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1221 Avenue ofthe Americas, 26th Floor

New York, NY 10020
Telephone: (212) 659-7300
Facsimile: (212) 918-8989
Lenard M. Parkins (NY Bar #4579124)
John D. Penn (NY Bar #4847208 and admitted pro hac vice)
Mark Elmore (admitted pro hac vice)
Attorneys for Midland Loan Services, Inc.
In re:
) Chapter 11
) Case No. 10-13800 (SCC)
Debtors. ) Joint Administration Requested
________________________________ )
I, Ronald F. Greenspan, declare as follows:
1. I am a Senior Managing Director in the Corporate Finance and Restructuring
practice of FTI Consulting ("FTI"). I lead our national Real Estate Restructuring Group. The
FTI Corporate Finance and Restructuring practice is the largest consulting practice in the United
States that deals predominantly with workouts, turnarounds, and bankruptcy reorganizations and
I believe our Real Estate Group is the preeminent such practice in the country. In my 19 year
career with FTI and its predecessor, PricewaterhouseCoopers, and my prior professional career
in the real estate and real estate fmance industries, I have had and continue to have extensive and
diversified experience in real estate matters including residential, commercial, industrial, and
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hospitality properties in various stages of development ranging from raw land to operating
properties. Such experience specifically includes engagements involving hundreds of hotels,
ranging from budget accommodations to five star resorts.
2. I received my Juris Doctor degree from Harvard Law School and a B.A. m
Economics from the University of California, Los Angeles. I am a Certified Insolvency and
Restructuring Advisor, a Fellow ofthe American College of Bankruptcy and hold a Certificate in
Distressed Business Valuation conferred by the AIRA. I am a member of a number of
insolvency and real estate related organizations, including the American Bankruptcy Institute,
the Urban Land Institute and the Association of Insolvency and Restructuring Advisors. I also
am a past-president and serve on the board of directors of the Los Angeles Bankruptcy Forum,
the largest organization of restructuring professionals in the Western United States.
3. Prior to the sale of our practice to Ffi in 2002, I was a partner with
PricewaterhouseCoopers. Prior to that, I held senior management positions as the chief operating
officer of Los Angeles Land Companies, the executive vice president of Brookside Savings &
Loan Association and the executive vice president of The Heritage Group, a nationwide real
estate investment and management company.
4. On May 1, 2010, Ffi was engaged as the fmancial advisor to Midland Loan
Services, Inc., special servicer for the Fixed Rate Trustee ("Midland"), in connection with a loan
secured by a portfolio of 45 hotels owned by affiliates of Innkeepers USA. I lead FTI' s
engagement team for this matter.
5. Attached hereto as Exhibit A is a list of articles I have authored during the prior
10 years; attached hereto as Exhibit B is a list of matters in which I have provided trial and/or
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deposition testimony (including all matters during the prior 4 years). Ffi is being compensated
at the rate of$150,000 per month, subject to adjustment depending upon circumstances.
6. I am familiar with the capital structure of the Debtors in these cases. Midland is
owed more than $825 Million, which is more than the total amount owed to all of the other
creditors combined. The secured lenders in these cases each have separate collateral pools and
separate obligors such that no pre-petition indebtedness is owed to any lender outside of that
lender's respective collateral pool and no hotel secures multiple debts. A chart that reflects the
secured indebtedness by collateral pool owed by the property owning Debtors is attached as
Exhibit C.
7. I am familiar with the organizational structure and the assets and liabilities of the
Debtors in these cases. The Debtors own a total of 72 hotels,-with each property-owning
Debtor owning just one hotel. Forty-five of the Debtors own hotels which secure debt to
Midland (the "Midland Debtors"). Other Debtors own 27 hotels which serve as collateral for
different lenders in other collateral pools---20 of those hotels are pledged to secure the Lehman
debt and the other 7 hotels secure debt to three different lenders. More hotels secure Midland's
loans than secure all of the Debtors' other secured Lenders combined and, according to a
presentation by the Debtors' investment banker, the 2009 EBITDA produced by the Midland
hotels accounts for approximately 63% of the entire Innkeeper's EBITDA (in contrast, the
EBITDA from the Lehman pool is just 21% of the total 2009 EBITDA and the EBITDA from
the remaining 7 properties, encumbered with debt to three different lenders, is 16% of the 2009
EBITDA). A diagram illustrating the organizational structure of the Debtors including their real
estate assets and secured liabilities is incorporated in Paragraph 12(a)(ii), infra.
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8. The Amended Declaration of Dennis Craven filed in support of first day pleadings
includes information regarding the operations of the Debtors. It describes the Debtors as having
26 employees while Island Hospitality Management, Inc. ("Island"), the hotel manager for the
hotels in each of the collateral pools, employs 100 times more people, about 2,600, to actually
manage and operate all of the hotels in these cases. Distilled to its essence, the Debtors'
operations are nothing more than 26 employees who oversee a third-party hotel management
company, supervise the (non)performance of long-overdue PIPs, and prepare fmancial and tax
reporting based on statements prepared by the management company---this is what constitutes
"their enterprise".
9. In connection with their first day filings, the Debtors filed their Motion for an
Order (A) Authorizing the Debtors to Assume the Plan Support Agreement and (B) Granting
Related Relief (the "Lock-Up Motion"). Through the Lock-Up Motion, the Debtors seek Court
authorization to enter into a Lock-Up (the "Lock-Up") with respect to a plan with Lehman ALI
Inc. ("Lehman"), which is the culmination of a series of integrated transactions among the
Debtors, Lehman and Apollo Investment Corporation ("AIC"), the Debtors' out of the money
equity holder.
Under the term sheet detailing the proposed plan of reorganization contemplated
under the Lock-Up (the "Lehman/ Apollo Plan"), the Debtors propose that Midland shall receive
a cramdown note in a face value not to exceed $550 Million, which would equate to at least a
$275 Million haircut for Midland. On the other hand, Lehman would receive 100% of the new
equity issued by the Debtors on account of its $220 Million claim and, pursuant to a side
Per the proposed Plan, the principal owed to every one of the Debtors' real property-secured lenders would be
crammed down involuntarily below prepetition levels and the mezzanine lenders, which are secured by the equity in
subsidiary corporations, would receive nothing. As the Debtors have no unsecured assets, under these
circumstances there is no question that common equity of the parent corporation, currently owned by Apollo, is out
of the money.
