restricted stock under the Ashford Prime Stock Plan in 2016 and 2017, respectively. These share grants were accounted for under the applicable accounting guidance related to share-based payments granted to non-employees and are recorded as a component of “management fees” in our condensed consolidated statements of operations. For both the three and nine months ended September 30, 2017, expense related to such grants was $27,000 and $61,000. For the three and nine months ended September 30, 2016, this expense was $26,000 and $50,000, respectively. The unamortized fair value of these grants was $259,000 as of September 30, 2017, which will be amortized over a period of 2.5 years.