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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-13957 
 RED LION HOTELS CORPORATION
(Exact name of registrant as specified in its charter)
Washington
 
91-1032187
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1550 Market St. #350
Denver Colorado
 
80202
(Address of principal executive offices)
 
(Zip Code)
Registrant's Telephone Number, Including Area Code: (509) 459-6100 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $.01 per share
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes o     No ý 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
o
  
Accelerated filer
 
ý
Non-accelerated filer
 
o
  
Smaller reporting company
 
ý
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  o    No  ý
The aggregate market value of the registrant's common stock as of June 30, 2018 was $282.5 million, of which 78.8% or $222.5 million was held by non-affiliates as of that date.
As of March 1, 2019, there were 24,603,081 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2019 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the registrant's 2018 fiscal year, are incorporated by reference herein in Part III.



TABLE OF CONTENTS
 
 
 
 
Item No.
Description
Page No.
 
 
 
 
PART I
 
Item 1
1
Item 1A
5
Item 1B
21
Item 2
22
Item 3
23
Item 4
23
 
 
 
 
PART II
 
Item 5
24
Item 6
26
Item 7
27
Item 7A
40
Item 8
40
Item 9
91
Item 9A
91
Item 9B
94
 
 
 
 
PART III
 
Item 10
94
Item 11
95
Item 12
95
Item 13
95
Item 14
96
 
 
 
 
PART IV
 
Item 15
97
Item 16
100
 
 
 
 
101
 
 
 





PART I

This annual report on Form 10-K includes forward-looking statements. We have based these statements on our current expectations and projections about future events. When words such as "anticipate", "believe", "estimate", "expect", "intend", "may", "plan", "seek", "should", "will" and similar expressions or their negatives are used in this annual report, these are forward-looking statements. Many possible events or factors, including those discussed in "Risk Factors" under Item 1A of this annual report, could affect our future financial results and performance, and could cause actual results or performance to differ materially from those expressed. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report.

In this report, "we", "our", "us", "our company" "RLHC" and "RLH Corporation" refer to Red Lion Hotels Corporation, doing business as RLH Corporation, and as the context requires, all of its consolidated subsidiaries as follows:

Wholly-owned subsidiaries:
•Red Lion Hotels Holdings, Inc.
•Red Lion Hotels Franchising, Inc.
•Red Lion Hotels Canada Franchising, Inc.
•Red Lion Hotels Management, Inc. (RL Management)
•Red Lion Hotels Limited Partnership
•RL Baltimore LLC (RL Baltimore)
•WestCoast Hotel Properties, Inc.
•Red Lion Anaheim, LLC
•RLabs, Inc.
Joint venture entities:
•RL Venture LLC (RL Venture) in which we hold a 55% member interest
•RLS Atla Venture LLC (RLS Atla Venture) in which we hold a 55% member interest
•
RLS DC Venture LLC (RLS DC Venture) in which we hold a 55% member interest

The terms "the network", "systemwide hotels" "system of hotels" or "network of hotels" refer to our entire group of owned, managed and franchised hotels.

Item 1.
Business

Available Information

Through our website (www.redlion.com), we make available our annual report on Form 10-K, quarterly reports on Form 10‑Q, current reports on Form 8-K, proxy statements, amendments to these filings and all other reports and documents that we file with the U.S. Securities and Exchange Commission (SEC) pursuant to Section 13(a) of the Securities Exchange Act of 1934.

The SEC also maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Our internet website also contains our Code of Business Conduct and Ethics, our Corporate Governance Guidelines; charters for our Audit, Compensation, and Nominating and Corporate Governance Committees, Accounting and Audit Complaints and Concerns Procedures, our Statement of Policy with Respect to Related Party Transactions, Stock Ownership Guidelines for Directors and Executive Officers and information regarding shareholder communications with our board of directors. The contents of our website are not incorporated into this filing.

General

We are a NYSE-listed hospitality and leisure company (ticker symbol: RLH) doing business as RLH Corporation and primarily engaged in the franchising and ownership of hotels under the following proprietary brands: Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse, Settle Inn, Americas Best Value Inn, Canadas Best Value Inn, Signature and Signature Inn, Knights Inn, and Country Hearth Inns & Suites.

All our properties strive to highlight friendly service and reflect the local flair of their markets. The upscale and midscale RLH Corporation brands of Hotel RL, Red Lion Hotel and Red Lion Inn & Suites offer a unique local spin on the expected travel experience in an environment that allows customers to feel welcome and at home. Our focus is to anticipate guest needs and pleasantly surprise them with our distinctive Pacific Northwest-inspired customer service. Warm and authentic, our commitment

1


to customer service includes a focus on delivering the guest locally inspired, friendly and personalized signature moments. This is intended to position each RLH Corporation brand hotel as an advocate to our traveling guests, creating brand relevance and loyalty, differentiating us from our competition.

Hotel RL, our upscale lifestyle brand launched in October 2014, is a full-service conversion brand that is targeted for the top 80 U.S. urban markets, inspired by the spirit of the Pacific Northwest and designed for consumers with a millennial mindset. With Hotel RL we have a hotel product that is intended to be flexible enough to allow adaptive reuse projects, conversions and new builds, to a lesser extent, while giving owners a more free-form approach to adapt the hotel to their unique markets and locations. The flat fee structure is a true differentiator in this segment to establish the Hotel RL brand, which provides a predictable cost structure for our franchisees with the opportunity to leverage a greater proportion of their top-line growth to superior hotel performance. There are seven hotels currently open in the Hotel RL brand and seven more expected to open in 2019 through 2021. The currently open hotels are located in Baltimore Inner Harbor, Maryland; Washington DC; Olympia, Washington; Salt Lake City, Utah; Brooklyn, New York; New Orleans, Louisiana and Fort Walton, Florida.

Our economy brands are focused on delivering our guests a consistent experience with exceptional comfort, quality and service at an affordable rate, with approximately 1,300 locations in 47 states, the District of Columbia, and two countries outside the United States.

A summary of our properties as of December 31, 2018, including the approximate number of available rooms, is provided below:
 
 
Upscale Service Brand
 
Select Service Brand
 
Total
 
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
Beginning quantity, January 1, 2018
 
104

 
14,400

 
978

 
55,100

 
1,082

 
69,500

Newly opened / acquired properties
 
30

 
5,000

 
395

 
24,200

 
425

 
29,200

Change in brand
 
(2
)
 
(100
)
 
2

 
100

 
—

 
—

Terminated properties(1)
 
(20
)
 
(3,400
)
 
(160
)
 
(9,600
)
 
(180
)
 
(13,000
)
Ending quantity, December 31, 2018
 
112

 
15,900

 
1,215

 
69,800

 
1,327

 
85,700

(1) Terminated properties include locations at which we ended our franchise relationship because the hotels did not meet RLH Corporation's hotel standards. We are focused on maintaining a set of brand standards at all of our locations.

A summary of our executed agreements for the year ended December 31, 2018 is provided below:
 
 
Upscale Service Brand
 
Select Service Brand
 
Total
Executed franchise license agreements, year ended December 31, 2018:
 
 
 
 
 
 
New locations
 
25

 
47

 
72

New contracts for existing locations
 
3

 
83

 
86

Change from company operated to franchised
 
9

 
—

 
9

Total executed franchise license and management agreements, year ended December 31, 2018
 
37

 
130

 
167


On May 14, 2018, Red Lion Hotels Franchising, Inc., a wholly-owned subsidiary of RLH Corporation (RLH Franchising) completed the purchase of all of the issued and outstanding shares of capital stock of Knights Franchise Systems, Inc. (KFS), and the purchase of certain operating assets from, and assumption of certain liabilities relating to the business of franchising Knights Inn branded hotels to hotel owners from Wyndham Hotel Group Canada, ULC and Wyndham Hotel Group Europe Limited, pursuant to an Amended and Restated Purchase Agreement, dated May 1, 2018. The aggregate purchase price was $27.2 million.

On October 5, 2017, we announced that we would be marketing for sale 11 of our owned hotels held by our consolidated joint venture, RL Venture. This is consistent with the Company’s previously stated business strategy to focus on moving towards operations as primarily a franchise company. As of December 31, 2018, nine of the properties have been sold. Using proceeds from the sale of the hotels and the release of restricted cash associated with the debt, RL Venture repaid the remaining principal balance outstanding under its loan agreement with Pacific Western Bank in July 2018. On August 9, 2018, we announced that we would be marketing for sale our leasehold interests in our Anaheim, California and Kalispell, Montana hotels and the hotel in Atlanta, Georgia owned by our consolidated joint venture, RLH Atlanta LLC (RLH Atlanta).


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On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the entertainment segment are reported as discontinued operations, and the assets and liabilities are classified as held for sale as of December 31, 2017 in this annual report on Form 10-K. The loss on sale of the entertainment segment included in the 2017 financial statements was $0.2 million, net of tax. See Note 17, Acquisitions and Dispositions within Item 8. Financial Statements and Supplementary Data for further discussion of the transactions discussed above.

Operations

We operate in two reportable segments:

•
The franchised hotels segment is engaged primarily in licensing our brands to franchisees. This segment generates revenue from royalty, marketing, and other fees that are primarily based on a percentage of room revenue or on room count or on transaction count and are charged to hotel owners in exchange for the use of our brand and access to our marketing and central services programs. These central services and marketing programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards.

•
The company operated hotel segment derives revenues primarily from guest room rentals and food and beverage offerings at owned and leased hotels for which we consolidate results. Revenues have also been derived from management fees and related charges for hotels with which we contract to perform management services, however our last management agreement terminated in February 2019.

Our remaining activities, none of which constitutes a reportable segment, have been aggregated into "other".

We have two measures of segment performance under generally accepted accounting principles in the United States of America (GAAP): revenue and operating income. In addition, the following non-GAAP measurements are used to evaluate the performance of our franchise segment:

•Revenue per available room (RevPAR)
•Average daily rate (ADR)
•Occupancy
•Room count

Intersegment revenues are minimal. Certain operating expenses are allocated to the operating segments based upon internally established allocation methodologies. Income tax provision (benefit) and certain corporate operating expenses are neither allocated to the segments nor included in the measures of segment performance. See Item 7. Non-GAAP Financial Measures for information about our non-GAAP measures and reconciliations to the most comparable GAAP measures.

Overview

Company Strategy

Our strategy is to grow our brands and profitability by expanding our franchise hotel network with additional hotels. In 2018 we executed 167 franchise agreements. Also during 2018, 180 franchise agreements in our network terminated, partially due to our focus on eliminating hotels that did not meet RLH Corporation's hotel standards.

By segmenting our upscale, midscale and economy brands with clear distinctions between each offering, we are uniquely positioned to provide an appealing alternative for a variety of owners. Our strategy for our upscale and midscale hotel brands is to identify larger urban metropolitan statistical areas (MSAs) that are saturated by larger brands in order to become the conversion brand of choice for owners of established hotels looking for alternatives in those markets. We believe our upscale and midscale brands have strong name recognition in the Western U.S. markets provide us with an opportunity to expand our hotel network into markets across North America where our brands will be a unique and new value proposition for current and potential hotel owners in markets saturated by competitor brands. To assist in our ability to grow our hotel network in larger metropolitan cities, we may consider special incentives, minority equity, joint venture opportunities with hotel owners and investors, or adding additional brand options. Our economy hotel brands have strong national brand name recognition and provide hotel owners an affordable alternative to traditional franchise programs with primarily flat fees, sensible property improvement plans and a wealth of resources and programs to support owners. In addition to conversion from other brands, independently branded hotel operations may also benefit

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from the RLH Corporation central services programs. For all of our properties, we strive to provide hotel owners leading demand distribution technology and sales support as part of our brand support programs.

Franchised Hotels

As of December 31, 2018 our network of hotels included 1,318 hotels under franchise agreements, representing approximately 83,800 rooms. We are growing our franchise network of hotels through execution of franchise agreements with hotel owners and through acquisitions of hotel brands and/or companies.

In March 2019, we announced the creation of a new subsidiary, RLabs, Inc. RLabs was formed to be a travel technology-based innovator that houses and builds on the groundbreaking technology platform the company has created, including RevPak. RLabs will focus on new revenue verticals, and on developing unique technology and system offerings for the hospitality industry including software, robotics, and artificial intelligence. The first offering from RLabs is Canvas Integrated Systems, an all-in-one cloud-based hospitality management suite featuring a collection of seamlessly-integrated tools designed to drive revenue, secure more revenue opportunities, automate channel management and reduce cost and friction for independent hotel owners.

In May 2018, we acquire the Knights Inn brand and related franchise agreements for approximately 350 hotels operating under the brand. See Note 17 for discussion of Acquisitions and Dispositions within Item 8. Financial Statements and Supplementary Data.

In December 2017, we announced the launch of franchiseasysm, a re-imagined franchise process to appeal to owners of independent hotels or hotels that don't fit a traditional franchise. The process provides a straightforward and flexible website application process for hoteliers looking to operate as independent or under the nationwide Country Hearth brand. Applications can be completed from a mobile device, and agreements offer an associated simplified fee structure.

In September 2016, we acquired over 1,000 hotel franchise and membership license agreements, as well as multiple brand names, including Americas Best Value Inn, Canadas Best Value Inn, Lexington Hotels & Inns, America's Best Inns & Suites, Jameson Inns, Country Hearth Inns & Suites, Vantage Hotels, Value Inn Worldwide, Value Hotel Worldwide, 3 Palms Hotels and Resorts and Signature Inn. These acquired brands substantially increased our number of franchise properties and provided us with a broader presence in the United States and Canada.

We are also investing in technology and sales and marketing talent to improve our ability to manage the various channels that drive occupancy and average daily rate at our hotels, including transient, group and preferred corporate business. We continue to improve and implement our guest management ecosystem, RevPak, which includes a number of industry revenue generation systems fully integrated to provide comprehensive information on customer acquisition, customer management and customer retention. This suite of products is flexible and dynamic and can be tailored to the needs of individual hotel brands. It also delivers dynamic and personalized communications and promotions tailored to individual guest travel needs and habits.

Our focus on providing improved e-commerce revenue generation to our hotel owners includes investing in our rlhco.com website, enhanced and economical guest loyalty program, and improved and targeted digital marketing utilizing information generated through our RevPak reservation and distribution system.

Company Operated Hotels

We operated nine hotels as of December 31, 2018. These include one wholly owned hotel, four hotels owned or operated under a land lease through joint venture (JV) entities, in each of which we have a majority ownership interest and consolidate as the primary beneficiary, three hotels operated under land and/or property leases held directly by the Company, and one hotel we operate under a management agreement.