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agreement, would convey 50% of this new equity to Apollo in exchange for a payment of$107.5
10. I have been asked by counsel for Midland to consider and render my opinion on
the following issues:
A. Whether the Lock-Up creates a windfall for Apollo/Lehman and deprives the
other secured creditors of the value of their collateral;
B. Whether the Lock-Up violates the single purpose entity structure of the Midland
C. Whether using the Debtors' own metrics the Lock-Up undervalues Midland's
collateral by capping Midland's claim at $550 Million;
D. Whether the Lock-Up puts the Debtor and Midland's collateral at risk;
E. Whether the Lock-Up is necessary to protect synergies of the "Innkeepers'
F. Whether the "fiduciary out" provision in the Lock-Up is illusory; and
G. Whether the alternative Five Mile Capital Proposal is superior to the transaction
contemplated in the Lock-Up.
11. In connection with the preparation of this Declaration, I reviewed, analyzed and
considered the documents, data and information set forth on Exhibit D hereto.
12. If the Lock-Up is approved by the Court, the risk to and burdens upon Midland
and the Midland Collateral will increase because the Debtors will have locked themselves into
pursuing the Lehman/Apollo Plan.
In choosing this direction, the Debtors have precluded their
consideration of any other offers or plan of reorganization by agreeing not to "directly or
indirectly seek, solicit, negotiate, vote for, consent to, support or participate in the formulation of
any plan of reorganization or other restructuring other than the [Lehman/ Apollo] Plan" and not to
As noted previously, the "Midland Collateral" is the bulk of the Debtors' combined estates by all measures---it is
more than 60% of their assets and EBITDA. Of course, for those Debtors that are actually obligated to Midland, the
collateral is 100% of their assets and accounts for 100% of their EBITDA.
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"directly or indirectly, seek, solicit, negotiate, support or engage in any discussions regarding
any chapter 11 plan other than the [Lehman/ Apollo] Plan." The Court should consider whether
the Lock-Up and the proposed treatment of Midland's secured claim is appropriate under the
applicable standards and whether the Lock-Up is fair to all of the creditors of all the Debtors.
See Lock-Up at 5-6. Upon my review, I have concluded that the Lock-Up and the transactions
embodied therein harm Midland, and the Midland Debtors, for the following reasons:
a. The Lock-Up improperly siphons value from the Midland collateral and all
upside of the reorganized Midland Debtors to Lehman and Apollo, thereby
giving Lehman and Apollo a windfall and depriving the other creditors of the
value of their collateral.
1. At its essence, the Plan grants Lehman the full value of its collateral,
substantial cash flow from the other creditor's collateral, and all future
appreciation of its and every other creditor's collateral (which other
collateral is more than three times larger than Lehman's collateral), all
without Lehman putting up any new value or providing any paydown,
additional collateral or benefit to any of the other secured creditors.
n. On the surface, one might ask how Lehman, which is swapping its
collateralized debt for all of the equity of Innkeepers, is thereby not
somehow putting at risk the value of its collateral. The answer lies in
the legal structure of the Innkeepers entities, which is different than a
more "conventional" company which has debt at (or guaranteed by) the
parent level. There does not exist now, and there is not specified under
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the Lehman/Apollo Plan, any debt at the parent levee---further, upon the
effective date of the Lehman/ Apollo plan, there will be no debt
encumbering the current Lehman assets (all current and proposed debt is
recourse only to, and secured by assets at, specific Single Purpose Entity
("SPE") subsidiaries). What that means is that Lehman, as the recipient
of 100% ofthe equity of the reorganized parent company, will thereafter
own free and clear the same assets which now serve as its collateral. A
chart illustrating the corporate and capital structure of Innkeepers
currently and under the Lehman/ Apollo Plan is attached hereto as
Exhibit E.
111. Since the reorganized parent company will continue to have no liability
on account of any prepetition (or post-petition) secured claim, Lehman
post-confirmation will continue to have a senior claim (by virtue of its
equity ownership of entities that own the assets free and clear) on all of
the value and proceeds of its prepetition collateral. And unlike a
"conventional" enterprise, where the conversion of debt to equity by one
creditor arguably aids the other creditors by deleveraging the entity that
has obligations to the other creditors post-confirmation, that is NOT
happening here. The collateral for the Midland (and other secured
creditors') obligations, and the only entities obligated on this debt,
remains exactly the same pre- and post-confirmation. These entities are
not getting a penny of debt relief on account of the Lehman
The term sheet does require a $75 Million exit loan facility, which will principally be used to retire the Five Mile
Capital $51 Million DIP. The term sheet however does not identifY any source for such ftmds nor indicate which
entities will be the borrower.
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"conversion" (since the entities that owe Lehman money are wholly
separate and distinct from the entities that have obligations to Midland
and the other secured creditors)---in fact, the only relief received by the
entities that owe Midland money is on account of the involuntary cram
down of the Midland debt, with all of the value from the Midland (and
other secured creditors') cramdown flowing to Lehman as the new
equity owner of such entities.
tv. Moreover, substantial collateral value in excess of what Midland will
receive on account of its claim, and all future appreciation, is being
appropriated by Lehman (and Apollo). That there is excess current
value cannot be disputed--- based on the Debtor's own projections
even if Midland were to receive the maximum note permitted by the
Lehman/Apollo Plan ($550 Million) and the interest rate suggested by
the Debtor in its April 22, 2010 presentations to Lehman (produced by
the Debtors in discovery), the Debtor's own forecasts of2011 EBITDA
from the Midland Collateral is $17.5 Million more than the debt service,
which amount of diverted cash value from Midland to Lehman and
Apollo increases each year thereafter. And based on preliminary
forecasts prepared by FTI, I believe the Debtors' advisors are
The Lehman/ Apollo plan does convert the $17.5 Million Lehman DIP to equity as well, but such DIP also is only
secured by the Lehman collateral and no entity obligated to Midland (or any other secured creditor) is obligated to
repay such DIP. Also, the entirety of the proceeds of such DIP is for the sole benefit of the Lehman collateral.
Debtor has provided Midland and FTI certain projections prepared by Moelis. One is a Powerpoint presentation
entitled "Project Tavern", dated April28, 2010. Further, they have provided an Excel model, titled "Tavern Model",
dated June 14, 2010. All of my references to the "Debtors' own projections" refer to the information and projections
contained in the latcr Excel model.
