Page 28 - Apple REIT 9 2008 Annual Report

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The purchase price for the hotels, net of debt assumed, was funded primarily by the Company’s ongoing best-efforts offering of
Units. The Company assumed approximately $34.5 million of debt secured by three of its hotel properties. In addition, the Company
assumed a non-mortgage note payable of $3.8 million in connection with the Lewisville, Texas Hilton Garden Inn hotel. The following
table summarizes the interest rate, maturity date and principal amount assumed associated with each note payable. All dollar amounts
are in thousands.
Principal
Location Brand Interest Rate Maturity Date Assumed
Lewisville, TX ........................................... Hilton Garden Inn 0.00% 12/31/2016 $ 3,750
Duncanville, TX ........................................ Hilton Garden Inn 5.88% 5/11/2017 13,966
Allen, TX ................................................... Hilton Garden Inn 5.37% 10/11/2015 10,787
Bristol, VA ................................................. Courtyard 6.59% 8/1/2016 9,767
$ 38,270
The Company leases all of its hotels to its wholly-owned taxable REIT subsidiary (or a subsidiary thereof) under master hotel
lease agreements. The Company also used the proceeds of its ongoing best-efforts offering to pay approximately $6.8 million,
representing 2% of the gross purchase price for these hotels, as a brokerage commission to Apple Suites Realty Group, Inc. (“ASRG”),
100% owned by Glade M. Knight, the Company’s Chairman and Chief Executive Officer.
No goodwill was recorded in connection with any of the acquisitions.
Management and Franchise Agreements
Each of the Company’s hotels are operated and managed, under separate management agreements, by affiliates of one of the
following companies: Dimension Development Two, LLC (“Dimension”), McKibbon Hotel Group, Inc. (“McKibbon”), Gateway
Hospitality Group, Inc. (“Gateway”), LBAM-Investor Group, L.L.C. (“LBA”), Texas Western Management Partners, L.P. (“Western”)
and Vista Host, Inc. (“Vista”). The agreements provide for initial terms of 1-5 years. Fees associated with the agreements generally
include the payment of base management fees, incentive management fees, accounting fees, and other fees for centralized services
which are allocated among all of the hotels that receive the benefit of such services. Base management fees are calculated as a
percentage of gross revenues. Incentive management fees are calculated as a percentage of operating profit in excess of a priority
return to the Company, as defined in the management agreements. The Company has the option to terminate the management
agreements if specified performance thresholds are not satisfied. For the year ended December 31, 2008 the Company incurred
approximately $441,000 in management fee expense.
Dimension, McKibbon, Gateway, LBA, Western or Vista is not affiliated with either Marriott or Hilton, and as a result, the hotels
they manage were required to obtain separate franchise agreements with each respective franchisor. The Hilton franchise agreements
generally provide for a term of 10 to 20 years. Fees associated with the agreements generally include the payment of royalty fees
and program fees. The Marriott franchise agreements generally provide for initial terms of 13 to 20 years. Fees associated with the
agreements generally include the payment of royalty fees, marketing fees, reservation fees and a communications support fee based on
room revenues. For the year ended December 31, 2008 the Company incurred approximately $468,000 in franchise fee expense.
Results of Operations
During the period from the Company’s initial capitalization on November 9, 2007 to July 30, 2008, the Company owned no
properties, had no revenue, exclusive of interest income and was primarily engaged in capital formation activities. During this period,
the Company incurred miscellaneous start-up costs and interest expense related to an unsecured line of credit. The Company’s first
investor closing under its ongoing best-efforts offering occurred on May 14, 2008 and the Company began operations on July 31, 2008
when it purchased its first hotel. During the remainder of 2008, the Company purchased an additional 20 hotel properties. As a result, a
comparison of 2008 operating results to prior year results is not meaningful.