Our Baltimore Hotel RL is a wholly owned hotel as of December 31, 2018. Previously, the hotel was held in its own JV entity, RLS Balt Venture, LLC, of which we owned 73%, until we purchased the remaining noncontrolling interest in October 2018.

As of December 31, 2018, our Hotel RL Salt Lake City and Hotel RL Olympia hotels are held in RL Venture, LLC, of which we own a 55% interest. During 2018, nine of the RL Venture properties were sold and we paid off the RL Venture debt agreement.

Our Red Lion Hotel Atlanta Airport is held in its own JV entity, RLS Atla Venture, LLC, of which we own 55%. The obligation for our debt under the JV loan agreement at RL Alta Venture, LLC is generally non-recourse to RLH Corporation, except for instances of fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations. 


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Our Washington DC Hotel RL is held in its own JV entity, RLS DC Venture, LLC, of which we own 55%.

We have a leasehold interest in our Anaheim, Seatac, and Kalispell hotel properties. These leases have expiration dates in 2021, 2024, and 2028, respectively. The Anaheim lease has 17 five-year renewal options remaining and the Kalispell lease has three five-year renewal options remaining.

We operate the Bellevue hotel under a management agreement. This agreement has expired in February 2019.

Revenues

In the fourth quarter of 2018, we disaggregated and reclassified the presentation of certain items in the Statements of Comprehensive Income (Loss). Results for the years ended December 31, 2018, 2017 and 2016 and interim periods for the years ended December 31, 2018 and 2017 have been reclassified to conform to our current year presentation. We have disaggregated royalty revenues from other franchise revenues, and combined revenues from company operated hotels and other revenues from managed properties.

We believe these classifications better reflect our results of operations as we have changed our business model to focus on the franchising of hotels. Additionally, we believe these reclassifications will allow better comparison with financial statements of peer companies. The reclassifications had no impact on total revenue for any period. See Note 2, Summary of Significant Accounting Policies within Item 8. Financial Statements and Supplementary Data for further discussion of the impact of these reclassifications on our Consolidated Statements of Comprehensive Income (Loss).

A summary of our reporting segment revenues is provided below (in thousands, except for percentages). For further information regarding our reportable segments, see Note 3, Business Segments within Item 8. Financial Statements and Supplementary Data.

 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
Royalty
 
$
22,309

 
16.4
%
 
$
17,558

 
10.2
%
 
$
7,472

 
5.0
%
Marketing, reservations and reimbursables
 
25,948

 
19.1
%
 
26,179

 
15.2
%
 
14,087

 
9.5
%
Other franchise
 
5,537

 
4.1
%
 
4,822

 
2.8
%
 
3,075

 
2.1
%
Company operated hotels
 
82,021

 
60.4
%
 
123,100

 
71.6
%
 
123,589

 
83.3
%
Other
 
34

 
—
%
 
267

 
0.2
%
 
128

 
0.1
%
Total revenues
 
$
135,849

 
100.0
%
 
$
171,926

 
100.0
%
 
$
148,351

 
100.0
%
 

Employees

At December 31, 2018, we employed approximately 540 people on a full-time or part-time basis. Our total number of employees fluctuates seasonally, primarily due to company operated hotel activity. At December 31, 2018, approximately 11% of our total workforce was covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and organized settlement of labor disputes. At February 28, 2019, we employed approximately 410 people on a full-time or part-time basis. Our employee count has declined over time as we have disposed of a number of our company operated hotels and entered into third party management agreements for many of our remaining company operated hotels. At February 28, 2019, none of our workforce was covered by collective bargaining agreements. We believe our employee relations are positive.

Item 1A.
Risk Factors

We are subject to various risks, including those set forth below, that could have a negative effect on our financial condition and could cause results to differ materially from those expressed in forward-looking statements contained in this report or other RLH Corporation communications.

Our operating results are subject to conditions affecting the lodging industry.

Our revenues and operating results may be impacted by and fluctuate due to a number of factors, including the following:

•
Changes in the desirability of the geographic regions in which our hotels are located, or adverse changes in local economies where our hotels are concentrated;

5


•
Insufficient available capital to us or our franchise hotel owners to fund renovations and investments needed to maintain our competitive position;
•
New supply or oversupply of hotel rooms in markets in which we operate due to the cyclical over-building in the hotel industry;
•
The attractiveness of our hotels to consumers and competition from other hotels and lodging alternatives such as Airbnb;
•
The need to periodically repair and renovate the hotels in our hotel network, including the ongoing need to refresh hotels to meet current industry standards and guest expectations;
•
The financial condition of third-party property owners and franchisees, which may impact their ability to fund renovations and meet their financial obligations to us as required under management and franchise agreements;
•
The quality and performance of the employees of the hotels in our network;
•
Changes in demand for business, convention, group and leisure traveler rooms and related lodging services, including reductions in business and federal, state and local government travel may result due to budgetary constraints or government shutdowns, increases in the use of video conferencing services, or general economic conditions;
•
Decreases in the frequency of business travel that may result from alternatives to in-person meetings, including virtual meetings hosted online or over private teleconference networks;
•
Extended periods of low occupancy demand, which may negatively impact our ability to increase rates;
•
Changes in travel patterns, extreme weather conditions and cancellation of or changes in events scheduled to occur in our markets;
•
The impact of internet intermediaries and competitor pricing;
•
The ability of third-party internet and other travel intermediaries to attract and retain customers;
•
Changes in guest expectations with respect to amenities at network hotels that require additional capital to meet;
•
Improvements in technology that require capital investment by us or our franchise hotel owners in infrastructure to implement and maintain;
•
The quality of services provided by franchisees;
•
Transportation and fuel costs, the financial condition of the airline industry and the resulting impacts on travel, including possible cancellation or reduction of scheduled flights into our markets and reductions in our business with airlines crews, which regularly stay at our hotels in many markets;
•
Increases in operating costs due to inflation and other factors such as minimum wage requirements, overtime, healthcare, working conditions, work permit requirements and other labor-related costs, energy prices, insurance and property taxes, as well as increases in construction or associated renovation costs;
•
Existing and potential new regulations relating to the preparation and sale of food and beverages, liquor service and health and safety of premises;
•
Impact of war, actual or threatened terrorist attacks, heightened security measures and other national, regional or international political and geopolitical conditions;
•
Recent travel bans and other federal regulations that restrict entry into the United States could reduce overall tourist and business travel;
•
Travelers' fears of exposure to contagious diseases or foodborne illness;
•
Climate change or availability of natural resources;
•
Restrictive changes in zoning and similar land use laws and regulations, or in health, safety and environmental laws, rules and regulations; and
•
Enacted, pending and possible future requirements to make substantial modifications to our hotels to comply with the Americans with Disabilities Act of 1990 or other governmental or regulatory requirements.

Any of these factors could adversely impact our hotel brands, hotel room demand, and/or pricing and thereby reduce occupancy, ADR and RevPAR or give rise to government imposed fines or private litigants winning damage awards against us. Reductions in occupancy, ADR and/or RevPAR could have a significant negative impact on the portion of our franchise revenues, which is derived from hotel rooms revenues as well as revenues from company operated hotels. These items could adversely affect our results of operations and financial condition.

The lodging industry is highly competitive, which may impact our ability to compete successfully with other hospitality and leisure companies.

The lodging industry is comprised of numerous national, regional and local hotel companies and is highly competitive. Competition for occupancy is focused on three major categories of travelers: business travelers, convention and group business travelers and leisure travelers. All three categories are significant occupancy drivers for our hotel system and our marketing efforts are geared towards attracting their business.


6


Competition in the industry is primarily based on service quality, range of services, brand name recognition, convenience of location, room rates, guest amenities and quality of accommodations. We compete against national economy, limited and full-service hotel brands and companies, various regional and local hotels in the upscale, midscale and economy hotel segments of the industry, and hotel alternatives, such as Airbnb. Many of our competitors have greater name recognition, a larger network of locations and greater marketing and financial resources than we do. Competitors may offer significantly lower rates, greater convenience, services or amenities or superior facilities, which could attract customers away from our hotels. New hotels are being built in several markets where we operate, which could adversely affect our business. In order to remain competitive and to attract and retain customers, we and the owners of our franchised and managed hotels must be able to differentiate and enhance the quality, value and efficiency of our product and customer service, and we must make additional capital investment to modernize and update our hotels.

We also compete with other hotel brands and management companies for hotels to add to our network, including through franchise and management agreements. Our competitors include management companies as well as large hotel chains that own and operate their hotels and franchise their brands. As a result, the terms of our prospective franchise and management agreements may not be as favorable as a hotel owner's current agreements. In addition, we may be required to make investments in or guarantee the obligations of third parties or guarantee minimum income to third parties in connection with future franchise or management agreements.

If we are unable to compete successfully in these areas, our market share and operating results could be diminished, resulting in a decrease in occupancy, ADR and RevPAR for our hotels. Changes in demographics and other changes in our markets may also adversely impact the convenience or desirability of our hotel locations, thereby reducing occupancy, ADR and RevPAR. ADR, occupancy and/or RevPAR declines could have a significant negative impact on the portion of our franchise revenues, which is derived from hotel rooms revenues as well as revenues from company operated hotels and adversely impacting our results of operations and financial condition.

We may be unsuccessful in identifying and completing acquisitions of new franchised hotel agreements, renewal of franchise hotel agreements and expanding our brands through acquisitions, which could limit our ability to implement our growth strategy and result in significant expense.

We are continuing to pursue the expansion of our franchise operations in markets where we currently operate and in selected new markets. We are also pursuing expansion of our RLH Corporation brands into targeted segments. Franchised hotels carry one of the RLH Corporation brands, and we may consider adding additional brand options in the future.

The growth of our franchise business will require considerable management time, as well as expenses for market development before any significant revenues and earnings are generated. There can be no assurance that we will be successful in achieving our objectives with respect to growing the number of franchised hotels in our system or that we will be able to attract qualified franchisees.

The growth in the number of franchised hotels is subject to numerous risks, many of which are beyond our control and that of the owners of our franchised hotels. Among other risks, the following factors affect our ability to achieve growth in the number of franchised hotels:

•
Competition with other hotel companies, many of which have more franchised hotels in their systems and more resources to assist owners of new franchised hotels with capital expenditures needed to satisfy brand standards;
•
Our ability to attract and retain qualified franchisees under one or more of our brands;
•
The recognition in the market and the reputation of the RLH Corporation brands;
•
Access to financial resources necessary to acquire new brands or hotels;
•
The ability of the owners of franchised hotels to maintain brand standards and to open and operate additional hotels profitably. Factors affecting the opening of new hotels, or the conversion of existing hotels to RLH Corporation brands, include among others:
•
The availability of hotel management, staff and other personnel;
•
The cost and availability of suitable hotel locations;
•
The availability and cost of capital to allow hotel owners and developers to fund investments;
•
Cost effective and timely construction and renovation of hotels (which can be delayed due to, among other reasons, labor and materials availability, labor disputes, local zoning and licensing matters, and weather conditions); and
•
Securing required governmental permits.
•
Our ability to continue to maintain and enhance our central reservation system to support additional franchised hotels in a timely, cost-effective manner; and

7


•
The effectiveness and efficiency of our development organization.

Our failure to compete successfully for properties to franchise, or to attract and maintain relationships with hotel owners and hotel investors, could adversely affect our ability to expand our system of hotels. An inability to implement our growth strategy could limit our ability to grow our revenue base and otherwise adversely affect our results of operations.

If our franchise or management contracts terminate or are not renewed, if new franchisees are unable to effectively integrate their hotels into our system, or if franchisees or owners are unprofitable or go out of business, our franchise or management fee revenue will decline.

As of December 31, 2018, there were 1,318 hotels in our system that were owned by others and operated under franchise agreements. Our revenues and operating results are dependent upon the ability of our franchisees to generate revenue at their franchised properties. If the revenues of our franchisees decrease, or our franchisees close their hotels, our operating results will be negatively affected.

Our business model depends on our ability to establish and maintain long-term, positive relationships with our franchisees. Franchise agreements generally specify a fixed term and contain an early termination provision for the franchisee to terminate at specific intervals or for specific reasons with or without penalty by providing notice to us. There is no assurance these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms. In addition, there can be no assurance that we will be able to replace expired or terminated franchise agreements, or that the provisions of renegotiated or new agreements will be as favorable to us as the expired or terminated agreements. If we fail to maintain and renew existing franchise agreements, we may be unable to expand our franchise business, and our financial condition and revenues could be negatively impacted. In addition, if a franchisee experiences financial or other difficulties, our franchisee may default on their obligations and be unable to satisfy their financial obligations to us, which would adversely effect on our revenues and financial condition.

We are party to management contracts for the Red Lion Hotel Atlanta International Airport, owned by RLH Atlanta joint venture and the Bellevue hotel property, which is owned by a third party. These agreements generally specify a fixed term, as well as management responsibilities defined by certain terms and conditions. Our failure to meet the obligations within these agreements could trigger early termination. Additionally, there is no assurance that these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms for other reasons. The Bellevue hotel management agreement terminated in February 2019.

We may have disputes with the owners of the hotels that we franchise.

The nature of our responsibilities under our franchise agreements may, in some instances, be subject to interpretation and may give rise to disagreements. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential franchisees, hotel owners and joint venture partners. However, we may not always be able to do so. Failure to resolve such disagreements may result in franchisees or other hotel owners leaving our system of hotels, or in litigation, arbitration or other legal actions.

General economic conditions may negatively impact our results and liquidity.

During the economic downturn, which began in 2007, discretionary travel decreased because of economic pressures, and this in turn hurt the hospitality industry and our company. High unemployment, lower family income, low corporate earnings, lower business investments and lower consumer and government spending all have the effect of reducing the demand for hotel rooms and related lodging services and put pressure on industry room rates and occupancy. As a result, during the years 2008 through 2013, we reported net losses from continuing operations. Although the economy has improved, a slowdown in the economic recovery or a worsening of economic conditions in 2019 could result in weak hospitality occupancy and rates and adversely affect our revenues and operating results. Negative economic conditions could also negatively impact our ability to obtain future financing and our liquidity in general. While we believe we have adequate sources of liquidity to meet our anticipated requirements for working capital and debt service for the foreseeable future, if our cash flow or capital resources prove inadequate or we do not meet our financial debt covenants, we could potentially face liquidity problems that could have a material adverse effect on our results of operations and financial condition.

