1301236--3/5/2010--MHI_Hospitality

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Risks Related to Our Debt and Financing and the Current Economic Crisis The general economic slowdown has negatively affected the financial performance of our hotels, which is the primary factor in determining their fair market value. If the general economic slowdown continues and fails to turn around, we may have difficulty complying with the covenants in our credit agreement. If the general economic slowdown continues to negatively affect the financial performance of our hotels, we may have difficulty refinancing existing indebtedness when it matures. Due to conditions beyond our control, we may not be able to obtain corporate financing in the future, and the terms of any future financings may limit our ability to manage our business. Difficulties in obtaining financing on favorable terms would have a negative effect on our ability to maintain our current operations and execute our business strategy. We have incurred a significant amount of debt and have increased our overall leverage. While we have managed a significant debt level since our inception, we do not have extensive experience managing significant debt loads. If we are unable to manage our debt successfully, we may be required to liquidate our properties, we may jeopardize our tax status as a REIT and we may have significant restrictions on our ability to make distributions to our stockholders. Our liquidity, including access to capital markets and financing, could be constrained by limitations in the overall credit markets, our creditworthiness, and our ability to comply with financial covenants in our debt instruments. The scarcity of equity and debt capital has frozen the market for buying and selling hotels. Our borrowing costs are sensitive to fluctuations in interest rates. Our shares may be delisted from the NASDAQ Global Market if the closing price for our shares is not maintained at $1.00 per share or higher. Risks Related to Our Business and Properties If the general economic slowdown continues and fails to turn around, our operating performance and financial results may be harmed by further declines in occupancy, average daily room rates and/or other operating revenues. We are subject to risks of increased hotel operating expenses and decreased hotel revenues. In keeping with our investment strategy, we may acquire, renovate, and/or re-brand hotels in new or existing geographic markets as part of our repositioning strategy. Unanticipated expenses and insufficient demand for newly repositioned hotels could adversely affect our financial performance and our ability to comply with covenants in our credit agreement and 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 restricted by the terms of our credit agreement and is subject to fluctuations in our financial performance, operating results and capital improvements requirements. Geographic concentration of our initial hotels will make our business vulnerable to economic downturns in the Mid-Atlantic, Midwest and Southeastern United States. 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. Risks Related to Conflicts of Interest of Our Officers and Directors 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 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. We may realize reduced revenue because our management company may experience conflicts of interest in connection with the management of the resort property. Risks Related to the Hotel Industry Our ability to comply with our credit terms, our ability to make distributions to our stockholders and the value of our hotels in general, may be affected by factors in the lodging industry. Operating our hotels under franchise agreements could increase our operating costs and lower our net income. 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. Dramatic global events such as the terrorist attacks of September 11, 2001 and the substantial run-up of oil prices in 2008 adversely affected the hotel industry generally, and these adverse effects may recur. 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. 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 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. We do not have the ability to control the sale of any hotel properties acquired through our joint venture program with The Carlyle Group ( Carlyle ). 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. Our success depends on key personnel whose continued service is not guaranteed.

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1301236--3/5/2010--MHI_Hospitality_CORP