EBITDA is being calculated after deducting a 4% of revenue FF&E reserve. Without such reserve, the cash flow
diversion would be even greatcr.
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significantly understating the likely future cash flow from the Midland
assets, meaning that the immediate value being diverted from the
Midland collateral to Lehman and Apollo is even greater.
v. If one were simply to use the valuation metrics established by the Apollo
purchase of half the Lehman equity, it is apparent that there is
approximately $130 to $170 Million of value in the Midland collateral
that Midland is NOT receiving---instead, this value is being transferred
to Lehman and Apollo for no consideration to Midland. In exchange for
its debt (and $17 Million DIP loan), which debt is secured by nothing
more than the 20 hotels in the Floating Rate Pool, Lehman is receiving
100% of the equity and is selling half to Apollo for $107.5 Million. This
means the value of the entirety of the equity Lehman is receiving is $215
Million and if you subtract the $17 Million DIP, the value of the
Lehman collateral is $198 Million. Per the Debtor, the Lehman
collateral is expected to produce EBITDA (after 4% of revenue FF&E
reserves) of$15.0 Million in 2010 and $13.9 Million in 2011
, yielding a
7.6 and 7.0 capitalization rate, respectively. If one applies those very
same valuation metrics to the Midland collateral, which the Debtor
forecasts will produce EBITDA (after 4% of revenue FF&E reserves) of
$51.5 Million in 2010 and $50.5 Million in 2011, the Midland collateral
is worth $680 Million to $720 Million. Yet the Lock-Up caps the
Source: Moelis Excel model, dated JlUle 14, entitled Project Tavern.
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Midland claim at $550 Million.
Midland is being deprived of all value
in excess ofthe $550 Million ceiling and all such value is being usurped
by Lehman and Apollo.
v1. Without any payment to or enhancement in the position of Midland,
hundreds of millions of dollars of future appreciation is also being
transferred to Lehman and Apollo. By the Debtor's own numbers, the
EBITDA of the Midland collateral is projected to grow from $50.5
Million in 2011 to $67.4 Million in 2015
. While one can debate what
will be the exact increase in value of the collateral from such growth, it
is beyond doubt that this 33% increase in cash flow over the next five
years can be expected to result in a meaningful increase in asset values.
Applying the same capitalization rate as implied by the Lehman sale to
Apollo, the increase in value of the Midland collateral will be
approximately $220 Million---or enough to make Midland whole if it
were to receive this plus the indicated $680 to $720 Million collateral
value today. However, under the Lehman/Apollo Plan, Lehman and
Apollo alone will receive such increased value of the Midland
collateral-none will flow to Midland.
vu. Also, the Debtors' multi-level corporate legal structure means that a
Section 1111 (b) election will not afford its intended protection against
an unfair cramdown. Since the transaction contemplated under the
Lock-Up Agreement contemplates an IPO of the stock of the
The Term Sheet similarly caps the allowed claims of the other secured creditors (except Lehman) at levels below
the value of their collateral as indicated by the Apollo purchase of half the equity from Lehman.
Source: Moelis Excel model, dated JWle 14, entitled Project Tavern.
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reorganized entity and not a sale of Midland's collateral, the Lock-Up
robs the secured creditors of the upside available under a Section
llll(b) election. Therefore, Lehman and Apollo will profit from a plan
that would strip away the value that would normally be afforded to a
secured creditor through Section llll(b).
b. The Lock-Up and Lehman/Apollo Plan ignore the SPE structures of the
Midland Debtors.
1. As noted earlier, not a single one of the Debtors has secured debt to
more than a single creditor. This was not an accident---it is the
specifically negotiated and mandated structure required by each of the
creditors and agreed to by the entirety of the Debtors and Apollo, their
sponsor and controlling shareholder at the time of the loans. Typically a
closing requirement of all such loans is what is commonly referred to as
a non-consolidation legal opinion whereby the lender receives
assurances that the borrowing entity is properly formed and is a legally
separate and distinct entity with no other creditors. This SPE structure
underlies much real estate lending and the entirety of the commercial
mortgage backed securities marketplace. The efficient delivery of
adequate credit to the commercial mortgage marketplace depends upon
this negotiated legal structure being respected. These terms, and their
consequences, are a fundamental lynchpin of much commercial
mortgage fmancing and its continued availability.
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n. The Lehman/ Apollo Plan ignores this corporate, legal and fmancial
structure-in fact, the Plan expressly violates it. Other than in the 20
entities which owe debt to Lehman, there is no creditor class in any of
the 52 other property-owning debtors (including the 45 property-owning
debtors which are liable on the Midland debt) to consent to the
Lehman/ Apollo cram down plan. These entities, by design and specific
covenant between the borrower and lender, are SPE entities with no
other creditors other than the single secured debt. Moreover, these
entities do not operate the properties---the hotels are leased to an
operating entity---hence, there will not even be meaningful trade debt at
these entities. To the extent there are some incidental unsecured claims
owed by these entities, they would be swamped by the massive, multi-
hundred million dollar deficiency claims created by the Lehman/Apollo
c. Using the Debtors' own valuation metrics, the Lock-Up likely undervalues
Midland's collateral by capping Midland's claim at $550 Million and, in any
event, precludes a market test of the actual value of Midland's collateral.
1. Using the valuation metric established by the Lehman sale of the equity
to Apollo and the Debtor's own financials, the Midland collateral is
worth approximately $130 to $170 Million more than allowed by the
Lehmani Apollo Plan and the Support Agreement. To the extent Debtor
wants to argue that somehow Midland's collateral is worth less than the
indicated amount, then it is axiomatic that the Lehman/ Apollo Plan is
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paying Lehman more than the value of its collateral, since the payment
to it was the basis of calculating an approximately $680 to $720 Million
value range for the Midland collateral---which overpayment to Lehman
would also not be permitted under the Bankruptcy Code.
n. Although I frequently provide expert valuation testimony, I readily
concede that property valuations can best be determined not by experts
but by the market. This often is not necessary, and experts' opinions
will suffice, when there is an automatic alignment of interests or
appropriate checks and balances are in place. A clear exception to that
situation is in the case of a new value plan of reorganization, which is
what we have here. Implementation of the Lock-Up would result in
Apollo, the prepetition equity holder, continuing to own 50% of the
equity in the reorganized debtor, while every one of the secured
creditors takes a significant cram down haircut. That is the essence of a
new value plan. Further, under the Lock-Up, the magnitude of the cram
downs and the value of the equity being retained by Apollo are
specifically precluded from having any market test.