8



We reported net losses from continuing operations from 2008 through 2013 and 2016 through 2017, and, although we had a net profit in 2014, 2015, and 2018, there is no assurance that we will be profitable in the future.

During the years 2008 through 2013 and in 2016 and 2017, we reported net losses from continuing operations. Not only did these losses have a direct adverse effect on our financial condition, they also increased our costs of borrowing. Although we have shown a net profit during two of the last four fiscal years, the long prior history of net losses could impair our ability to raise capital needed for franchise expansion, hotel investments and other corporate purposes. There is no assurance that we will be able to achieve profitability in the future.

Our new programs and new brands may not be successful.

We have made a significant investment in RevPak, a guest management system that allows hotel operators to increase their bookings by integrating customer relationship management software, sales force automation processes, translation services, a central guest reservation system, and digital and field marketing capabilities onto a single platform. Additionally, RevPak allows operators to measure results with reputation management, business intelligence, and web analytics capabilities. We believe this technology provides a measureable benefit to our company, our franchisees and other users of RevPak by helping increase hotel patronage and generate strong RevPAR growth. However, we cannot be certain this technology will provide all the benefits we anticipated, that it will be well received by all of our franchisees and hotel owners, or that we will be able to recover the costs we incurred in developing this system. We also cannot assure you that other recently announced programs and brands, such as Hotel RL, or any other new programs or brands we may launch in the future will be accepted by hotel owners, potential franchisees, or the traveling public or other customers. We also cannot be certain that we will recover the costs we incurred in developing or acquiring these programs or brands, or that the brands or any new programs will be successful.

We may have difficulty integrating the Knights Inn brands into our operations.

The integration of the recently acquired Knights Inn brands into our own operations will be time consuming and presents financial, managerial and operational challenges. Issues that arise during this process may divert management’s attention away from our day-to-day operations, and any difficulties encountered in the integration process could cause internal disruption in general, which could impact our relationships with employees, hotel owners, hotel franchisees, or guests. Migrating hotels and franchisees to our reservations and other systems and business practices could be more difficult and time consuming than we anticipated, and could result in additional unanticipated expenses. Our combined results of operations could also be adversely affected by any issues we discover that were attributable to Knights Inn’s operations that arose before the acquisition. Failure to successfully integrate the Knights Inn brand in a timely and cost-efficient manner could impair our ability to realize any or all of the other anticipated benefits of the acquisition, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

Our business is seasonal in nature, and we are likely to experience fluctuations in our results of operations and financial condition.

Our business is seasonal in nature, with the period from May through October generally accounting for the greatest portion of our annual company operated hotel revenues. In addition, our upscale and midscale franchise agreements contain fees paid to us primarily based on a percentage of hotel revenue. Therefore, our results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. The seasonal nature of our business increases our vulnerability to risks during this period, including labor force shortages, cash flow problems, economic downturns and poor weather conditions. The adverse impact to our revenues would likely be greater as a result of our seasonal business.

Our expenses may remain constant or increase even if revenues decline.

The expenses of owning and operating a hotel are not necessarily reduced when circumstances such as market factors and competition cause a reduction in its revenues. Accordingly, a decrease in our revenues could result in a disproportionately higher decrease in our earnings because our expenses are unlikely to decrease proportionately. In addition, we continue to invest in sales and marketing, technology, franchising and personnel resources in an effort to position our company for future growth. These investments may not produce the returns we anticipate or the returns may take longer to achieve than expected.

9



The planned sale of joint venture and company owned hotels may not occur in the timeline expected and the company may not be able to replace the Revenue and Adjusted EBITDA from this business in future periods.

On October 5, 2017 the company’s Board of Directors approved a process to market and sell 11 hotel ownership positions maintained in joint venture arrangements. Subsequently in August 2018, we announced a process to market and sell three additional owned or leased hotels. In December 2018, we also listed a joint venture hotel for sale. This is consistent with the Company’s previously stated business strategy to focus on moving towards operations as primarily a franchise company. Between October 2017 and December 31, 2018, the company completed the sale of nine hotel properties for an aggregate sale value of $116.5 million. The completion of these sales allowed the company’s consolidated subsidiary, RL Venture, LLC, to repay in full the principal balance due under its loan agreement with Pacific Western Bank, as well as pay down approximately $20.6 million outstanding under our credit agreement with Deutsche Bank AG New York Branch and the other lenders party to that agreement. We expect that the completion of these sales will allow the company to reduce long-term debt and/or to increase cash reserves for future franchise agreement growth initiatives.

It is our intention, subject to market conditions to sell all of our remaining hotel ownership positions in the next few years. Despite favorable market conditions at the time of the plan, we cannot be certain that the hotel sales will occur according to the timing or market prices anticipated. We cannot be certain that we will be able to replace the revenue and Adjusted EBITDA results from these hotels or other hotel sales with franchise business growth in future periods, or that the profit margins of our franchise business will be as we expected.

The use of common stock to fund new acquisitions will dilute existing shareholders.

In connection with our acquisition of Vantage, we issued 690,000 shares of common stock. We settled the first portion of contingent consideration due in January 2018 in the amount of (i) $4.0 million cash and (ii) 414,000 shares of the Company's common stock. We settled the second and final portion of the Vantage contingent consideration in October 2018 in the amount of (i) $3.0 million in cash and (ii) 276,000 shares of the Company’s common stock. Future acquisitions of other hotels or brands may also involve the issuance of our equity securities as payment, in part or in full, for the businesses or assets acquired. These future issuances of our equity securities will dilute existing shareholders’ ownership interests.

Joint venture and other acquisition arrangements may not prove successful and could result in operating difficulties and failure to realize anticipated benefits.

We have ownership interests of 55% in each of our joint ventures. We may in the future acquire interests in other properties through joint venture arrangements with other entities. In addition, we may enter into other non-property investment joint ventures through other divisions for marketing or other services. Partnerships, joint ventures and other business structures involving our co-investment with third parties generally include some form of shared control over the operations of the business and create additional risks. Some of these acquisitions may be financed in whole or in part by loans under which we are jointly and severally liable for the entire loan amount along with the other joint venture partners. The terms of these joint venture arrangements may be more favorable to the other party, or parties, than to us. Although we will actively seek to minimize such risks before investing in partnerships, joint ventures or similar structures, investing in a property through such arrangements may subject our investment to risks not present with a wholly owned property, including, among others, the following:

•
The other owner(s) of the investment might become bankrupt;
•
The other owner(s) may have economic or business interests or goals that are inconsistent with ours;
•
The other owner(s) may not have the economic ability to contribute operating funds, if needed, increasing our investment and funding to the joint venture(s);
•
The other owner(s) may be unable to make required payments or meet guarantor obligations on loans under which we are jointly and severally liable;
•
The other owner(s) may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, such as selling the property at a time when to do so would have adverse consequences to us;
•
Actions by the other owner(s) might subject the property to liabilities in excess of those otherwise contemplated by us; and
•
It may be difficult for us to sell our interest in the property at the time we deem a sale to be in our best interests.

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If any franchise or hotel acquisitions fail to perform in accordance with our expectations or if we are unable to effectively integrate new franchisees or hotels into our operations, our results of operations and financial condition may suffer.

Based on our experience, newly acquired, developed or converted hotels typically begin with lower occupancy and room rates, thereby resulting in lower revenue. Any future expansion within our existing markets could adversely affect the financial performance of our hotels in those markets and, as a result, negatively impact our overall results of operations. Expansion into new markets may also present operating and marketing challenges that are different from those we currently encounter in our existing markets. Our inability to anticipate all of the changing demands that expanding operations will impose on our management and management information and reservation systems, or our failure to quickly adapt our systems and procedures to new markets, could result in lost revenue and increased expenses and otherwise have an adverse effect on our results of operations and financial condition.

In addition, our franchise agreements require that franchisees comply with certain brand standards that help maintain the quality and reputation of our brands. These include property improvement plans required at the beginning of the franchise relationship, as well as continuing obligations related to the appearance of the properties and the service levels provided by hotel employees. If our franchisees fail to make the investments necessary to maintain or improve their properties in accordance with our brand standards, guest preference for our brands could diminish and cause a negative impact on our overall results of operations. In addition, if our franchisees fail to observe these brand standards or meet their contractual requirements, we may elect to exercise our termination rights, which would eliminate revenues from these properties and cause us to incur expenses related to terminating these contracts. We may be unable to find suitable or offsetting replacements for any terminated franchise relationships.

If owners of hotels that we franchise cannot repay or refinance mortgage loans secured by their properties, our revenues and profits could decrease and our business could be negatively impacted.

The owners of many of our franchised properties have pledged their hotels as collateral for mortgage loans they entered into when those properties were purchased or refinanced. If an owner cannot repay or refinance maturing indebtedness on favorable terms or at all, the lender could declare a default, accelerate the related debt, and repossess the property. Such sales or repossessions could, in some cases, result in the termination of our franchise agreements and eliminate our anticipated income and cash flows, which could negatively affect our results of operations.

Failure of the joint venture or joint venture owners to comply with debt covenants could adversely affect our financial results or condition.

During 2015 we entered into joint ventures related to our Washington DC and Atlanta properties, of which we own an equity interest of 55% in each. We manage the Atlanta hotel under a management agreement with a five-year term and three five-year extension options.

In connection with these transactions, the joint ventures borrowed a combined total of $26.0 million, which is secured by the hotel properties within the joint venture entities. The credit agreements for these loans contain customary affirmative and negative covenants. The current outstanding principal balance of these loans as of December 31, 2018 is $25.2 million.

Since 2015, our DC hotel has not generated enough revenues to comply with the debt covenants in place under its credit agreement. As a result, we have been required to make additional cash contributions to this joint venture entity in 2017 and 2018, in the form of preferred capital, in the amount of $1.4 million. The preferred capital will be repaid to us only when the underlying hotel property is sold or when the joint venture is liquidated, plus a preferred return that ranges from 9%-11%.

In addition, in December, 2018, we agreed to amend the loan agreement for our DC property to cure certain covenant defaults by increasing our principal guarantee to $10.5 million.

Since 2016, our Atlanta hotel has not generated enough revenues to comply with the debt covenants in place under its credit agreement. As a result, we have been required to make additional cash contributions to this joint venture entity in 2019, in the form of preferred capital, in the amount of $2.8 million. The preferred capital will be repaid to us only when the underlying hotel property is sold or when the joint venture is liquidated, plus a preferred return that ranges from 9%.

In May 2017 and 2018, RLH Corporation provided an additional $2.8 million and $2.0 million, respectively, to RLS Balt Venture to fund operating losses. This funding was not treated as a loan or as a capital contribution. Rather, it is preferred capital of RLS Balt Venture and will be repaid only when the Baltimore hotel property is sold or when RLS Balt Venture is liquidated. Upon

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such an event, RLH Corporation will receive the preferred capital plus a preferred return of 9% on the May 2017 preferred capital and 11% on the May 2018 preferred capital, compounded annually, prior to any liquidation proceeds being returned to the members.

While we believe that our joint ventures are stabilized and that they will be able to continue to comply with their terms of their credit agreements, there can be no assurance that we won’t be required to make additional capital contributions or increase guarantees in the future. Any failure of our joint ventures to comply with the terms of their loan covenants, or our inability to cure defaults by making additional capital contributions or increasing our principal guarantees, could result in a demand for immediate repayment of the loans, which could result in one or more of these hotels being foreclosed upon and otherwise adversely affect our results of operations and financial condition, and limit our ability to obtain financing. For additional information, see Note 8 Debt and Line of Credit within Item 8. Financial Statements and Supplementary Data.

We have incurred debt financing and may incur increased indebtedness in connection with acquisitions, capital expenditures, other corporate purposes or growth of our system of hotels.

In May, 2018, we entered into a credit agreement with Deutsche Bank AG New York Branch, Capital One, National Association, Raymond James Bank, N.A., as lenders and DB as the administrative agent (DB Credit Agreement), which provided for a $30.0 million senior secured term loan facility and a $10.0 million senior secured revolving credit facility (Line of Credit). We borrowed the full amount of the $30.0 million senior secured term loan at closing to fund our acquisition of Knights Franchise Systems, Inc., and borrowed an additional $10.0 million under our line of credit to partially fund the purchase of the outstanding debt of RL Baltimore, a wholly owned subsidiary of RLS Balt Venture LLC, a consolidated subsidiary of RLH Corporation, which was wholly owned as of December 31, 2018. The loan is guaranteed by all of our direct and indirect wholly-owned subsidiaries, and secured by all of our assets and the assets of our subsidiary guarantors. As of December 31, 2018, $9.4 million was outstanding under the Senior Secured Term Loan facility and $10.0 million was outstanding under the Line of Credit.

Neither our Articles of Incorporation nor our Bylaws limit the amount of indebtedness that we may incur. Subject to limitations in our debt instruments, we may incur additional debt in the future to finance hotel renovations, repairs and replacements, for general corporate purposes or for hotel acquisitions. If our leverage increases, the resulting debt service could adversely affect our operating cash flow. The degree to which we are leveraged could also increase our vulnerability to and reduce our flexibility to respond to, general adverse economic and lodging industry conditions, including increases in interest rates, and could impair our ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise. Increasing leverage could also place our company at a competitive disadvantage as compared to our competitors that are not as highly leveraged. Our indebtedness is, and will likely continue to be, secured by our existing assets. If we are not able to meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure. Economic conditions could result in higher interest rates, which would increase debt service on our variable rate credit facilities and could reduce the amount of cash available for general corporate purposes.

Increases in interest rates could adversely affect our business and financial results.

We have exposure to increase in interest rates under our DB Credit Facility. Outstanding amounts under the Senior Secured Term Loan and Line of Credit will bear interest at our election of 1-month, 2- month, 3-month, or 6-month LIBOR plus 3.00% with interest payable at the end of each elected 1-month, 2-month, 3-month, or 6-month elected term. As of December 31, 2018, we have elected 1-month LIBOR rates resulting in an interest rate of 5.3%. Any significant increase in interest rates would have a material adverse effect on our financing costs and our future results of operations and cash flows.

In addition, the DB Credit Facility uses LIBOR as a benchmark for establishing the interest rate. LIBOR is the subject of recent proposals for reform, and in July 2017, the United Kingdom’s Financial Conduct Authority, which regulated LIBOR, announced that it intends to phase out LIBOR by the end of 2021, which is prior to the 2023 maturity date of our DB Credit Agreement. The DB Credit Agreement provide that if LIBOR is unavailable, the interest rate will be based upon a comparable or successor rate, which is approved by the administrative agent. At this time, the consequences of the phase out of LIBOR is unknown, however, the substitution of a comparable or successor rate could result in an increase in the cost of our variable interest rate(s) under the DB Credit Facility.


