1474098--3/24/2010--Pebblebrook_Hotel

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{investment, property, distribution}

{tax, income, asset}

{provision, law, control}

{loan, real, estate}

{condition, economic, financial}

{interest, director, officer}

{competitive, industry, competition}

{operation, natural, condition}

{cost, contract, operation}

{cost, regulation, environmental}

{product, market, service}

{acquisition, growth, future}

{regulation, change, law}

{debt, indebtedness, cash}

{stock, price, share}

{personnel, key, retain}

{control, financial, internal}

{loss, insurance, financial}

We have not yet identified any specific hotel properties to acquire and our short-term investments may provide lower net returns. Our cash and cash equivalents and short term investments are maintained in a limited number of financial institutions and the funds in those institutions may not be fully or federally insured. We depend on the efforts and expertise of our key executive officers and would be adversely affected by the loss of their services. Our senior executive officers have broad discretion to make investments, and they may make investments where the returns are substantially below expectations or which result in net operating losses. We intend to invest primarily in the upper upscale segment of the lodging market which is highly competitive and generally subject to greater volatility than most other market segments and could negatively affect our profitability. Failure of the lodging industry to exhibit improvement may adversely affect the operating results of the hotels we acquire and our ability to execute our business strategy. Our returns could be negatively impacted if the third-party management companies that will operate our hotels do not manage our hotel properties effectively. Restrictive covenants in our management contracts could preclude us from taking actions with respect to the sale or refinancing of a hotel property that would otherwise be in our best interest. Our TRS lessee structure will subject us to the risk of increased hotel operating expenses. Our hotels operated under franchise agreements will be subject to risks arising from adverse developments with respect to the franchise brand and to costs associated with maintaining the franchise license. Our ability to make distributions to our shareholders is subject to fluctuations in our financial performance, operating results and capital improvements requirements. We may use a portion of the net proceeds from our initial public offering and the concurrent private placement to make distributions to our shareholders, which would, among other things, reduce our cash available to invest in hotel properties and may reduce the returns on your investment in our common shares. If we cannot obtain financing, our growth will be limited. Future debt service obligations could adversely affect our overall operating results, may require us to sell hotel properties, may jeopardize our qualification as a REIT and could adversely affect our ability to make distributions to our shareholders and the market price of our common shares. Any joint venture investments that we make could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers financial condition and disputes between us and our co-venturers. Unanticipated expenses and insufficient demand for hotels in new geographic markets could adversely affect our profitability and our ability to make distributions to our shareholders. Our conflicts of interest policy may not adequately address all of the conflicts of interest that may arise with respect to our activities. We may from time to time make distributions to our shareholders in the form of our common shares which could give rise to non-cash taxable income to our shareholders. Risks Related to Investments in Mortgage Loans Our strategy of acquiring outstanding debt secured by a hotel or resort property may expose us to risks of costs and delays in acquiring the underlying property. Risks Related to the Lodging Industry Current economic conditions may reduce demand for hotel properties and adversely affect hotel profitability. Our operating results and ability to make distributions to our shareholders may be adversely affected by various operating risks common to the lodging industry. Competition for acquisitions may reduce the number of properties we can acquire. The seasonality of the lodging industry may cause fluctuations in our quarterly revenues that cause us to borrow money to fund distributions to our shareholders. The cyclical nature of the lodging industry may cause the returns from our investments to be less than we expect. Due to our expected concentration in hotel investments, a downturn in the lodging industry would adversely affect our operations and financial condition. Capital expenditure requirements at our properties may be costly and require us to incur debt, postpone improvements, reduce distributions or otherwise adversely affect the results of our operations and the market price of our common shares. Hotel and resort development and redevelopment is subject to timing, budgeting and other risks that may adversely affect our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders. The increasing use of Internet travel intermediaries by consumers may reduce our revenues. We may be adversely affected by increased use of business related technology which may reduce the need for business related travel. Future terrorist attacks or changes in terror alert levels could adversely affect travel and hotel demand. The outbreak of influenza or other widespread contagious disease could reduce travel and adversely affect hotel demand. Uninsured and underinsured losses could result in a loss of capital. Our hotels may be subject to unknown or contingent liabilities which could cause us to incur substantial costs. Noncompliance with environmental laws and regulations could subject us to fines and liabilities which could adversely affect our operating results. Compliance with the Americans with Disabilities Act could require us to incur substantial costs. General Risks Related to the Real Estate Industry Illiquidity of real estate investments could significantly impede our ability to sell hotels or otherwise respond to adverse changes in the performance of our hotel properties. Increases in property taxes would increase our operating costs, reduce our income, and adversely affect our ability to make distributions to our shareholders. The costs of compliance with or liabilities under environmental laws could significantly reduce our profitability. Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem. Any mortgage debt obligations we incur will expose us to increased risk of property losses to foreclosure, which could adversely affect our financial condition, cash flow and ability to satisfy our other debt obligations and make distributions to our shareholders. Risks Related to Our Organization and Structure Provisions of our declaration of trust may limit the ability of a third party to acquire control of us by authorizing our board of trustees to authorize issuances of additional securities. Provisions of Maryland law may limit the ability of a third party to acquire control of us by requiring our board of trustees or shareholders to approve proposals to acquire our company or effect a change of control. The ownership limitations in our declaration of trust may restrict or prevent shareholders from engaging in certain transfers of our common shares. Our rights and the rights of our shareholders to take action against our trustees and officers are limited, which could limit shareholders recourse in the event of actions not in their best interests. Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our shareholders to effect changes to our management. The ability of our board of trustees to change our major policies without the consent of shareholders may not be in shareholders interest. We have entered into agreements with each of our executive officers that requires us to make payments in the event the officer s employment is terminated by us without cause, by the officer for good reason or under certain circumstances following a change of control of our company. If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our shareholders could lose confidence in our financial results, which could harm our business and the value of our common shares. If we fail to qualify, or to remain qualified, as a REIT would result in higher taxes and reduced cash available for distribution to our shareholders. Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our shareholders. Under recently issued Internal Revenue Service, or IRS, guidance, we may pay taxable dividends of our common shares and cash, in which case shareholders may sell our common shares to pay tax on such dividends, placing downward pressure on the market price of our common shares. The formation of our TRS lessees increases our overall tax liability. Our ownership of our TRS lessees is limited and our transactions with our TRS lessees will cause us to be subject to a 100 percent penalty tax on certain income or deductions if those transactions are not conducted on arm s-length terms. If the leases of our hotel properties to our TRS lessees are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to our shareholders. If our operating partnership failed to qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to our shareholders and suffer other adverse consequences. If our hotel managers do not qualify as eligible independent contractors, we would fail to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to our shareholders. Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends. Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities. Complying with REIT requirements may cause us to forego otherwise attractive business opportunities or liquidate otherwise attractive investments. The ability of our board of trustees to revoke our REIT qualification without shareholder approval may subject us to federal and state income tax and reduce distributions to our shareholders. We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our common shares. The share ownership restrictions of the Code for REITs and the 9.8 percent share ownership limit in our declaration of trust may inhibit market activity in our shares and restrict our business combination opportunities. If states and localities in which we own material amounts of property or conduct material amounts of business raise their income and property tax rates or amend their tax regimes in a manner that increases our state and local tax liabilities, we would have less cash available for distribution to our shareholders and the market price of our common shares could be adversely affected.

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1474098--3/24/2010--Pebblebrook_Hotel_Trust