Thus, we have a
new value plan, without testing the market either as to the
appropriateness of the size of the cramdowns or the value of the equity
being retained, the implementation of which is being aided and abetted
by a preferential immediate payoff to one creditor and the capture by
And not a penny of what Apollo is paying to keep its equity will even go into the reorganized debtor---rather it is
being paid, preferentially, to reduce by 50% the exposure of a single creditor (while the exposure of the other
creditors is not being reduced at all, except to the extent their debt is being involuntarily eliminated by the cram
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such creditor (and the pre-petition equity holder, Apollo) of hundreds of
millions of dollars of other creditors' current collateral value and future
111. One only has to look at another current hospitality bankruptcy case, that
of Extended Stay, to see the limitations of expert valuations in the
current environment and why a market test is so critical if secured
creditors are not to be deprived of the potential value of their collateral.
In Extended Stay, the appraiser who had valued the Debtor's assets at
over $8 Billion in 2007 (coincidently, the same year as the Apollo
leveraged buyout oflnnkeepers), produced a valuation of $2.8 Billion in
2010. The Debtor sought to do a transaction with consideration of $3.3
Billion to the creditors. However, after exposing the assets to the
marketplace, a competitive round of offers and counteroffers ensued
between several very capable investors, and the consideration fmally
settled at $3.925 Billion. This was very substantially above the
"appraised value" and the initial offer by the debtor's favored party,
which offer the debtor wanted to accept. However, such offer would
have clearly deprived the secured lenders of the full value of their
While I believe it is instructive to consider the Extended Stay valuation and the results of testing this value against
market offers, in most other respects Innkeepers is a very different business model and structure than Extended Stay.
Both companies own predominantly hotels in mid-level segments of the hospitality industry and have been hurt by
excessive leverage and the economic slowdown. But that is essentially where the similarities end. Extended Stay is
its own brand name and operates its hotels under its own trade names (which names are legally owned by an
affiliate owned by the entities which prepetition controlled Extended Stay) rather than the Innkeepers' business
model of exclusively using (paying for) much better known third-party franchised names, such as Marriott. Further,
an affiliate of Extended Stay---HVM LLC, which is owned and controlled by David Lichtenstein and Lightstone,
who also controlled Extended Stay pre-petition---manages its hotels and supervises and directs the thousands of
employees who staff and operate the hotels. Innkeepers has but 26 employees total---the 2,600 employees at the
hotels are employees of Island Hospitality, an unrelated third party company that manages all of the Innkeeper-
owned hotels. Consequently, Extended Stay generates most of its reservations from an affiliated reservation and
marketing department, whereas Innkeepers primarily relies upon (and pays for) its franchisors for this vital service.
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collateral. I believe the same situation presents itself here only in a more
malignant form---not only is the debtor asking the court to preclude a
market test of what are very desirable assets (or the company as a
whole), but it is being done in favor of the existing out-of-the-money
equity, which appointed the entirety of the Debtor's board of directors
and will benefit from holding 50% of the reorganized equity at below
market values.
IV. The usual purpose of a "stalking horse" plan or bid is that it sets a
minimum consideration, which floor the Debtor is assured of receiving.
Moreover, a stalking horse bid is often thought to encourage other
parties to consider their own, higher bid because it constitutes "price
discovery" that reduces uncertainty---one knows the "price that must be
beat" and is accompanied with a bidding procedures order to ensure a
fair process. The Lock-Up Agreement, on the other hand, is clearly
designed to prevent any discovery of what is actually the market value
of the company and its assets, much less a competitive bidding
process-it, therefore, sets a self-serving ceiling rather than a floor on
what the Debtor and its creditors will receive. Similarly, the Bankruptcy
Code provides for exclusivity to allow the Debtor a limited period to
formulate a plan of reorganization---but here, where the Lock-Up
ensures the pre-petition equity owners half of the equity ownership of
the reorganized Debtor with all secured and unsecured creditors
suffering a massive cram down of principal, it is clear that an equitable
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result can only occur if the value tested by a market process or
exclusivity is lifted so that competing plans can be offered that allow the
creditors to achieve the actual value of their collateral. The Lock-Up
prevents any such test.
d. The Lock-Up puts Midland's collateral at risk if any one of the 19
Termination Events, many of which are not in the Debtors' control, occurs
and the Lock-Up confers no benefits to the Creditors (or Debtor).
1. The termination provisions of the Lock-Up are perilous for the Midland
Collateral, all of the secured creditors, and the Debtor itself. Paragraphs
6(a) through 6(s) set forth 19 Termination Events, any one of which
causes a termination of the Lock-Up in just two days, unless waived by
Lehman in its sole discretion. While including the usual and customary
termination events, such as a default by either party (Paragraph 6(r),
Paragraph 6 also contains many other events that are extraordinary and
create significant danger to all of the non-Lehman creditors (and the
Debtor). For example, Paragraph 6(a) makes it a termination event if
The Debtor has suggested that it had no alternative to the Lehman/Apollo Plan because the Midland lendcr, as a
REMIC (real estate mortgage investment conduit established per Sections 860A thru 860G of the IRC), is limited in
the assets it can own; specifically, REMICs cannot own equity securities and thcrefore could not do the debt for
equity swap in the same fashion as Lehman. While that is a technically true statement regarding the Internal
Revenue Code, it is a complete red hcrring as respects what could be done between Innkeepers and Midland and is
a failed excuse rathcr than a reason why the Debtors have not attempted to negotiate a similar transaction with
Midland. Thcre are a myriad of structuring techniques that could allow Midland to be a party to a restructuring that
would achieve very similar benefits for the Debtors as the Lehman transaction purports to accomplish (albeit not for
Apollo). Witness, for example, the Five Mile Capital DIP loan---Midland as a REMIC could not directly make a
DIP loan but could introduce Five Mile Capital, a major beneficiary of the Midland REMIC and holder of a "first
loss position" in such structure, to Innkeepers and not object to subordinate its loan to a Five Mile Capital priming
DIP loan. This accomplished the exact same result as the direct Lehman DIP. Similarly, thcre are a myriad of
potential structures where Midland and/or its beneficiaries could participate in a restructuring whcre the normal
benefits that accrue on account of being the "fulcrum" security would flow to Midland and its beneficiaries rather
than being siphoned to Lehman and Apollo under the guise of being necessitated by Internal Revenue Code
limitations on Midland.