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Our existing leverage may limit our ability to borrow additional funds or take certain actions we believe are beneficial to our business operations.

As of December 31, 2018, the principal amount outstanding under our DB Credit Agreement was $19.4 million. In addition, our joint ventures RLH Atlanta and RLH DC, in which we hold a majority interest, have outstanding mortgage debt of $9.2 million and $15.9 million, respectively, and we have provided a principal guarantee of $10.5 million on the RLH DC debt. Various limitations in our DB Credit Agreement may reduce our ability to incur additional debt, to engage in some transactions and to capitalize on business opportunities. In particular, the DB Credit Agreement contains certain affirmative and negative covenants, including the maintenance of certain financial ratios and restrictions that may prevent us from engaging in certain beneficial transactions, such as limitations on incurring additional debt, entering into mergers, consolidations and sales of assets, making investments or dispositions, granting liens, declaring dividends or repurchasing any of our outstanding common stock. These restrictive covenants may prevent us from pursuing acquisitions, making capital expenditures or pursuing other business opportunities we believe are beneficial to the company and its shareholders. Failure to comply with the affirmative or restrictive covenants would be an event of default under our DB Credit Agreement.

Our business requires capital for ongoing hotel maintenance, modernization and renovation, as well as for any asset or brand acquisitions or development projects we may want to undertake. If needed capital is not available, our ability to successfully compete with hotels in our scale categories may be adversely impacted.

We are committed to keeping our company owned properties well-maintained and attractive to our customers in order to maintain our competitiveness within the industry and keep our hotels properly positioned in their markets. We are also focused on working with our franchise hotel owners so that they maintain their properties to the same standards. This requires ongoing access to capital for both us and our franchisees for replacement of outdated furnishings as well as for facility repair, modernization and renovation. To the extent we or our franchisees cannot fund these expenditures from cash generated from operations, funds must be borrowed or otherwise obtained. If these funds cannot be obtained, the expenditures have to be deferred to a later period. Without needed investments, we may need to cancel the agreement with the franchisee or move the hotel to a lower classification, both of which would likely have a negative impact on our franchise revenue stream.

In the recent past, our levels of capital expenditures for our company operated hotels have been lower than normal due to the general economic conditions impacting our industry and/or the marketing of our hotels for sale. Customers may not view these investments and improvements as significant enough to allow us to charge higher room rates, and this could negatively impact our hotel revenues and operating results. There are likely to be similar adverse effects if our franchisees are unable to make comparable investments in their properties. Without needed investments, we may have to move the hotel to a lower classification, which would likely have a negative impact on our hotel revenue stream.

Hotel maintenance, brand acquisitions, hotel acquisitions and new project development are subject to a number of risks, including:

•
Availability of capital;
•
Construction delays and cost overruns;
•
Unavailability of rooms or meeting space for revenue generating activities during modernization and renovation projects;
•
Numerous federal, state and local government regulations affecting the lodging industry, including building and zoning requirements and other required governmental permits and authorizations;
•
Uncertainties as to market demand or a loss of market demand after capital improvements have begun; and
•
Potential environmental problems.

Whether capital for new investments and maintenance of existing hotels will be available to us and our franchisees depends on a number of factors, including our cash reserves, profitability, degree of leverage, the value of assets, borrowing restrictions that may be imposed by lenders and conditions in the capital markets. The condition of the capital markets and liquidity factors are outside our control, so there is no assurance that we or our franchisees will be able to obtain financing as needed.

If we need to raise capital through issuance of additional common stock, preferred stock or convertible debt, current shareholders may experience significant dilution. Moreover, there is no assurance that we could raise money through equity issuances.

If we seek to raise additional capital through financing, our leverage may increase. If our leverage increases, the resulting debt service could adversely affect our operating cash flow. Our continuing indebtedness could increase our vulnerability to general economic and lodging industry conditions, including increases in interest rates.


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Any unanticipated delays or expenses incurred in connection with hotel maintenance and renovation, hotel acquisitions and new project development could impact expected revenues and availability of funds, negatively affect our reputation among hotel customers, owners and franchisees and otherwise adversely impact our results of operations and financial condition, including the carrying costs of our assets.

We are subject to various obligations and restrictions under the leases governing our leased properties. In addition, we may not be able to renew these leases on favorable terms or at all.

Four of our company operated hotels, three of which are owned hotels and one of which is owned through a joint venture entity and all of our corporate offices are subject to leases. In addition to the requirement to pay rent, the leases for these properties generally impose various maintenance and other obligations on us and may also require us to obtain the consent of the landlord before taking certain actions such as modifications to the properties. These lease provisions may limit our flexibility with the leased properties, delay modifications or other actions we may wish to take, or result in disputes with the landlords. In addition, the terms of the leases for three of our leased properties will expire in the period from 2021 through 2028. There can be no assurance that any of our landlords will be willing to extend these leases and, even if they are willing to extend, it is possible that the lease costs will increase, which would adversely impact the hotel operations and our expenses. If some of our leases are not renewed for any reason, we could incur additional costs and expenses associated with negotiating a new lease agreement and moving our offices to a new location. On October 31, 2018, the Company's lease for the Red Lion River Inn expired. The landlord filed a lawsuit against the Company on January 24, 2019 in Spokane Superior Court, alleging breach of the lease agreement and tort claims relating to the condition of the hotel. The Company filed its answer on January 25, 2019, denying all allegations and asserting various affirmative defenses.

The results of some of our hotels are significantly impacted by group contract business and other large customers, and the loss of such customers for any reason could harm our operating results.

Group contract business and other large customers, or large events, can significantly impact the results of operations of some of the hotels in our network. These contracts and customers vary from hotel to hotel and change from time to time. Contracts with large customers such as airlines and railroads are typically for a limited period of time, after which they may be eligible for competitive bidding. The impact and timing of group business and large events are not always predictable and are often episodic in nature. The operating results for hotels in our network can fluctuate as a result of these factors, possibly in adverse ways, and these fluctuations can harm our overall operating results.

The increasing use of third-party travel websites by consumers may adversely affect our profitability.

A significant percentage of hotel rooms for individual guests are booked through internet travel intermediaries like Priceline, Expedia, or Travelocity, to whom we commit to pay various commissions and transaction fees for sales of our rooms through their systems. As internet bookings now represent the majority of hotel reservations in the industry, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us or our franchisees.

Moreover, some of these internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as "three-star downtown hotel") at the expense of brand identification. We believe that these internet intermediaries hope that consumers will eventually develop brand loyalties to their reservation systems. Although most of the business for our hotels is expected to be derived from traditional channels, if the amount of sales made through internet intermediaries increases significantly, our profitability may be adversely affected.

We rely on our central reservation system and other technologies for occupancy at hotels in our network and a lack of investment in upgrades or new technologies or any failures in the system could negatively affect our revenues and cash flows.

The hospitality industry requires the use of technology and systems for property management, procurement, reservations, operation of customer loyalty programs, distribution and other purposes. These technologies can be expected to change guests' expectations, and there is the risk that advanced new technologies will be introduced requiring further investment capital. We maintain a hotel reservation system that allows us to manage our hotel network's rooms inventory through various distribution channels, including our website, and execute rate management strategies. As part of our marketing strategy, we encourage guests to book on our website, which guarantees the lowest rate available compared to third-party travel websites.

The development and maintenance of our central reservation system and other technologies may require significant capital. There can be no assurances that, as various systems and technologies become outdated or new technology is required, we will be able to replace or introduce them as quickly as our competition or within budgeted costs and time frames. Further, there can be no

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assurance that we will achieve the benefits that may have been anticipated from any new technology or system. If our systems fail, whether as a result of a deliberate cyber-attack or an unintentional event that causes interruptions or delays in our ability to process reservations, our ability to conduct business and generate revenue will be negatively impacted. If our systems fail to achieve anticipated benefits, or if we fail to keep up with technological or competitive advances, our revenues and cash flows could suffer.

Our central reservation system includes a third-party operated call center that enables guests to make reservations on a 24/7 basis. Poor performance by the third party provider, disputes with the third party provider, increased costs of the call center or our inability to renew or extend our agreement with the third party on favorable terms could adversely impact the hotel operations and our expenses as well as those of our franchised and managed hotels.

Failure to maintain the security of internal or customer data could adversely affect us.

Our operations require us to collect and retain large volumes of internal and customer data, including credit card numbers and other personally identifiable information of our customers, which are entered into, processed by, summarized by and reported by our various information systems and those of our service providers. We also maintain personally identifiable information about our employees. Our franchise hotel owners also maintain similar personally identifiable information, on systems that we do not control. The security of this data may potentially be breached due to a number of risks, including cyber-attack, system failure, computer virus, or unauthorized or fraudulent use by customers, company employees, franchisees or employees of third party vendors. Although we employ systems to protect data, no system is impenetrable. A theft, loss or fraudulent use of customer, employee or company data by us or our franchise hotel owners could adversely impact our reputation and could result in significant remedial and other costs, fines and litigation.

We also rely on a variety of direct marketing techniques to reach guests and potential guests, including email marketing, telemarketing and postal mailings. Changes in laws and regulations regarding direct marketing and solicitation could adversely affect the effectiveness of these marketing techniques and could force us to make changes to our marketing strategies. Our failure to comply with laws and regulations regarding direct marketing could result in fines or place restrictions on our business.

If we fail to comply with privacy regulations, we could be subject to fines or other restrictions on our business.

We collect and maintain information relating to our guests for various business purposes, including credit card information and information on guest preferences that we use to enhance customer service and for marketing and promotional purposes. The collection and use of personal data are governed by privacy laws and regulations enacted in the United States, as well as by various contracts under which we operate. Privacy regulation is an evolving area in which different jurisdictions may have inconsistent compliance requirements. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to service our guests and market our products, properties and services. In addition, noncompliance with applicable privacy regulations, either by us or in some circumstances by third parties engaged by us or our franchise hotel owners, could result in fines or restrictions on our use or transfer of data.

Disruption or malfunction in our information systems could adversely affect our business.

Our information technology systems are vulnerable to damage or interruption from:

•
Earthquakes, fires, floods and other natural disasters;
•
Power losses, computer system failures, internet and telecommunications or data network failures, operator negligence, improper operation by or supervision of employees, physical and electronic losses of data and similar events; 
•
Third party provider disruptions in service; and
•
Computer viruses, penetration by individuals seeking to disrupt operations or misappropriate information, and other breaches of security.

We rely on our systems to perform functions critical to our ability to operate, including our central reservation system. Accordingly, an extended interruption in the systems' function could significantly curtail, directly and indirectly, our ability to conduct our business and generate revenue.


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We have identified material weaknesses in our internal controls over financial reporting during the years ended December 31, 2017 and 2016. We have remediated these material weaknesses as of December 31, 2018, however if we fail to continue to maintain an effective system of internal controls, we may not be able to accurately report our financial results, prevent fraud, or maintain investor confidence.

Effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act. In addition, Section 404 under the Sarbanes-Oxley Act requires that our auditors attest to the design and operating effectiveness of our controls over financial reporting. Our compliance with the annual internal control report requirement for each fiscal year will depend on the effectiveness of our financial reporting, data systems, and controls across our operating subsidiaries. Furthermore, a part of our growth strategy has been, and may continue to be, the acquisition of complementary businesses, and we expect these systems and controls to become increasingly complex to the extent that we integrate acquisitions and our business grows. Likewise, the complexity of our transactions, systems, and controls may become more difficult to manage. We cannot be certain that these measures will ensure that we design, implement, and maintain adequate controls over our financial processes and reporting in the future, especially for acquisition targets that may not have been required to be in compliance with Section 404 of the Sarbanes-Oxley Act at the date of acquisition.

During our evaluation of the effectiveness of the internal controls over financial reporting as of December 31, 2017, we identified material weaknesses in each of the following areas: Control Environment, Risk Assessment, Monitoring and Financial Closing and Reporting.

In particular, controls related to the following were not designed to operate effectively:

Control Environment
We did not maintain a sufficient complement of personnel with the appropriate knowledge, experience and/or training in application of GAAP commensurate with our financial reporting requirements.
We did not maintain adequate qualified personnel with regard to certain significant complex transactions and technical accounting matters.

Risk Assessment
We did not design and maintain internal controls that were effective in identifying, assessing and addressing risks that significantly impact the financial statements or the effectiveness of the internal controls over financial reporting. We did not modify our controls to sufficiently address changes in risks of material misstatement as a result of changes in our operations, organizational structure and operating environment, specifically the expansion of activities related to recent acquisitions.

Monitoring
We did not design and maintain effective monitoring of compliance with established accounting policies, procedures and controls. This weakness included the failure to design and operate effective procedures and controls whose purpose is to evaluate and monitor effectiveness of the individual control activities.

Financial Closing and Reporting
We did not design and maintain effective controls over the financial closing and reporting process with sufficient precision to mitigate a potential material misstatement.

These deficiencies were pervasive in nature and create a reasonable possibility that a material misstatement of the annual or interim financial statements would not have been prevented or detected on a timely basis.

During 2018, management executed a remediation plan that included significant changes to the Company’s accounting and internal audit staffing. Remediation efforts included a formal risk assessment performed by internal audit and senior management and included an internal review of all internal control processes, which resulted in the identification of new internal controls to address design gaps, the re-design of certain existing controls, and the elimination of redundant or unnecessary controls. During 2018, we completed our remediation plan and successfully completed testing of the new control environment. As a result of our internal control testing, we have concluded that the material weaknesses have been remediated as of December 31, 2018.

Any material weaknesses in the future could cause harm to our operating results or cause us to fail to meet our financial reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.


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Any failure to protect our trademarks could have a negative impact on the value of our brand names.

The success of our business depends in part upon our continued ability to use our trademarks, increase brand awareness and further develop our brands. We have registrations with the U.S. Patent and Trademark Office of various formulations of certain trademarks, including but not limited to the following: Red Lion, Hotel RL, Red Lion Inn & Suites, GuestHouse & Design, Settle Inn, Settle Inn & Suites, Signature & Design, Signature Inn, Knights Inn, Americas Best Value Inn, ABVI, Value Inn Worldwide, Vantage & Design, 3 Palms Hotels & Resorts & Design, America’s Best Inns & Suites, Country Hearth Inn & Suites, Jameson Inn, Lexington, Canadas Best Value Inn & Design, CBVI, Cavanaughs and Cascadia Soapery, Hello Rewards, MAKE IT #WORTH IT, PROJECT WAKE UP CALL, RLHC and RLH.

