Page 41 - Apple REIT 9 2008 Annual Report

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Notes to Consolidated Financial Statements
Note 1
General Information and Summary of Significant Accounting Policies
Organization
Apple REIT Nine, Inc. together with its wholly owned subsidiaries (the “Company”) is a Virginia corporation formed to invest
in hotels, residential apartment communities and other income-producing real estate in selected metropolitan areas in the United
States. Initial capitalization occurred on November 9, 2007, when 10 Units, each Unit consisting of one common share and one
Series A preferred share, were purchased by Apple Nine Advisors, Inc. (“A9A”) and 480,000 Series B convertible preferred shares
were purchased by Glade M. Knight, the Company’s Chairman and Chief Executive Officer (see Note 4 and 7). The Company began
operations on July 31, 2008 when it purchased its first hotel. The Company has no foreign operations or assets and as of December
31, 2008, its operations include only one segment. The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts and transactions have been eliminated. Although the Company has an interest in several
variable interest entities through its purchase commitments, it is not the primary beneficiary and therefore does not consolidate any of
these entities.
The Company intends to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. The REIT
Modernization Act, effective January 1, 2001, permits real estate investment trusts to establish taxable businesses to conduct certain
previously disallowed business activities. The Company has a wholly-owned taxable REIT subsidiary (or subsidiary thereof)
(collectively, the “Lessee”), which leases all of the Company’s hotels.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. The fair market
value of cash and cash equivalents approximates their carrying value. As of December 31, 2008, all cash and cash equivalents were
held at three institutions, Wachovia Bank, N.A., BB&T Corporation and Bank of America, N.A. Cash balances may at times exceed
federal depository insurance limits.
Investment in Real Estate and Related Depreciation
Real estate is stated at cost, net of depreciation, and includes real estate brokerage commissions paid to Apple Suites Realty
Group, Inc. (“ASRG”), a related party 100% owned by Glade M. Knight, Chairman and CEO of the Company. Repair and
maintenance costs are expensed as incurred while significant improvements, renovations, and replacements are capitalized.
Depreciation is computed using the straight-line method over estimated useful lives of the assets, which are 39 years for buildings, ten
years for major improvements and three to seven years for furniture and equipment.
The Company considers expenditures to be capital in nature based on the following criteria: (1) for a single asset, the cost must
be at least $500, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (2)
for group purchases of 10 or more identical assets, the unit cost for each asset must be at least $50, including all normal and necessary
costs to place the asset in service, and the useful life must be at least one year; (3) for major repairs to buildings, the repair must be at
least $2,500 and the useful life of the asset must be substantially extended.
The Company records impairment losses on hotel properties used in operations if indicators of impairment are present, and the
undiscounted cash flows estimated to be generated by the respective properties is less than their carrying amount. Impairment losses
are measured as the difference between the asset’s fair value less cost to sell, and its carrying value. No impairment losses have been
recorded to date.
The purchase price of real estate properties acquired is allocated to the various components, such as land, buildings and
improvements, intangible assets and in-place leases as appropriate, in accordance with Statement of Financial Accounting Standards
No. 141, “Business Combinations” (“SFAS 141”). The purchase price is allocated based on the fair value of each component at
the time of acquisition. Generally, the Company does not acquire real estate assets that have in-place leases as lease terms for hotel
properties are very short term in nature. Other than the leases discussed in Note 2, there has been no allocation of purchase price to
intangible assets such as management contracts and franchise agreements as such contracts are generally at current market rates and
any other value attributable to these contracts is not considered material.