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any one of eight Plan Milestones is not achieved on the prescribed
timeline-the enumerated Milestones begin 45 days after the petition
and conclude 270 days after the petition, meaning the agreement is in
jeopardy of termination throughout the entire tenure of this bankruptcy
case; Paragraphs 6(b) and (c) make it a Termination Event if Lehman
has not executed a defmitive sale agreement for half of its shares by 45
days after the debtor's petition date or has not consummated such sale
within 270 days of debtors' petition date, respectively; Paragraphs 6(g)
and (i) make it a Termination Event if the Company seeks to modify any
Plan Milestone, does not oppose any filing by another seeking to modify
any such Plan Milestone, or if the Company makes any filing which is
inconsistent with the Lehman/ Apollo Plan (which would presumably
mean that any effort by the Company to activate its "Fiduciary Out",
discussed in Paragraph 12(), infra, would be a Termination event);
Paragraph 6(p) makes it a Termination Event if there is any material
adverse change in connection with the Debtor's assets or operations or in
the real estate, capital, banking or fmancial markets in general; and
Paragraph 6(q) makes it a Termination Event if Lehman in the sole
exercise of its discretion after tax due diligence determines the
transaction cannot be structured to its satisfaction.
n. The consequence to the Midland collateral, and indeed the Debtor, is
severe if the Lock-Up were to be approved by this Court and then
terminated pursuant to any of the myriad of controllable or
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uncontrollable Termination Events. Section 8(a) immediately terminates
the Debtor's use of the Lehman cash collateral upon the occurrence of
any one of the 19 Termination Events, some with corresponding
subparts. That would not only disrupt the operations of the 20 Lehman
hotels, but would also mean the Lehman hotels would no longer be
paying their prorata share of the corporate overhead and administrative
expenses of the Debtors---thereby greatly increasing the burden on the
other collateral (Midland's collateral would then be over 80% of the
estate assets) and/or rendering the Debtors administratively insolvent.
Further, upon certain Termination Events (those in Paragraphs 6(a)(vii)
and (viii)), as set forth in Paragraph 8(b), videlicet the failure of the court
to confirm the Lehmani Apollo Plan in accordance with the Plan
Milestones, Lehman can exercise all remedies with respect to its
collateral "with no further bankruptcy court approval required" or
cause a Section 363 sale of its collateral with Lehman receiving all
proceeds and able to credit bid. Clearly such action, either of which
would deprive the Debtors of these assets, and the most draconian of
which by the very terms of the Agreement are executable without further
court approval, would be disruptive to the Debtors and, if there is
enterprise value created from synergies, as claimed by the Debtors,
would be value destructive.
111. Furthermore, Lehman has the right in its sole discretion to terminate the
Lock-Up (and thereby cause the adverse consequences of such
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termination discussed above) if the terms of the post-petition note in
favor of Midland (and the note in favor of each of the other secured
creditors) is not to its liking. By itself, it would seem that the fact that
there is no specified interest rate (and other terms) that would be deemed
satisfactory to Lehman, and therefore gives it a perpetual "out", is
sufficient reason alone for the Court to deny approval of the Lock-Up.
e. There are no synergies inherent in the Debtors' "enterprise" the saving of
which necessitate the Lock-Up.
1. The Debtors' argue that the Lock-Up will allow them to "continue
realizing certain synergistic efficiencies in the operation of their hotels
with all of the attendant benefits of a comprehensive hotel enterprise."
See Lock-Up Motion at 4-5. This statement implies both that there are
synergistic benefits of maintaining the current "enterprise" and that the
Court should consider these benefits to the overall hotel enterprise when
determining whether to approve the Lock-Up.
n. I do not believe either of those implications exists in fact. First, there is
no benefit to the Midland collateral of remaining owned by the Debtors.
There is no support for the proposition that there are meaningful
economies of scale achieved in the operation of 72 hotels that are not
already achieved by the operation of the 45 Midland properties alone.
Besides the fact that little is achieved by adding 27 properties to a
portfolio that already numbers 45, the hotels are spread throughout the
country (dissipating any potential benefits of scale) and are actually
Page 19 of26
managed by Island Hospitality, not the Debtors, and all employees who
operate the hotels are employees of Island Hospitality and not the
Debtors. If owned separately, the several pools of hotels now owned by
the Debtors could still be managed and operated by Island Hospitality
(or any other hotel management company), thereby preserving any
potential (and undoubtedly small) synergies (if any in fact exist from
common operation of the pools). Further, the all-important brand names
and reservation systems which underlie the Debtors' hotels are owned
and operated by the franchisors (such as Marriott), for which the
franchisors are paid a handsome fee (for the Midland pool, this ranges
between 7.5% and 10.5% of gross revenues)---the ownership of the
hotels by Debtor has no contribution to the franchise name or its
operation---in fact, keeping the several pools of collateral together under
the Innkeeper aegis actually creates Franchisor cross-pool default risks
(as exists under the Marriott PIP agreement), which risks would not exist
if the pools were separately owned.
Second, even if there were some
small synergies from having the two pools stay under Debtors'
ownership and those synergies somehow necessitated a Lock-Up, there
is no rationale that such synergies should be garnered at the cost of
providing Midland (and the other non-Lehman creditors) less than the
value of their collateral. As discussed above, the Lock-Up provides
Midland, as presumably does Lehman, has an agreement with each of the franchisors allowing the continuation of
the franchise agreement in the event of foreclosure by Midland. Hence, the Debtor's ownership of the properties is
not necessary for the continuation of the Marriott (or other) franchise agreements and, as the Marriott PIP agreement
highlights, the Debtor's past and continued ownership of the properties actually has put the franchise agreement in
jeopardy for what the Marriott agreement defines as the 23 Marriott Defaulted Hotels.
Page 20 of26
Midland less than the value of its collateral---such should not and,
pursuant to the Bankruptcy Code, cannot be the cost or consequence of
the Debtors maintaining its claimed "enterprise synergies", even if they
f. The Lock-Up's purported "fiduciary out" is illusory.