We have also registered various formulations of the Red Lion trademark and others in several international jurisdictions including for example, Canada, Mexico, China, India, Australia, the European Union and a number of other countries in Asia. We cannot be assured that the measures we have taken to protect our trademarks will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brands and their market acceptance, competitive advantages or goodwill, which could adversely affect our business.

Departures of senior executives or other key employees could adversely affect our business.

We have seen significant turnover among our senior executives over the past five years. Our current Chief Executive Officer was hired in 2014. Our current Chief Financial Officer was hired in January 2019 to replace her predecessor, who was hired in 2017 and announced his departure for personal reasons in October 2018. We hired a new Chief Operating Officer in June 2018, after the departure of our prior Chief Operating Officer and President of Global Development in May 2018, and our Chief Marketing Officer announced he will be departing the company in May 2019. We may in the future hire additional officers and key employees. To be properly integrated into our company, new executives and employees must spend a significant amount of time learning our business model and management system, in addition to performing their regular duties. As a result, the integration of new personnel may result in some disruption to our ongoing operations, and the lack of continuity among our executive team could have a material adverse effect on our business, financial condition and results of operations.

We place substantial reliance on the lodging industry experience and the institutional knowledge of the members of our senior management team. We compete for qualified personnel against companies with greater financial resources than ours, and the loss of the services of one or more of these individuals, or delay in replacing a key employee, could hinder our ability to effectively manage our business. Finding suitable replacements for senior management and other key employees can be difficult, and there can be no assurance we will continue to be successful in retaining or attracting qualified personnel in the future. We currently do not carry key person insurance on members of our senior management team. Any loss of a senior team member could have a material adverse impact on our financial condition or results of operations.

We are exposed to impairment risk of goodwill, intangibles and other long-lived assets.

Financial and credit market volatility directly impacts fair value measurement through our company's estimated weighted average cost of capital used to determine discount rates, and through our common stock price that is used to determine market capitalization. During times of volatility, significant judgment must be applied to determine whether credit or stock price changes are a short-term swing or a longer-term trend.

At the end of 2018, our goodwill amount was $18.6 million, and other intangible assets totaled $60.9 million. Market conditions in the future could adversely impact the fair value of one or both of our franchise or hotel reporting units, which could result in future impairments of their goodwill, intangibles and other long-lived assets.

The assessment for possible impairment requires us to make judgments, including:

•
Estimated future cash flows from the respective properties or business units, which are dependent upon internal forecasts;
•
Estimation of the long-term rate of growth for our business;
•
The useful life over which our cash flows will occur;
•
The determination of real estate and prevailing market values;
•
Asset appraisals; and
•
Current estimated net sales proceeds from pending offers or net sales proceeds from previous, comparable transactions, if available and appropriate.


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In accordance with the guidance for the impairment of long-lived assets, if the expected undiscounted future cash flows are less than net book value, the excess of net book value over estimated fair value of the assets is charged to current earnings. There were no impairment charges in 2016 or 2017. However, in 2018 we recognized an impairment charge of $7.1 million on our Baltimore property due to default on the RL Baltimore loan, coupled with challenging cash flow results for the asset gave rise to the impairment, and an impairment charge of $3.5 million in our Guesthouse brand name intangible asset and reclassified the amount from an indefinite lived intangible asset to a finite lived intangible asset as the brand has encountered lower growth than previously expected, mostly due to the addition of other offerings in our portfolio. Changes in our estimates and assumptions as they relate to valuation of goodwill, intangibles and other long-lived assets could affect, potentially materially, our financial condition or results of operations in the future.

Risks associated with real estate ownership may adversely affect revenue or increase expenses.

We are subject to varying degrees of risk that generally arise from the ownership of real property. Revenue and cash flow from our hotels and other real estate may be adversely affected by, and costs may increase or market values may decrease as a result of, changes beyond our control, including but not limited to:

•
Changes in national, regional and local economic conditions;
•
Changes in local real estate market conditions;
•
Opening of other competing hotels in the region;
•
Increases in interest rates and other changes in the availability, cost and terms of financing and capital leases;
•
Increases in property and other taxes;
•
The impact of present or future environmental legislation;
•
Adverse changes in other governmental regulations, insurance and zoning laws; and
•
Condemnation or taking of properties by governments or related entities.

These adverse conditions could potentially cause the terms of our borrowings to change unfavorably. Unfavorable changes in one or more of these conditions could also result in unanticipated expenses and higher operating costs, thereby reducing operating margins and otherwise adversely affecting our results of operations and financial condition.

The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our hotels and harm our financial condition.

Real estate investments are relatively illiquid, and therefore we and the joint ventures in which we participate have a limited ability to promptly sell one or more hotels in response to changing economic, financial or investment conditions. The real estate market, including the market for hotels, is affected by general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. In addition, it may be difficult or impossible to convert hotels to alternative uses if they become unprofitable due to competition, age of improvements, decreased demand or other factors. The conversion of a hotel to an alternative use would also generally require substantial capital expenditures. This inability to respond promptly to changes in the performance of our hotels could adversely affect our financial condition and results of operations as well as our ability to service debt. In addition, sales of appreciated real property could generate material adverse tax consequences, which may make it disadvantageous for us to sell certain of our hotels.

Sales of a substantial number of shares of our common stock in the public market, or the perception in the public markets that these sales may occur, may depress our stock price.

If our shareholders sell substantial amounts of our common shares in the public market, the market price of our common shares could decrease. On June 12, 2018 our largest shareholder, HNA RLH Investments LLC sold 3,738,401 shares of our common stock, representing approximately 15.8% of our outstanding common stock on that date, in a private transaction to funds and accounts managed by Coliseum Capital Management (Coliseum), and Coliseum subsequently sold 488,037 shares on that date to accounts advised by Vindico Capital. Because our common stock is relatively thinly traded, a sale of a large block of shares in the public market by any major shareholder would likely result in a significant decline in our stock price. Our stock price may also fluctuate materially based on announcements by large shareholders disclosing acquisitions or sales of our common stock, by such shareholders expressing their views with respect to actions they believe should be taken by our company, or by such shareholders taking actions designed to impact our corporate policy and strategy, such as attempting to obtain control of our board of directors or initiating or substantially assisting an unsolicited takeover attempt.

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares.


18


Large shareholders could seek to impact our corporate policy and strategy, and their interests may differ from those of other shareholders.

As of March 1, 2019, Coliseum Capital Management (Coliseum) held 15% of our outstanding shares of common stock. Coliseum, or one or more other large shareholders may take actions designed to impact our corporate policy and strategy, and their interests may differ from those of other shareholders. Such actions could include, among other things, attempting to obtain control of our board of directors or initiating or substantially assisting an unsolicited takeover attempt.

The market price for our common stock may be volatile.

The stock market has experienced and may in the future experience extreme volatility, oftentimes unrelated to the operating performance of particular companies. Many factors could cause the market price of our common stock to rise or fall, including but not limited to:

•
Changes in general economic conditions, and subsequent fluctuations in stock market prices and volumes;
•
Changes in financial estimates, expectations of future financial performance or recommendations by analysts;
•
Changes in market valuations of companies in the hospitality industry;
•
Actual or anticipated variations in our quarterly results of operations;
•
Issuances of additional common stock or other securities;
•
Announcements by our shareholders disclosing acquisitions or sales of our common stock or expressing their views with respect to actions they believe should be taken by our company;
•
Low daily trading volume of our stock; and
•
Announcements by us or our competitors of, or speculation with respect to, acquisitions, investments or strategic alliances.

We are not currently paying dividends and will likely not pay dividends for the foreseeable future.

We have never paid or declared any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, contractual restrictions and other factors that our board of directors deems relevant.

Our properties are subject to risks relating to natural disasters, terrorist activity and war, and any such event could materially adversely affect our operating results without adequate insurance coverage or preparedness.

Our financial and operating performance may be adversely affected by acts of God, such as natural disasters, particularly in locations where our properties are located. Our properties are generally covered by comprehensive liability, public area liability, fire, boiler and machinery, extended coverage and rental loss insurance. However, certain types of catastrophic losses, such as those from earthquake, volcanic activity, flood, terrorism and environmental hazards, may exceed or not be covered by the insurance. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. Similarly, threatened or actual terrorist activity, war, epidemics, travel-related accidents, geopolitical uncertainty, international conflict and similar events that impact domestic and international travel have caused in the past, and may cause in the future, our results to differ materially from anticipated results. In addition, depending on the severity, a major incident or crisis may prevent operational continuity at hotels in our network and consequently impact the value of our brands or the reputation of our business.

Our international operations are subject to political and monetary risks.

We currently have franchised hotels operating outside of the United States, including in Canada and South Korea. We may also in the future enter into new joint venture or franchise agreements with foreign hotel operators. International operations generally are subject to greater economic, geopolitical and other risks that are not present in United States operations. These risks include not only administrative and logistical difficulties in managing worldwide operations, but also risks of war, terrorism or civil unrest, political instability, exposure to local economic conditions, and adverse changes in the diplomatic relations between foreign countries and the United States.

Sales in international jurisdictions typically are made in local currencies, which exposes us to risks associated with currency fluctuations. Fluctuations in currency exchange rates may significantly increase the amount of translated U.S. dollars required for expenses outside the United States, or significantly decrease the U.S. dollars received from foreign currency revenues. We

19


also face exposure to currency translation risk because we report the results of our business outside of the United States in local currency, and then translate those results to U.S. dollars for inclusion in our consolidated financial statements. As a result, changes between the foreign exchange rates and the U.S. dollar will affect the recorded amounts of our foreign assets, liabilities, revenues and expenses, and could have a negative impact on our financial results. To date we have not entered into foreign exchange hedging agreements to reduce our exposure to fluctuations in currency exchange rates, but even if we enter into these hedging agreements in the future, they may not eliminate foreign currency risk entirely, and will involve risks of their own in the form of transaction costs and counterparty risk.

In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. As a result, the steps we have taken to protect our trademarks and brands in foreign countries may not be sufficient to prevent the unauthorized use or the imitation of our trademarks by others, which could reduce the value of our brand and its goodwill, which could adversely affect our business. As we continue to expand internationally, the risks related to our international operations will become more significant.

Government regulation could impact our franchise business.

The Federal Trade Commission (FTC), various states and certain foreign jurisdictions, where we market franchises, regulate the sale of franchises. The FTC requires franchisors to make extensive disclosure to prospective franchisees but does not require registration. A number of states in which our franchisees operate require registration or disclosure in connection with franchise offers and sales. In addition, several states in which our franchisees operate have "franchise relationship laws" or "business opportunity laws" that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While our business has not been materially affected by such regulation, there can be no assurance that this will continue or that future regulation or legislation will not have such an effect.

We are subject to environmental regulations.

Our results of operations may be affected by the costs of complying with existing and future environmental laws, ordinances and regulations. Under federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in the property. These laws impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate a contaminated property properly, may prevent the owner from selling a property or using it as collateral for a loan. Environmental laws may also restrict the use or transfer of a property as well as the operation of businesses at the property. The costs of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could have an adverse effect on our results of operations and financial condition.

Phase I environmental site assessments (ESA) have been performed on all hotel properties owned and leased by us. A Phase I ESA involves an on-site inspection and research of historical usages of the subject and surrounding properties, and regulatory databases regarding underground storage tanks and other matters. If the results of a Phase I ESA reveal potential issues warranting further investigation, a Phase II ESA, which may include soil testing, ground water sampling or borings will be recommended. It is possible that Phase I and Phase II ESAs will not reveal all environmental liabilities or compliance concerns or that there will be material environmental liabilities or compliance concerns that we do not discover.

A Phase II ESA conducted in 2013 at our previously owned Port Angeles hotel property revealed that fill material from an unknown source was placed at the property prior to construction of the existing buildings. Diesel and lube oil-range petroleum hydrocarbons and benzene were detected in one sample collected at concentrations greater than MTCA Method A cleanup levels. Additional testing conducted at the Port Angeles site in August 2013 identified petroleum hydrocarbons and PAHs at concentrations greater than applicable cleanup levels near a former auto repair area that were likely related to impacted fill material identified in the area. At the time of the sale of our Port Angeles property in July 2018, no exposure pathways existed due to caps on the soil consisting of asphalt or structures. However, there can be no assurance that clean-up will not be required in the future, and as a prior owner of this property we may retain some liability for the costs of remediation.

Because of past uses of a small parcel of land including a storage building that we own in Salt Lake City, a Phase I ESA and subsequent Phase II ESA was conducted. The Phase II revealed the presence of VOCs in groundwater and in soil gas. Once the nature and extent of the release is understood, an effort to reduce source concentrations or evaluate the risk must be made. The cost of removing the source of contamination is estimated to be $250,000.

Other than as disclosed above, we have not been notified by any governmental authority and we have no other knowledge of any continuing material noncompliance, material liability or material claim relating to hazardous or toxic substances or other

20


environmental substances in connection with any of our properties. Nevertheless, there is no assurance that these properties do not have any environmental concerns associated with them or that we will not be required in the future to perform or fund cleanup or hazardous or toxic substances. In addition, there is no assurance that we will not discover problems we are unaware of that currently exist, that future laws, ordinances or regulations will not impose any material environmental liability, or that the current environmental condition of our existing and future properties will not be affected by the condition of neighboring properties, such as the presence of leaking underground storage tanks, or by third parties unrelated to us.

We face risks relating to litigation.

At any given time, we are subject to claims and actions incidental to the operation of our business. The outcome of these proceedings cannot be predicted. If a plaintiff were successful in a claim against us, we could be faced with the payment of a material sum of money, and we may not be insured for such a loss. If this were to occur, it could have an adverse effect on our financial condition and results of operations.

In addition, our financial condition may be adversely impacted by legal or governmental proceedings brought by or on behalf of our employees or customers. In recent years, a number of hospitality companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination, accessibility and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits in the future may be instituted against us, and we may incur material damages and expenses, which could have an adverse effect on our results of operations and financial condition.

