1301236--3/22/2007--MHI_Hospitality

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{tax, income, asset}

{acquisition, growth, future}

{stock, price, operating}

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Risks Related to Our Business and Properties Failure of the lodging industry to exhibit improvement would adversely affect our business plan and cause a decline in the value of our common stock. Conflicts of interest could result in our executive officers and certain of our directors acting in a manner other than in our stockholders best interest. Our executive officers and certain of our directors may experience conflicts of interest in connection with their ownership interests in our operating partnership. Our tax indemnification obligations, which were not the result of arm s-length negotiations and which apply in the event that we sell certain properties, could subject us to liability, which we currently estimate to be approximately $46.0 million, and limit our operating flexibility and reduce our returns on our investments. Our agreements with MHI Hotels Services and its affiliates, including the contribution agreements, management agreement, strategic alliance agreement, subleases, partnership agreement of our operating partnership and employment agreements, were not negotiated on an arms length basis and may be less favorable to us than we could have obtained from third parties. Unanticipated expenses and insufficient demand for hotels we acquire in new geographic markets could adversely affect our profitability and our ability to make distributions to our stockholders. We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel and as a result, our returns are dependent on the management of our hotels by MHI Hotels Services. Our ability to make distributions to our stockholders is subject to fluctuations in our financial performance, operating results and capital improvements requirements. We agreed to provide to certain of the contributors of our initial properties opportunities to guarantee liabilities of our operating partnership which may limit our ability to make similar opportunities available to owners of properties that we would like to purchase. This limitation may adversely affect our ability to acquire properties in the future. Future debt service obligations could adversely affect our overall operating results, may require us to liquidate our properties, may jeopardize our tax status as a REIT and limit our ability to make distributions to our stockholders. We are subject to risks of increased hotel operating expenses and decreased hotel revenues. Operating our hotels under franchise agreements could increase our operating costs and lower our net income. Our executive officers have very limited experience operating a public company or a REIT, which could increase our general and administrative costs and reduce our cash available for distributions. Future acquisitions may not yield the returns expected, may result in disruptions to our business, may strain management resources and may result in stockholder dilution. Our net income would be adversely affected if our leases for the resort property are terminated or if the sub-lessees have insufficient net income to pay rent. We may realize reduced revenue because our management company may experience conflicts of interest in connection with the management of the resort property. Geographic concentration of our initial hotels will make our business vulnerable to economic downturns in the Mid-Atlantic, Midwest and Southeastern United States. Our borrowing costs are sensitive to fluctuations in interest rates. We are a new company with limited operating history, and we might not be able to operate our business or implement our operating policies and strategies successfully, which could negatively impact our ability to make distributions and cause you to lose all or part of your investment. Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on a joint venture partners financial condition and disputes between our joint venture partners and us. Investments in condominium hotels may be adversely affected by state and local regulations as well as unit owner participation. We may be required to purchase condominium units which may not be readily resold and which will impact our returns. Risks Related to the Hotel Industry Our ability to make distributions to our stockholders may be affected by factors in the lodging industry. Hotel re-development is subject to timing, budgeting and other risks that would increase our operating costs and limit our ability to make distributions to stockholders. The hotel business is capital intensive, and our inability to obtain financing could limit our growth. The events of September 11, 2001, recent economic trends, the military action in Afghanistan and Iraq and prospects for future terrorist acts and military action have adversely affected the hotel industry generally, and these adverse effects may continue. Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to our stockholders. Noncompliance with governmental regulations could adversely affect our operating results. General Risks Related to the Real Estate Industry Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition. Our hotels may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem. Risks Related to Our Organization and Structure Our failure to qualify as a REIT under the federal tax laws will result in substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders. Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow. Our ability to effect a merger or other business combination transaction may be restricted by our operating partnership agreement. Complying with REIT requirements may cause us to forego attractive opportunities that could otherwise generate strong risk-adjusted returns and instead pursue less attractive opportunities, or none at all. Complying with REIT requirements may force us to liquidate otherwise attractive investments, which could result in an overall loss on our investments. Taxation of dividend income could make our common stock less attractive to investors and reduce the market price of our common stock. Provisions of our charter may limit the ability of a third party to acquire control of our company. Provisions of Maryland law may limit the ability of a third party to acquire control of our company. Provisions in our executive officers employment agreements and the strategic alliance agreement may make a change of control of our company more costly or difficult. Our ownership limitations may restrict or prevent you from engaging in certain transfers of our common stock. The board of directors revocation of our REIT status without stockholder approval may decrease our stockholders total return. The ability of our board of directors to change our major corporate policies may not be in your interest. Our success depends on key personnel whose continued service is not guaranteed.

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1301236--3/22/2007--MHI_Hospitality_CORP