1. A Debtor whose debts exceed its assets---a condition made explicit in
the instant case by the Lehmani Apollo Plan and acknowledged by all
constituents---has a duty to all of its creditors. In my experience,
Debtors try to minimally, some would say ostensibly, satisfy such
obligation with what is commonly called a "fiduciary out" in lock-up
n. The "fiduciary out" in the Lock-Up, paragraph 25(c), provides:
"The Company agrees that the Fiduciary Out shall not apply,
and may not be used, to annul, modify, amend, or otherwise
alter any of the Plan Milestones or any of the remedies in
respect thereof; provided, however, that if the Company
secures a binding and firm written commitment with
respect to an alternative transaction that will provide Lehman
with a higher and better recovery than the recovery
proposed under the Plan (a "Firm Alternative Transaction"),
the Company shall provide Lehman with at least ten (10)
Business Days to determine whether Lehman will consent to
such Firm Alternative Transaction. If Lehman does not
consent to such Firm Alternative Transaction, the Company
may only exercise the Fiduciary Out after it has obtained an
order from the Bankruptcy Court authorizing the Company to
exercise the Fiduciary Out in accordance with the terms
hereof. The Company agrees that in determining whether a
Firm Alternative Transaction is "higher and better," all factors
must be considered including contingencies, conditionality,
legal and fmancial execution risk, economics and Lehman's
opinion as to whether such Firm Alternative Transaction
is "higher and better." [emphasis added]
Page 21 of26
(iii) By definition, a "fiduciary out" that requires an alternative proposal to be both better
for a single creditor and subject to a single creditor's approval before the Debtor
can accept an alternative proposal, especially when such single creditor is the
proponent of the Plan involved in the lock-up agreement, is wholly illusory. This is
not a "fiduciary out", but a fiduciary handcuff whose key is held not by the
company in the exercise of its duty but by the minority creditor who has already cut
a deal to revert half the equity of the company to the existing out-of-the-money
equity holder. If this were deemed to satisfy the Debtor's obligations to its other
creditors, there in effect would be no such obligations, which is not what I
understand the bankruptcy law to be.
(iv) Even if the Lock-Up contained a legitimate "fiduciary out" clause, other provisions
of this Lock-Up render it completely meaningless and ineffective in the real world.
First, the Debtor is allowed only to consider (and pass on to Lehman for its
approval) a "binding and firm" offer. No initial purchase or investment offer for a
company is "binding and firm" ---even the fmal Lehman agreement presented to this
court for its endorsement, which was the result of months of negotiation and due
diligence, has a myriad of conditions that make it other than "binding and firm",
including such provisions as reaching defmitive documentation, satisfactory tax
planning, no material adverse change, effecting satisfactory (but wholly undefmed)
cram down of all secured creditors, etc. No competing proposal is likely to be made
without similar conditions to it being binding and, therefore, any such alternative
offer would not qualify---even though the Lehman offer does not meet the same test
Page 22 of26
either. Further, the Lock-Up, hidden away in the misleadingly titled paragraph
"S(c) Approvals", provides as follows:
"Neither Party shall, directly or indirectly, seek, solicit, negotiate, support or
engage in any discussions relating to or enter into any agreements relating
to, any restructuring, plan of reorganization, dissolution, winding up,
liquidation, reorganization, merger, transaction, sale or disposition (or all or
substantially all of their assets or equity) other than as set forth in the
Plan Term Sheet and the Plan, nor shall either Party solicit or direct any
person or entity, including, without limitation, any member of any of the
Parties' board of directors or, as to the Company, any holder of equity in the
Company, to undertake any of the foregoing"
It would be virtually impossible for any company, especially a closely held
enterprise with no SEC filings, such as Innkeepers, to receive a binding (and full
market value) offer if such company is precluded from soliciting, negotiating or
even just discussing with a prospective offeror its assets, contracts, business
operations or the terms of an offer. Offering circulars, informational memoranda,
due diligence, data rooms, email solicitations and the like are standard, in fact
mandatory, if one is to seriously attempt to achieve a full market value offer---yet
Innkeepers, its officers and its agents are specifically precluded from doing any of
these things. The obverse is also true---failure to do these things, and in particular
to contractually bind oneself not to do these things, is an affirmative statement of
intent to hinder receipt of a competitive market value proposal.
g. There has been made a superior proposal for a plan of reorganization that
treats more favorably all of the parties with an economic interest in the
It is not difficult to divine why Apollo is going to such lengths, including preventing the Debtor from exposing
itself to a better offer, to ensure that Apollo is the uncontested owner of a significant share of Innkeepers' equity. In
connection with the 2007 Midland loan, Apollo guaranteed the performance of significant PIP obligations. It is
uncontested that ltmkeepers has defaulted on its Marriott PIP obligations. Midland has filed suit against Apollo to
enforce its guaranty obligations. Buried in the Lehman/ Apollo term sheet, under the misleading heading "Closing
Conditions", is a provision that mandates post-closing and post-reorganization that so long as Apollo holds at
least 25% of the Innkeepers' equity, ltmkeepers shall use the exit financing and its net cash flow to satisfY the PIP
obligations for which Midland has sued Apollo.
Page 23 of26
Debtor (except Lehman, because it was likely receiving under the
Lehman/Apollo Plan significantly more value than its claim (collateral) is
1. I have seen a proposal by Five Mile Capital to fmance an alternative
plan of reorganization (the FMC Plan) which treats all of the secured
and unsecured creditors of Innkeepers, except for Lehman, better than
the Lehman/Apollo Plan and suffers none of the infirmities of the
Lehman/ Apollo Plan discussed above. My understanding is that the
FMC Plan is contingent upon Midland, as the largest creditor, agreeing
to support it and Midland is having a meeting of its credit committee this
week (the week of August 23, 2010) to decide whether to issue such
support. The following chart, taken from the Five Mile Capital
proposal, describes the treatment of all pre-petition creditors
The chart below reflects that $238 million is outstanding under the Floating Rate Mortgage Loan; however, this
amount includes approximately $18 million of postpetition interest.
Page 24 of26
($ in millions)
------ r--------.