In addition, in recent years there has been increasing activity by patent holding companies (so-called patent "trolls") that do not use technology but whose sole business is to enforce patents for monetary gain against companies in a wide variety of businesses and industries. These efforts typically involve proposing licenses in exchange for a substantial sum of money and may also include the threat or actual initiation of litigation for that purpose. Any such litigation can be quite costly to defend, even if infringement is unsubstantiated or speculative. We have been threatened with one such claim and two claims have actually been filed against us. Each claim is related to separate technology, but we believe that each such technology is non-proprietary. Both filed claims have been resolved. If we are ultimately found to have violated a patent, our operations could be negatively impacted and/or we might be subject to substantial financial penalties, licensing fees and attorneys' fees. It is not possible to predict the potential impact on our business and operations of any future claims of this type that may be asserted against us.

Washington law contains provisions that could deter takeover attempts.

Our company is incorporated in the State of Washington and subject to Washington state law. The Washington State Anti­takeover Act could interfere with or restrict takeover bids or other change-in-control events affecting us. For example, one statutory provision prohibits us, except under specified circumstances, from engaging in any significant business transaction, such as a merger, with any shareholder who owns 10% or more of our common stock (which shareholder, under the statute, would be considered an "acquiring person") for a period of five years following the time that such shareholder becomes an acquiring person.

Item 1B.
Unresolved Staff Comments

None.


21


Item 2.
Properties

Company Operated Properties

Company operated properties are those properties that we own, lease, or operate through a management contract. A number of our owned and leased properties are operated by third party management companies.

The table below reflects our nine company operated hotel properties and locations, as well as total available rooms per hotel, as of December 31, 2018.
 
  
 
  
Total
 
 
 
 
Available
Property
 
Location
 
Rooms
Company operated properties
 
 
 
 
Red Lion Anaheim (1)
  
Anaheim, California
  
308

Red Lion Hotel Kalispell (1)
  
Kalispell, Montana
  
170

Red Lion Hotel Seattle Airport (1)
  
Seattle, Washington
  
144

Hotel RL Olympia (2)
  
Olympia, Washington
  
193

Hotel RL Salt Lake City (2)
  
Salt Lake City, Utah
  
394

Hotel RL Baltimore Inner Harbor (3)
 
Baltimore, Maryland
 
130

Hotel RL Washington DC (4)
 
Washington, DC
 
99

Red Lion Hotel Atlanta (5)
 
Atlanta, Georgia
 
246

Red Lion Hotel Bellevue (6)
  
Bellevue, Washington
  
181

Company operated properties (9 properties)
 
 
 
1,865

__________ 
(1) Leased
(2) Owned by RL Venture and operated by a third party management company
(3) Wholly owned and operated by a third party management company
(4) Owned by RLS DC Venture, LLC and operated by a third party management company
(5) Owned by RLS Atla Venture, LLC; managed by RL Management, Inc.
(6) No ownership; managed by RL Management, Inc., contract terminated in February 2019.

Franchised Hotels

Under our franchise agreements, we receive royalties for the use of the RLH Corporation brands and marketing funds for the promotion of the RLH Corporation brands. We also make available certain services to those hotels including reservation systems, advertising and national sales, our guest loyalty program, revenue management tools, quality inspections and brand standards, as well as administer central services programs for the benefit of all the hotels in our network. At December 31, 2018, our franchised operations consisted of 1,318 hotels with an approximate room count of 83,800.


22


Item 3.
Legal Proceedings

On September 26, 2018, Radisson Hotels International, Inc. filed a complaint against RLH Corporation and our subsidiary Red Lion Hotels Franchising, Inc. in the United States District Court for the Eastern District of Washington. The complaint alleges tortious interference with agreements between Radisson and several franchisees controlled by Inner Circle Investments and seeks damages in an undetermined amount. RLH Corporation believes this complaint is without merit and we intend to defend it vigorously.

On October 31, 2018, the Company's lease for the Red Lion River Inn expired. The landlord filed a lawsuit against the Company on January 24, 2019 in Spokane Superior Court, alleging breach of the lease agreement and tort claims relating to the condition of the hotel. The Company filed its Answer on January 25, 2019, denying all allegations and asserting various affirmative defenses. RLH Corporation believes this complaint is without merit and we intend to defend it vigorously.

At any given time, we are subject to additional claims and actions incidental to the operation of our business. While the outcome of these proceedings cannot be predicted, it is the opinion of management that none of such proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows or results of operations. See Note 11 Commitments and Contingencies within Item 8. Financial Statements and Supplementary Data.

Item 4.
Mine Safety Disclosures

Not applicable.


23


PART II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information for Common Stock

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol RLH.

Holders

At March 1, 2019, there were 107 shareholders of record of our common stock.

Dividends

Historically, we have not paid any cash dividends on our common stock. The board of directors periodically reviews our dividend policy and our longer-term objectives of maximizing shareholder value. Any determination to pay cash dividends in the future will be at the discretion of our board.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2018 on plans under which equity securities may be issued to employees, directors or consultants. All of our equity compensation plans have been approved by our shareholders.
 
 
  
(a)
 
(b)
 
(c)
 
 
 
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
Number of Securities
Remaining Available for
Future Issuance Under
Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
Equity Compensation Plans Approved by Security Holders:
  
 
  
 
 
 
 
2006 Stock Incentive Plan(1)
  
—

  
$
—

 
—

 
2015 Stock Incentive Plan(2) 
  
81,130

 
$
8.20

 
1,051,643

 
2008 Employee Stock Purchase Plan
  
—

  
$
—

 
317,729

 
Total
  
81,130

  
$
8.20

 
1,369,372

__________
(1) Excludes 166,445 of unvested restricted stock units granted under the 2006 Stock Incentive Plan.
(2) Excludes 1,439,857 of unvested restricted stock units granted under the 2015 Stock Incentive Plan.

24


Performance Graph

The following graph compares the five-year cumulative total return to shareholders of our common stock with the five-year cumulative total return of the Russell 2000 Index and the S&P Hotels, Resorts & Cruise Lines Index.

RLH2018GRAPHA01.JPG

The above presentation assumes an investment of $100 in our common stock, the Russell 2000 Index and the S&P Hotels, Resorts & Cruise Lines Index and depicts RLH Corporation's price performance relative to the performance of the Russell 2000 Index and the Standard & Poor's Hotels, Resorts & Cruise Lines Index, assuming a reinvestment of all dividends. The price performance on the graph is historical and not necessarily indicative of future stock price performance.


25


Item 6.
Selected Financial Data

The following table sets forth our selected consolidated financial data as of and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014. The selected Consolidated Statements of Comprehensive Income (Loss) and Balance Sheet data are derived from our audited consolidated financial statements. The audited consolidated financial statements for certain of these periods are included elsewhere in this annual report. The selected consolidated financial data set forth below should be read in conjunction with, and are qualified in their entirety by, our consolidated financial statements and related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations and other financial information included elsewhere in this annual report and in our prior filings with the SEC.
 
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
 
 
(In thousands, except per share data)
Consolidated Statements of Comprehensive Income (Loss) Data
 
 
 
 
 
 
 
Total revenues (1)
$
135,849

 
$
171,926

 
$
148,351

 
$
131,863

 
$
128,311

 
Asset impairment
10,582

 
—

 
—

 
—

 
—

 
Gain on asset dispositions, net
(42,021
)
 
(449
)
 
(2,436
)
 
(17,692
)
 
(4,006
)
 
Operating income (loss)
21,753

 
1,103

 
(146
)
 
12,417

 
4,779

 
Net income (loss) from continuing operations
15,086

 
(1,669
)
 
(6,094
)
 
3,563

 
1,192

 
Net income from discontinued operations
—

 
181

 
1,254

 
453

 
1,111

Net Income (Loss) attributable to RLH Corporation
$
1,957

 
$
581

 
$
(4,677
)
 
$
2,719

 
$
2,303

 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
0.08

 
$
0.01

 
$
(0.29
)
 
$
0.12

 
$
0.06

 
Discontinued operations
—

 
0.01

 
0.06

 
0.02

 
0.06

 
 
$
0.08

 
$
0.02

 
$
(0.23
)
 
$
0.14

 
$
0.12

Diluted earnings (loss) per share
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
0.08

 
$
0.01

 
$
(0.29
)
 
$
0.11

 
$
0.06

 
Discontinued operations
—

 
0.01

 
0.06

 
0.02

 
0.06

 
 
$
0.08

 
$
0.02

 
$
(0.23
)
 
$
0.13

 
$
0.12

 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Total assets (2)
$
249,787

 
$
327,714

 
$
341,899

 
$
284,747

 
$
219,004

 
Total debt, net of debt issuance costs
$
44,170

 
$
111,397

 
$
108,331

 
$
87,557

 
$
29,873

(1) Revenues for years 2014 through 2017 are presented under Topic 605 while revenues for 2018 are presented under Topic 606 consistent with adoption of Topic 606 as of January 1, 2018 using the modified retrospective method.
(2) Years 2014 through 2016 have been revised to reflect previously understated depreciation of leasehold improvements for our Red Lion Hotel Seattle Airport property. For further information regarding the revision, see Note 2, Summary of Significant Accounting Policies within Item 8. Financial Statements and Supplementary Data.


26



Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with Item 8. Financial Statements and Supplementary Data.

Introduction

We are a NYSE-listed hospitality and leisure company (ticker symbol: RLH) doing business as RLH Corporation and primarily engaged in the franchising, management and ownership of hotels under the following proprietary brands: Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse, Settle Inn, Americas Best Value Inn, Canadas Best Value Inn, Signature and Signature Inn, Knights Inn, and Country Hearth Inns & Suites.

A summary of our properties as of December 31, 2018, including the approximate number of available rooms, is provided below:
 
 
Upscale Service Brand
 
Select Service Brand
 
Total
 
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
Beginning quantity, January 1, 2018
 
104

 
14,400

 
978

 
55,100

 
1,082

 
69,500

Newly opened / acquired properties
 
30

 
5,000

 
395

 
24,200

 
425

 
29,200

Change in brand
 
(2
)
 
(100
)
 
2

 
100

 
—

 
—

Terminated properties(1)
 
(20
)
 
(3,400
)
 
(160
)
 
(9,600
)
 
(180
)
 
(13,000
)
Ending quantity, December 31, 2018
 
112

 
15,900

 
1,215

 
69,800

 
1,327

 
85,700

(1) Terminated properties include locations at which we ended our franchise relationship because the hotels did not meet RLH Corporation's hotel standards. We are focused on maintaining a set of brand standards at all of our locations.

A summary of our executed agreements for the year ended December 31, 2018 is provided below:
 
 
Upscale Service Brand
 
Select Service Brand
 
Total
Executed franchise license agreements, year ended December 31, 2018:
 
 
 
 
 
 
New locations
 
25

 
47

 
72

New contracts for existing locations
 
3

 
83

 
86

Change from company operated to franchised
 
9

 
—

 
9

Total executed franchise license and management agreements, year ended December 31, 2018
 
37

 
130

 
167


We operate in two reportable segments:

•
The franchised hotels segment is engaged primarily in licensing our brands to franchisees. This segment generates revenue from royalty, marketing and other fees that are primarily based on a percentage of room revenue or on room count or on transaction count and are charged to hotel owners in exchange for the use of our brand and access to our marketing and central services programs. These central services and marketing programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards.

•
The company operated hotel segment derives revenues primarily from guest room rentals and food and beverage offerings at owned and leased hotels for which we consolidate results. Revenues have also been derived from management fees and related charges for hotels with which we contract to perform management services, however our last management agreement terminated in February 2019.

Our remaining activities, none of which constitutes a reportable segment, have been aggregated into "other".

Major Transactions During Reporting Periods Presented

On May 14, 2018, Red Lion Hotels Franchising, Inc., a wholly-owned subsidiary of RLH Corporation (RLH Franchising) completed the purchase of all of the issued and outstanding shares of capital stock of Knights Franchise Systems, Inc. (KFS), and the purchase of certain operating assets including franchise agreements for approximately 350 hotels from, and assumption of certain liabilities

27


relating to the business of franchising Knights Inn branded hotels to hotel owners from Wyndham Hotel Group Canada, ULC and Wyndham Hotel Group Europe Limited, pursuant to an Amended and Restated Purchase Agreement, dated May 1, 2018. The aggregate purchase price was $27.2 million. See Note 17 Acquisitions and Dispositions within Item 8. Financial Statements and Supplementary Data.

Consistent with the Company's previously stated business strategy to focus on moving towards operations as primarily a franchise company, on October 5, 2017, we announced that we would be marketing for sale 11 of our owned hotels held by our consolidated joint venture, RL Venture. In addition, on August 9, 2018, we announced that we would be marketing for sale our leasehold interests in our Anaheim, California and Kalispell, Montana hotels and the hotel in Atlanta, Georgia owned by our consolidated joint venture, RLH Atlanta LLC. In 2018, nine of the RL Venture properties were sold for $116.5 million. Most of the buyers entered into franchise license agreements to retain the Red Lion brand. Immediately following the sales of the hotels, our consolidated subsidiary RL Venture, LLC repaid the principal balance outstanding under its loan agreement with Pacific Western Bank, as required by the terms of the agreement.

It is our intention, subject to market conditions to sell all of our hotel ownership positions in the next few years so that we can focus on our hotel franchise business, which is less capital intensive and generates higher profit margins than the hotel ownership business. We anticipate that the completion of these sales will allow the Company to significantly reduce or eliminate long-term debt and to increase cash reserves for future franchise agreement growth initiatives.

On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the entertainment segment are reported as discontinued operations and the assets and liabilities are classified as held for sale for all periods presented in this annual report on Form 10-K.

In September 2016, we (i) acquired selected assets and assumed certain liabilities of Vantage Hospitality Group, Inc. (Vantage), a subsidiary of Thirty-Eight Street, Inc. (TESI) and (ii) acquired one brand name asset from TESI. Vantage was a hotel franchise company, and the addition of the Vantage assets substantially increased our number of franchise properties and provided us with a broader presence in the United States and Canada. We acquired over 1,000 hotel franchise and membership license agreements, as well as multiple brand names, including Americas Best Value Inn, Canadas Best Value Inn, Lexington Hotels & Inns, America's Best Inns & Suites, Jameson Inns, Country Hearth Inns & Suites, Vantage Hotels, Value Inn Worldwide, Value Hotel Worldwide, 3 Palms Hotels and Resorts and Signature Inn. The acquisition price of $40.2 million included $22.6 million of cash and $5.8 million in stock paid at closing, as well as subsequent contingent payments of cash and stock totaling $10.9 million and the assumption of $0.9 million in liabilities.

For further discussion on these transactions, see Note 17, Acquisitions and Dispositions within Item 8. Financial Statements and Supplementary Data.


28


Results of Operations

A summary of our Consolidated Statements of Comprehensive Income (Loss) is provided below (in thousands):
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
Total revenues
 
$
135,849

 
$
171,926

 
$
148,351

Total operating expenses
 
114,096

 
170,823

 
148,497

Operating income (loss)
 
21,753

 
1,103

 
(146
)
Other income (expense):
 
 
 
 
 
 
Interest expense
 
(6,209
)
 
(8,252
)
 
(6,752
)
Loss on early retirement of debt
 
(794
)
 
—

 
—

Other income (loss), net
 
265

 
818

 
326

Total other income (expense)
 
(6,738
)
 
(7,434
)
 
(6,426
)
Income (loss) from continuing operations before taxes
 
15,015

 
(6,331
)
 
(6,572
)
Income tax benefit
 
(71
)
 
(4,662
)
 
(478
)
Net income (loss) from continuing operations
 
15,086

 
(1,669
)
 
(6,094
)
Net income from discontinued operations
 
—

 
181

 
1,254

Net income (loss)
 
15,086

 
(1,488
)
 
(4,840
)
Net (income) loss attributable to noncontrolling interest
 
(13,129
)
 
2,069

 
163

Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
$
1,957

 
$
581

 
$
(4,677
)
 
 
 
 
 
 
 
Non-GAAP data: (1)
 
 
 
 
 
 
 EBITDA from continuing operations
 
$
38,227

 
$
20,745

 
$
16,275

Adjusted EBITDA from continuing operations
 
$
15,766

 
$
25,683

 
$
19,870

_________
 
 
 
 
 
 
(1)  See Item 7. Non-GAAP Financial Measures for a reconciliation of non-GAAP measures to net income (loss) for the periods presented

For the year ended December 31, 2018, we reported net income attributable to RLH Corporation of $2.0 million or $0.08 per weighted average basic share, which includes (i) $42.0 million in gains from the disposal of nine hotel properties, (ii) $10.6 million in impairment losses related to our Baltimore property and GuestHouse brand name intangible asset, and (iii) $2.2 million in acquisition and integration related costs.

For the year ended December 31, 2017, we reported net income attributable to RLH Corporation of $0.6 million or $0.02 per weighted average share, which includes (i) $1.5 million in acquisition and integration related costs, (ii) $0.1 million in employee separation and transition costs, (iii) $3.8 million of income tax benefit due to changes from H.R. 1 known as the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act) and (iv) $1.5 million in net income before tax from discontinued operations of our entertainment segment.

For the year ended December 31, 2016, we reported net loss attributable to RLH Corporation of $4.7 million or $0.23 per weighted average basic share, which includes (i) $2.1 million in acquisition and integration related costs, (ii) a $1.9 million gain on sale of assets, (iii) $0.6 million in employee separation costs, (iv) $0.1 million in costs for environmental cleanup at one of our hotel properties, and (v) $2.0 million in net income before tax from discontinued operations of our entertainment segment.

The above special items are excluded from operating results in Adjusted EBITDA. For the year ended December 31, 2018, Adjusted EBITDA was $15.8 million, compared to $25.7 million for the year ended December 31, 2017 and $19.9 million for the year ended December 31, 2016.


29


Non-GAAP Financial Measures

EBITDA is defined as net income (loss), before interest, taxes, depreciation and amortization. We believe it is a useful financial performance measure due to the significance of our long-lived assets and level of indebtedness.

Adjusted EBITDA is an additional measure of financial performance. We believe that the inclusion or exclusion of certain special items, such as gains and losses on asset dispositions and impairments and discontinued operations, is necessary to provide the most accurate measure of core operating results and as a means to evaluate comparative results.

During the fourth quarter of 2018, we modified the definition of Adjusted EBITDA as used in prior periods to exclude the effect of non-cash stock compensation expense. We believe that the exclusion of this item is consistent with the purposes of the measure described below and we have applied this modification to all prior periods presented.

EBITDA and Adjusted EBITDA are commonly used measures of performance in our industry. We utilize these measures because management finds them a useful tool to calculate more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. Our board of directors and executive management team consider Adjusted EBITDA to be a key performance metric and compensation measure. We believe they are a complement to reported operating results. EBITDA and Adjusted EBITDA are not intended to represent net income (loss) defined by generally accepted accounting principles in the United States of America (GAAP), and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP. In addition, other companies in our industry may calculate EBITDA and, in particular, Adjusted EBITDA differently than we do or may not calculate them at all, limiting the usefulness of EBITDA and Adjusted EBITDA as comparative measures.


30


The following is a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In thousands)
Net income (loss)
$
15,086

 
$
(1,488
)
 
$
(4,840
)
 
Depreciation and amortization
17,003

 
18,824

 
16,095

 
Interest expense
6,209

 
8,252

 
6,752

 
Income tax expense (benefit)
(71
)
 
(4,662
)
 
(478
)
 
Net income from discontinued operations (1)
—

 
(181
)
 
(1,254
)
 EBITDA from continuing operations
38,227

 
20,745

 
16,275

 
Stock-based compensation (2)
3,955

 
3,309

 
2,640

 
Asset impairment (3)
10,582

 
—

 
—

 
Acquisition and integration costs (4)
2,219

 
1,529

 
2,112

 
Employee separation and transition costs (5)
1,509

 
100

 
627

 
Loss on early retirement of debt (6)
794

 
—

 
—

 
Gain on asset dispositions (7)
(41,520
)
 
—

 
(1,912
)
 
Reserve for environmental cleanup (8)
—

 
—

 
128

Adjusted EBITDA from continuing operations
15,766

 
25,683

 
19,870

 
Net income from discontinued operations (1)
—

 
181

 
1,254

 
Depreciation and amortization of discontinued operations
—

 
64

 
186

 
Interest expense from discontinued operations
—

 
—

 
12

 
Gain on sale of business unit
—

 
(883
)
 
—

 
Income tax expense from discontinued operations
—

 
1,348

 
790

 
Adjusted EBITDA from discontinued operations
—

 
710

 
2,242

Adjusted EBITDA from continuing & discontinued operations
15,766

 
26,393

 
22,112

 
Adjusted EBITDA attributable to noncontrolling interests
(1,806
)
 
(6,863
)
 
(6,840
)
Adjusted EBITDA attributable to RLH Corporation
$
13,960

 
$
19,530

 
$
15,272

 
 
 
 
 
 
 
(1)  On October 3, 2017, the Company completed the sale of its entertainment segment. Based on this sale, the results of operations of the entertainment segment are reported as discontinued operations for all periods presented.
(2)  Represents total stock-based compensation for each period. All are included within Selling, general, administrative and other expenses on the Consolidated Statements of Comprehensive Income (Loss).
(3)  During the third quarter of 2018 we recognized an impairment on our Baltimore hotel asset. During the fourth quarter of 2018 we recognized an impairment on our Guesthouse brand name. All are included within Asset impairment on the Consolidated Statements of Comprehensive Income (Loss).
(4)  Acquisition and integration costs for 2018 are associated with the Knights Inn and Vantage acquisitions. Acquisition and integration costs for 2017 and 2016 are associated with the Vantage acquisition. Acquisition and integration costs include periodic changes in the fair value and probability of contingent consideration arising from our 2016 Vantage acquisition.
(5)  The costs recognized in 2018 relate to employee separation, primarily for severance agreements with our Chief Operating Officer, and President of Global Development in May 2018 and our Chief Marketing Officer in December 2018. The costs recognized in 2017 consisted of legal and consulting services associated with the CFO transition. The costs recognized in 2016 consisted of the separation costs of a former Executive Vice President and Chief Financial Officer and other legal and consulting services associated with the CFO transition. These costs are included within Selling, general, administrative and other expenses on the Consolidated Statements of Comprehensive Income (Loss).
(6)  The Loss on early retirement of debt arose primarily on a $20.6 million early payment of our Senior Secured Term Loan. The debt was repaid using proceeds from a distribution from RL Venture after the sales of our Red Lion Hotel Port Angeles and Hotel RL Spokane. All are included within Loss on early retirement of debt on the Consolidated Statements of Comprehensive Income (Loss).
(7)  Represents the gain on our sale of nine properties during 2018. During 2016, RLH Corporation recorded a gain on sale of intellectual property, net of brokerage fees, of $0.4 million and a $1.5 million gain on sale of the Coos Bay property. All are included within Gain on asset dispositions, net on the Consolidated Statements of Comprehensive Income (Loss).
(8)  In the first quarter of 2016, a reserve was recorded for environmental cleanup at one of our hotel properties.


31


Revenues

Franchise and Marketing, Reservations and Reimbursables Revenues
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In thousands)
Royalty
 
$
22,309

 
$
17,558

 
$
7,472

Marketing, reservations and reimbursables
 
25,948

 
26,179

 
14,087

Other franchise
 
5,537

 
4,822

 
3,075


2018 Compared to 2017

Revenues from royalties increased by $4.8 million or 27% and other franchise revenues increased by $0.7 million or 15%. These increases are primarily due to the additional revenue provided by the acquisition of the Knights Inn franchised hotels in May 2018. Marketing, reservations, and reimbursables revenue did not fluctuate materially between the periods as new and acquired franchise agreements in 2018 have contributed at a lower rate to these revenues than franchise agreements that were terminated in 2017 and 2018, offsetting the impact of the additional agreements.

2017 Compared to 2016

Revenues from royalties increased by $10.1 million or 135% and other franchise revenues increased by $1.7 million or 57%. These increases are primarily due to the additional revenue provided by the acquisition of the Vantage franchised hotels in September 2016 as these franchises provided a full year of revenues in 2017 compared to a partial year of revenue in 2016. Marketing, reservations, and reimbursables revenue increased $12.1 million or 86% primarily due to additional revenues received from acquired Vantage franchise agreements in 2016.

Company Operated Hotels Revenues

 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In thousands)
Company operated hotels
 
$
82,021

 
$
123,100

 
$
123,589


2018 Compared to 2017

Company operated hotels revenue decreased by $41.1 million or 33%. This decrease was primarily due to the disposal of nine hotel properties from our company operated hotels segment during the year ended December 31, 2018 while no hotel properties were disposed of during the year ended December 31, 2017.

2017 Compared to 2016

Company operated hotels revenue decreased by $0.5 million or 0.4%. There was minimal fluctuation in revenues generated by our company operated hotels year over year as only one hotel property was disposed of during the year ended December 31, 2016 while no hotel properties were disposed of during the year ended December 31, 2017.

Operating Expenses

Operating expenses generally include direct operating expenses for each of the operating segments, depreciation and amortization, hotel facility and land lease expense, gain or loss on asset dispositions, general and administrative expenses and acquisition and integration costs.


32


Our operating expenses from continuing operations were as follows (in thousands):
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
Marketing, reservations and reimbursables
 
$
26,877

 
$
25,435

 
$
16,426

Company operated hotels
 
67,314

 
95,731

 
97,666

Selling, general, administrative and other expenses
 
32,122

 
29,753

 
18,634

Depreciation and amortization
 
17,003

 
18,824

 
16,095

Asset impairment
 
10,582

 
—

 
—

Gain on asset dispositions, net
 
(42,021
)
 
(449
)
 
(2,436
)
Acquisition and integration costs
 
2,219

 
1,529

 
2,112

Total operating expenses
 
$
114,096

 
$
170,823

 
$
148,497


2018 Compared to 2017

Marketing, reservations and reimbursables expenses increased by $1.4 million or 6%. This increase was due to an increase in transaction and reservation counts, primarily related to the Knights Inn acquisition in 2018.

Company operated hotel expenses decreased by $28.4 million or 30% and depreciation and amortization expense decreased $1.8 million or 10%. These decreases were primarily due to the disposal of nine hotel properties from our company operated hotels segment during the year ended December 31, 2018 while no hotel properties were disposed of during the year ended December 31, 2017. The decrease in depreciation and amortization from hotel sales was partially offset by additional amortization from acquired intangible assets that were part of the Knights Inn acquisition in May 2018.

Selling, general, administrative and other expenses increased by $2.4 million or 8%. This increase was primarily related to increased expenses in severance and share based payment expenses during 2018.

We recognized an impairment loss of $7.1 million on our Baltimore property in the third quarter of 2018 due to challenging cash flows at the property and we recognized an impairment loss of $3.5 million on our GuestHouse brand intangible asset in the fourth quarter of 2018 as the brand has encountered lower growth than previously expected, mostly due to the addition of other offerings in our portfolio.

We recognized a net gain on asset dispositions of $42.0 million from the disposal of nine hotel properties during the year ended December 31, 2018.

2017 Compared to 2016

Marketing, reservations and reimbursables expenses increased by $9.0 million or 55%. This increase was primarily due to a full year of the additional fees assumed as part of the Vantage acquisition in 2016.

Company operated hotel expenses decreased by $1.9 million or 2% fluctuation in expenses as one hotel property was disposed of during the year ended December 31, 2016 while no hotel properties were disposed of during the year ended December 31, 2017.

Selling, general, administrative and other expenses increased by $11.1 million or 60%. This increase was due to primarily related to additional expenses incurred related to franchises agreements acquired as part of the Vantage acquisition in 2016.

Depreciation and amortization expense increased by $2.7 million or 17%. This increase is primarily due to the addition of finite-lived intangible assets from the acquisition of the Vantage franchised hotels in September 2016, resulting in a full year of amortization in 2017 compared to a partial year of amortization in 2016.

Interest Expense

Interest expense decreased $2.0 million or 25% in 2018 compared with 2017. This decrease is due to the payoff of $73.2 million of RL Venture debt and $13.3 million of RL Baltimore debt, partially offset by borrowings of the Senior Secured Term Loan and Line of Credit, during 2018.


33


Interest expense increased $1.5 million or 22% in 2017 compared with 2016. The increase is primarily due to the higher principal amount of debt outstanding during 2017, as the result of draws to complete the hotel renovations. The average outstanding debt balances for 2018, 2017 and 2016 were $78.5 million, $111.6 million, and $100.7 million, respectively. The 2018 decrease was primarily due to hotel sales and related reduction in debt outstanding.

Loss on Early Retirement of Debt

In 2018, we recognized a loss of $0.8 million for the early retirement of debt when we repaid the outstanding balances of our RL Venture and RL Baltimore loans. The overall loss was driven primarily by the write off of unamortized debt issuance costs. See Note 8, Debt and Line of Credit within Item 8. Financial Statements and Supplementary Data.