Five Mile DIP $50.8 $0.0 $50.8 -$50.8 $0.0
Lehman DIP $17.0 $0.0 $17.0 -$17.0 $0.0
Fixed Rate Cl\ffiS Mortgage Loan $825.4 -$225.4 $600.0 -$66.4 $533.6
Floating Rate Mortgage Loan $238.5 -$86.8 $151.7 -$16.8 $134.9
Floating Rate Mezzanine Loan $121.0 -$121.0 $0.0 $2.6 $0.0
Anaheim Mortgage Loan $13.7 -$3.7 $10.0 -$1.1 $8.9
Anaheim Mezzanine Loan $21.3 -$21.3 $0.0 -$0.4 $0.0
Capmark Mission Valley Cl\ffiS Mortgage Loan $47.4 -$12.9 $34.5 -$3.8 $30.6
Capmark Garden Grove Cl\ffiS Mortgage Loan $37.6 -$10.3 $27.3 -$3.0 $24.3
Capmark Ontario Cl\ffiS Mortgage Loan $35.0 -$9.6 $25.4 -$2.8 $22.6
Merrill Lynch Washington D.C. Cl\ffiS Mortgage Loan $25.6 $7.0 $18.6 -$2.1 $16.5
Merrill Lynch Tysons Corner Cl\ffiS Mortgage Loan $25.2 -$6.9 $18.3 -$2.0 $16.3
Merrill Lynch San Antonio Cl\ffiS Mortgage Loan $24.2 -$6.6 $17.6 -$1.9 $15.6
Present Value ofB-Notes(l) $0.0 $0.0 $16.4 -$16.4 $0.0
Total Debt $1,482.6 -$511.4 $987.5 -$187.1 $803.4
DIP Retirement $67.8 $67.8
Pre-Petition Creditor Pay downs $103.0 $103.0
Fixed Rate Cl\ffiS Mortgage Special Servicer Fee $3.3 $3.3
Funding of FF&E Reserve $13.8 $13.8
Pre-fimding of Future PIP Work $15.0 $15.0
Additional Cash on Balance Sheet (2) $17.3 $17.3
Purchase ofB-Notes at Present Value $16.4 $16.4
New Cash $0.0 $0.0 $46.1 $190.5 $236.6
Total Caeital Structure $1,482.6 -$511.4 $1!033.6 $3.3 $1!040.0
(I) B-Notes represent an interest in the equity waterfall of the new capital structure that is subordinate to a 2.0x multiple on the Investors'
Investment. The note face value is set at 20% of the deficiency claim. Present Value established based upon 5 to 7 year period and no interest
(Z) Includes amount allocated to pay unsecured creditors (other than holders of deficiency claims) their pro rata share of$500,000.
n. The very fact that a competing proposal offers significantly more value
to each of the creditors is indicative that the Lehmani Apollo Plan
improperly deprives the creditors of the value of their collateral (and
transfers such value to Lehman and Apollo). Further, the FMC Plan
provides all of the creditors, including Lehman, a true safeguard against
it being an unfair plan---each creditor may take its collateral in lieu of
the treatment proposed by the FMC Plan. Finally, unlike the
Lehmani Apollo Plan, which expressly prohibits the Debtor from
exposing the Company and its assets to the market or a competing plan
Page 25 of26
(undoubtedly because of the improper motivation that such activity
would highlight the unfairness of the Lehman/ Apollo Plan), the FMC
Plan expressly provides for market exposure and overbids-including
the opportunity for Lehman and Apollo to bid competitively for the
company and its assets if they are still interested at a fair market price.
I declare, under penalty of perjury pursuant to 28 U.S.C. 1746, tbat the foregoing is true
and correct.
Executed this 23rd day of August, 2010 at Sun Valley, Idaho.
Page26 of26
uedsueeJD UOCJ
Ronald F. Greenspan- Articles
"Money Changes Everything" (Daily Bankruptcy Review, June 16, 2010)
"2009- It Was a Very ____ Year" (Daily Bankruptcy Review, January 13, 2010)
"Real Estate Workouts: Building a New Paradigm" (ABI Journal, December 2009)
"Interview, Selection, Retention and Role of Financial Advisors" (Inside the Minds: The
Role of Creditors' Committees in Chapter 11 Bankruptcies, October 2008)
"Recovery in U.S. Homebuilding Sector is Likely to Take Several More Years" (Daily
Bankruptcy Review, April 16, 2008)
"Predicting Corporate-Default Cycle Upended by History-Bucking Trends" (Daily
Bankruptcy Review, January 24, 2007)
"Homebuilders: A Cycle Unlike Prior Cycles" (Daily Bankruptcy Review, November 29,
"KERP's Are out, But Incentives Are In" (TMA Journal of Corporate Renewal, 2006)
"UnTill" We Meet Again: Why Till Might Not Be the Last Word on Cram Down Interest
Rates" (ABI Journal, 2004)
"The Un-real World of Troubled REITs" (ABI Journal, 2001)
"When Are Servicing Rights Born?" (American Banker, 2000).
"The Next Industry Crisis Could Be Even Bigger" (American Banker, 1999)
Ronald F. Greenspan
Expert Testimony and Depositions
!Fidelity Bond vs. Brand X X
USBC - Eastern District of Pennsylvania
lin re Pacific American Mortgage Company X
USBC - Central District of California
lin re Maxicare, Inc. X X
USBC - Central District of California
lin re Aladdin Gaming LLC X
USBC - Nevada
lin re Sandpiper-Golf Trust LLC v. Sandpiper at SBCR, LLC X X
JAMS- Oxnard, California
In re Sutter's Place, Inc., dba Bay 101, Petitioner in the City of X X
San Jose, State of California, Gaming Control Administration
lin re Sierra Hospitality X X
US District Court -Northern District of California
lin reNew Hotels, Inc. X
Central District of California
lin re Peregrine Systems, Inc. X X
USBC - District of Delaware
lin re Ardent Communications, Inc. X
USBC - District of Columbia
!LaSalle Bank National Association v. Lehman Brothers X X
!Holdings, Inc.
US District Court - Maryland
re Maple Leaf Farms, Inc. v. American Appraisal X
Inc., et al
US District Court - Central District of California
California Hotel Acquisition Company, LLC v. The X
Community Redevelopment Agency of the City of Los
Los Angeles Superior Court
!American West Homes, Incorporated v. SoCal Housing X X
!Partners, L.L.C.
US District Court - Central District of California
re Heilig-Meyers Company X X
USBC- Eastern District of Virginia
!United States of America v. State Street Bank & Trust X X

USBC Case No. A-01-4605-KJC
Delaware District of Delaware
lin re Commercial Money Center, Inc. X X
USBC - Southern District of California
re: Enron Corporation Securities Litigation X
MDL Docket No. 1446
US District Court- Southern District of Texas
(Houston Division)
1 of3
Ronald F. Greenspan
Expert Testimony and Depositions
lin re Defendant and Plaintiff-in-Counterclaim in connection X
!With Blue Hills Office Park LLC (Plaintiff, Defendant-in-
v. J.P. Morgan Chase Bank as Trustee for the
!Registered Holders of Credit Suisse First Boston Mortgage
Securities Corp., Commercial Mortgage Pass-Through
Certificates, Series 1999-C 1 (the "Trust") and CSFB 1999-
1 Royall Street, LLC (Defendants, Plaintiffs-in-
Counterclaim) v. William Langelier and Gerald Finberg
(Defendants-in -Counterclaim).
US District Court - District of Massachusetts
lin re Plaintiff in connection with LaSalle Bank National X
!Association (f/k/a LaSalle National Bank), as Trustee for the
of Asset Securitization Corporation
Mortgage Pass-Through Certificates Series
1997-DS (Plaintiff) v. Nomura Asset Capital Corporation and
!Asset Securitization Corporation (Defendants)
US Supreme Court of the State ofNew York
County ofNew York
lin re Botanical Extracts, Inc., Hauser Technical Services, Inc., X
iZetapharm, Inc., d/b/a BI Nutriceuticals
USBC - Central District of California
In re Wells Fargo Bank Minnesota N.A. et al v. UBS X X
'W arburg Real Estate Securities and UBS Paine Webber
US District Court - Dallas County, Texas
ln re LaSalle Bank National Association et al v. UBS X
Warburg Real Estate Securities and UBS Paine Webber
US District Court - Dallas County, Texas
!In re Wells Fargo Bank Minnesota N.A. et al v. Salomon X
Brothers Realty Corp., UBS Warburg Real Estate Securities,
Inc., and Artesia Mortgage Capital Corporation
US District Court - Dallas County, Texas
ln re Wells Fargo Bank Minnesota N.A. et al v. Lehman X
Brothers Holdings, Inc.
US District Court - Dallas County, Texas
In re Brobeck, Phleger & Harrison LLP X
USBC Case No. 03-32715-DM7
Northern District of California
San Francisco Division
In re South Coast Property Company 96-A, L.P. X X
USBC - Central District of California
In re Lior Matian; Pegasus Group Ventures, Inc.; The X
Physicians Wealth and Retirement Network; and Satbir Singh;
vs. Related CCD LLC; Related Las Vegas LLC, et al, in the
District Court of Clark County Nevada, Case No. A515559,
Dept. No. XX
US District Court- Clark County, Nevada
2 of3
Ronald F. Greenspan
Expert Testimony and Depositions
In re Yellowstone Mountain Club, LLC X X
USBC Case No. 08-61570-RBK
USBC - District of Montana
In re Teachers Insurance & Annuity Association of America, X
et al vs. Criimi Mae Services Limited Partnership, et al
US District Court- Southern District ofNew York
ln re: Westland Devco, LP X X
US Bankruptcy Court- District of Delaware
In re: Innkeepers USA Trust, et al. X
US Bankruptcy Court-Southern District of New York
In re: GTS 900 F, LLC, a California limited liability X
pompany, aka Concerto
US Bankruptcy Court- Central District of California
Los Angeles Division
3 of3
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1111. at Prc.peti:ier. r Omw.s'Gtounc'
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8' Guenu-:tor
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Grand Pr:x \4ezz
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Sp. scw-w- c m
innkeepers USA I
2.. Guarantor ot {I) N<>-'1-Re<::OtJISI> Canm Od ObRga'ions un1fof' ofi loan (ii) Capital
Expenddures under the .Anaheim HS l oim and (iii)
.ayllft't!'tt a:ld
under the Anahei-m HS Me.r...-anine l.oan
3. Operating T tmantlot all notels In !he Se25 Rate CMOS Pool
4. Operating Terum 1<>r ofl ho-m tt;o FkWing Rate Pool
5. OpUating T ;()( the Anftf"\ei;n HS Loans.
6. Operat'ng Tenant 1<>r the om a no r,lortgagc Loon
7< C.'perabng ttm.:mt for tho. Garoor: Gro\'('l Mortgage i,can
!t Tenant ftlf the Mfss.1on Valley Mortgage Loa:n
9. Operating 1 er..ant fer the CoG. 1 }'SOns Comer and San Mcfigage t o-a-ns
Draft- Subject to Revision
Not Admissible in Any Proceeding
: KPA te-as.a-co

I KPA lease-oo. Inc -]


Corporate and Capital Structure Overview- Pre and Post Lehman/ Apollo Plan
Current and Structure
$700K Common and Preferred
I $173M AIC (Apollo) Common JV (49%}
$75M AIC Preferred Genwood Raleigh
$145M Public Preferred
$359M Floating Rate $35M Anaheim $120M Capmark $75M Merrill
$825MM Fixed Rate CMBS Pool CMBS Pool CMBS I Mortgage CMBS Financing CMBS Financing
45 Hotels I 5.686 Keys ($238 Senior I $121 Mezz) (Senior I Mezz} 3 Hotels I 701 Keys 3 Hotels I 372 Keys
2009 Hotel EBITDA: $59.8M 20 Hotels! 2.778 Keys 1 Hotel I 230 Keys 2009 Hotel EBITDA: 2009 Hotel EBITDA:
2009 Hotel EBITDA: 2009 Hotel EBITDA: $7.4M $6.8M
$20.1M $1.8M
Lehman/ Apollo Plan Corporate
and Structure
$107.5MM AIC (Apollo) Common
$107.5MM Lehman Common
l I
Unencumbered Property
$550MM Fixed Rate CMBS Pool Pool
45 Hotels I 5,686 Keys 20 Hotels /2.778 Keys
2009 Hotel EBITDA: $59.8M 2009 Hotel EBITDA:
In addition. the term sheet requires a $75 Million exit financing loan. The source of these funds,
obligor(s) and/or security for such loan is not identified.
3% incentive equity
JV (49%}
Genwood Raleigh
$150MM CMBS/ Mortgage
Anaheim CMBS I Capmark CMBS Merrill
Mortgage Financing CMBS Financing
{Senior I Mezz} 3 Hotels I 701 Keys 3 Hotels! 372 Keys
1 Hotel/ 230 Keys 2009 Hotel EBITDA: 2009 Hotel EBITDA:
2009 Hotel EBITDA: $7.4M $6.8M
Source Moehs & Company presentation dated Apr;l28. 2010 and Lehmani Apollo Plan Term Sheet dated July 17. 2010 provided in conjunction wiih Lehmani Apolio proposed Plan of Reorganization.

1m F T