Income Taxes

We reported an income tax benefit on continuing operations of $0.1 million in 2018. We reported income tax benefits on continuing operations of $4.7 million and $0.5 million in 2017 and 2016, respectively. We reported income tax expense on discontinued operations of $1.3 million and $0.8 million in 2017 and 2016, respectively. The income tax provisions vary from the statutory rate primarily due to a partial valuation allowance against our gross deferred tax assets. See Note 14, Income Taxes within Item 8. Financial Statements and Supplementary Data.

Discontinued Operations

On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the entertainment segment are reported as discontinued operations, and the assets and liabilities are classified as held for sale as of December 31, 2017 in this annual report on Form 10-K. See Note 17, Acquisitions and Dispositions within Item 8. Financial Statements and Supplementary Data for further discussion. There were no results reported as discontinued operations for the year ended December 31, 2018.

Assets Held for Sale

As of December 31, 2017, six properties from our company owned hotels segment met the criteria to be classified as held for sale comprising $34.4 million of assets held for sale on the Consolidated Balance Sheets. These properties were subsequently sold during 2018.

At December 31, 2018, we have no properties classified as held for sale.

See Note 17 Acquisitions and Dispositions within Item 8. Financial Statements and Supplementary Data for further discussion on assets held for sale.

Liquidity and Capital Resources

Overview

Our principal source of liquidity is cash flows from operations. Cash flows may fluctuate and are sensitive to many factors including changes in working capital and the timing and magnitude of capital expenditures and payments on debt. Working capital, which represents current assets less current liabilities, was $5.9 million and $12.4 million at December 31, 2018 and 2017. We believe that we have sufficient liquidity to fund our operations at least through March 2020.

We may seek to raise additional funds through public or private financings, strategic relationships, sales of assets or other arrangements. We cannot assure that such funds, if needed, will be available on terms attractive to us, or at all. If we sell additional assets, these sales may result in future impairments or losses on the final sale. Finally, any additional equity financings may be dilutive to shareholders and debt financing, if available, may involve covenants that place substantial restrictions on our business.

We are committed to keeping our properties well maintained and attractive to our customers in order to maintain our competitiveness within the industry and keep our hotels properly positioned in their markets. This requires ongoing access to capital for replacement of outdated furnishings as well as for facility repair, modernization and renovation for our owned properties.

34


 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In thousands)
Net cash provided by (used in) operating activities
 
$
(3,514
)
 
$
14,516

 
$
5,562

Net cash provided by (used in) investing activities
 
76,898

 
(16,145
)
 
(30,688
)
Net cash provided by (used in) financing activities
 
(98,453
)
 
(1,122
)
 
37,533


Operating Activities

Net cash used in operating activities totaled $3.5 million in 2018 compared with net cash provided by operating activities of $14.5 million during 2017 and $5.6 million during 2016. The drivers of the 2018 decrease of $18.0 million from 2017 were $4.3 million in increased cash outflows from working capital accounts primarily due to the disbursement of key money, in addition to $13.8 million lower net income (loss), as adjusted for noncash reconciling income/expense items.

In 2017, net cash provided by operating activities was higher by $8.9 million compared with 2016. This increase was driven by $2.2 million in improved cash flows from working capital accounts, in addition to $6.7 million in higher net income, after adjustment for noncash income/expense items.

Investing Activities

Net cash provided by investing activities totaled $76.9 million during 2018 compared with net cash used in investing activities of $16.1 million during 2017 and $30.7 million in 2016. Cash flows increased $93.0 million in 2018 compared to 2017 primarily due to proceeds from hotel sales, partially offset by the acquisition of Knights Inn brand and related franchise agreements.

The primary drivers of the improved cash flows in 2017 compared to 2016 were lower capital expenditures, $6.7 million net payment related to the sale of the entertainment segment in 2017, and the 2016 acquisition of Vantage Hospitality. In 2016, we spent $33.5 million on capital expenditures related to hotel renovations compared with $9.8 million in 2017. We also used $22.6 million in cash to purchase Vantage partially using redemptions of $18.1 million of investments in 2016.

Financing Activities

Net cash flows used by financing activities were $98.5 million during 2018, compared with $1.1 million in 2017 and net cash provided by financing activities of $37.5 million in 2016. In 2018, we had borrowings on long-term debt of $30.0 million, drew $10.0 million on our line of credit, made repayments of $108.0 million on long-term debt, paid $7.0 million in contingent consideration from the Vantage Hospitality acquisition, and paid $21.5 million in distributions to noncontrolling interest. In 2017, we had borrowings on long-term debt of $3.3 million, with repayments of $1.4 million, and $3.1 million in distributions to noncontrolling interest.

In 2016, we had borrowings on long-term debt of $24.8 million, with repayments of $4.9 million, as well as $18.5 million in net proceeds from sale of our common stock and recognized $3.2 million from the sale of joint venture interests.

Debt

Senior Secured Term Loan and Line of Credit

In May 2018, we entered into a $30.0 million senior secured term loan facility (Senior Secured Term Loan) and a $10.0 million senior secured revolving credit facility (Line of Credit). The $30 million principal amount of the Senior Secured Term Loan was distributed at closing to fund the KFS acquisition. In August 2018, we amended the agreement in response to a default on the RL Baltimore loan.

The Senior Secured Term Loan and Line of Credit matures in May 2023. Outstanding amounts under the Senior Secured Term Loan and Line of Credit will bear interest at our election of 1-month, 2-month, 3-month, or 6-month LIBOR plus 3.00% with interest payable at the end of each elected 1-month, 2-month, 3-month, or 6-month elected term. As of December 31, 2018, we have elected 1-month LIBOR rates resulting in an interest rate of 5.3% as of December 31, 2018.

The Senior Secured Term Loan additionally includes mandatory prepayment of any outstanding principal balance using any proceeds from incurred or issued indebtedness, and, starting with the full fiscal quarter ending March 31, 2019, requires prepayments in an amount equal to (x) 50% of all distributions received by RLH Corporation or its subsidiary guarantors from their respective subsidiaries and joint venture interests during any such fiscal quarter, minus (y) the amount of the amortization payment required

35


to be made by RLH Corporation for such fiscal quarter, capped at $5 million. In addition, all net proceeds received by RLH Corporation from non-ordinary course asset sales and other specified dispositions of property, including the RL Venture property sales, must be maintained in a cash collateral account controlled by DB, subject to the right of RLH Corporation to prepay the Senior Secured Term Loan in whole or in part at any time with such proceeds.

In August 2018, we deposited $20.6 million from asset sale proceeds and related joint venture distributions into a cash collateral account controlled by the lender. We subsequently used these funds to make a prepayment on the balance outstanding under the Senior Secured Term Loan, reducing the outstanding balance of the Senior Secured Term Loan to $9.4 million at December 31, 2018. In August 2018, we also drew the full $10.0 million available to us on the Line of Credit. This amount remains outstanding as of December 31, 2018 and we have no further borrowing capacity through the Line of Credit. Due to the August 2018 prepayment described above, there are no further scheduled principal payments due until maturity.

The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It includes customary events of default, cross-default provisions, and restrictions on payment of dividends. The loan agreement also includes customary reporting, financial and operating covenants. We were in compliance with all covenants under the Senior Secured Term Loan and Line of Credit at December 31, 2018.

RLH Atlanta

In September 2015, RLH Atlanta, a wholly-owned subsidiary of RLS Atla Venture LLC, obtained a mortgage loan from PFP Holding Company IV LLC, an affiliate of Prime Finance, secured by a hotel adjacent to the Atlanta International Airport, which opened in April 2016 as the Red Lion Hotel Atlanta International Airport. The initial principal amount of the loan was $6.0 million, and the lender agreed to advance an additional $3.4 million to cover expenses related to improvements to the hotel, which we drew during the first quarter of 2016.

The outstanding principal amount is $9.2 million at December 31, 2018. The loan matures in September 2019. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 6.35%. Monthly principal payments of $10,000 began in September 2017 and increased to $15,000 in October 2018. Our joint venture partner owns 45% of RLS Atla Venture at December 31, 2018. RLS Atla Venture LLC was in compliance with all financial covenants under the loan agreement with PFP Holding Company IV LLC at December 31, 2018. We are currently evaluating options regarding the upcoming maturing including, but not limited to, disposal of the property prior to maturity or negotiation of replacement debt.

RLH DC

In October 2015, RLH DC, a wholly-owned subsidiary of RLS DC Venture LLC, obtained a mortgage loan from Pacific Western Bank, which was used, along with cash on hand, to acquire, and is secured by, the Hotel RL Washington DC. The initial principal amount of the loan was $15.2 million, and the lender agreed to advance an additional $2.3 million to cover expenses related to improvements to the hotel.

In May 2018, this loan was amended. With the amendment, RLH Corporation provided approximately $450,000 to RLS DC Venture to be used as a principal payment on the debt. This funding was treated as preferred capital of RLS DC Venture. The loan was also amended to add a $4.5 million principal guarantee by RLH Corporation. The amendment also allows future debt service coverage ratio covenant defaults to be cured by an increase in the RLH Corporation principal guarantee. This option can be exercised a maximum of two times during the remaining term of the loan.

On December 14, 2018, RLH DC and RLH Corporation executed an additional amendment to the loan agreement to increase the RLH Corporation principal guarantee to $10.5 million and to suspend the debt service coverage ratio and loan to value ratio covenants through May 31, 2019. RLS DC Venture LLC was in compliance with all financial covenants under the loan agreement with Pacific Western Bank at December 31, 2018.

The outstanding principal amount is $15.9 million at December 31, 2018. The loan matures in October 2019. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 4.55%. Monthly principal payments began in November 2017 in an amount that would repay the outstanding principal balance over a 25-year amortization period. Our joint venture partner owns 45% of RLS DC Venture as of December 31, 2018. We are currently evaluating options regarding the upcoming maturing including, but not limited to, disposal of the property prior to maturity or negotiation of replacement debt.


36


RL Venture

In January 2015, RL Venture Holding LLC, a wholly-owned subsidiary of RL Venture LLC, and each of its 12 wholly-owned subsidiaries entered into a loan agreement with Pacific Western Bank, which was secured by the hotels owned by RL Venture. In 2018, nine of the RL Venture properties were sold for $116.5 million. Using proceeds from the hotel sales and restricted cash associated with the debt, in July 2018, RL Venture repaid the full $73.2 million principal outstanding under its loan agreement with Pacific Western Bank. This debt is no longer outstanding as of December 31, 2018.

RL Baltimore

In April 2015, RL Baltimore, a wholly-owned subsidiary of RLS Balt Venture LLC, obtained a mortgage loan from PFP Holding Company IV LLC, an affiliate of Prime Finance, secured by the Hotel RL Baltimore Inner Harbor. The initial principal amount of the loan was $10.1 million, and the lender agreed to advance an additional $3.2 million to cover expenses related to improvements to the hotel, which we drew during the year ended December 31, 2015.

In September 2018, RLH Corporation, through our wholly owned subsidiary RLH Baltimore Loan Acquisition LLC (RLH Balt Acquisition), purchased the outstanding promissory note, in the original principal amount of $13.3 million, made by RL Baltimore, LLC to PFP (Baltimore Note) for a total purchase price of $13.6 million. We funded the acquisition of the Baltimore Note with $10.0 million in borrowings from our Line of Credit and cash on hand. In October 2018, we executed an agreement with Shelbourne Falcon Charm City Investors LLC (Shelbourne Falcon II), an entity led by Shelbourne, in which we purchased the remaining 27% ownership interest in RLS Balt Venture for $0.3 million. Subsequent to the buyout, RLS Balt Venture is now a fully consolidated subsidiary of the Company and the debt is no longer outstanding as of December 31, 2018.

Contractual Obligations

The following table summarizes our significant contractual obligations, including principal and estimated interest on debt and capital leases, as of December 31, 2018 (in thousands):
 
 
Total
 
Less than
1 year
 
1-3 years
 
4-5 years
 
After
5 years
Total Debt (1)
 
$
50,864

 
$
27,971

 
$
2,071

 
$
20,822

 
$
—

Capital leases (1)
 
440

 
166

 
263

 
11

 
—

Operating leases
 
75,563

 
5,035

 
10,408

 
4,006

 
56,114

Total contractual obligations (2)
 
$
126,867

 
$
33,172

 
$
12,742

 
$
24,839

 
$
56,114

(1) Includes estimated interest payments and commitment fees over the life of the debt agreement or capital lease.
(2) With regard to purchase obligations, we are not party to any material agreements to purchase goods or services that are enforceable or legally binding as to fixed or minimum quantities to be purchased or stated price terms.

We have leasehold interests at various hotel properties, as well as our corporate offices in Denver, Colorado. These leases require us to pay fixed monthly rent and have expiration dates of 2019 and beyond, which are reflected in the table above.

Off-Balance Sheet Arrangements

As of December 31, 2018, we had no off-balance sheet arrangements, which have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Seasonality

Our business has historically been subject to seasonal fluctuations, with more revenues and profits realized from May through October than during the rest of the year. Due to the large amount of acquisitions and dispositions undertaken by the Company during the periods presented, this seasonality is not as apparent as it would be in a steady state.
 

37



Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. We consider a critical accounting policy to be one that is both important to the portrayal of our financial condition and results of operations and requires management's most subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies within Item 8. Financial Statements and Supplementary Data; however, we have also identified our most critical accounting policies and estimates below. Management has discussed the development and selection of our critical accounting policies and estimates with the audit committee of our board of directors, and the audit committee has reviewed the disclosures presented below.

Revenue Recognition and Receivables

Revenue is generally recognized as our performance obligations are satisfied. We recognize revenue from the following sources:

•
Franchised Hotels - royalty, marketing and other fees are received in connection with licensing our brands to franchisees. Effective January 1, 2018 there was a change in the recognition of the initial fees and application fees associated with the adoption of Topic 606, Revenue from Contracts with Customers, which is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. See Note 2, New and Recent Accounting Pronouncements for further discussion of the adoption and related impact, within Item 8. Financial Statements and Supplementary Data.

•
Company-Operated Hotels - Room rental and food and beverage sales from majority owned and leased hotels and management fees from hotels under management contract. Revenues are recognized when services have been performed, generally at the time of the hotel stay or guests visit to the restaurant and at the time the management services are provided. We also recognize other revenue and costs from managed properties when we incur the related reimbursable costs. These costs primarily consisting of payroll and related expenses at managed properties where we are the employer.

We review the ability to collect individual accounts receivable on a routine basis. We recognize an allowance for doubtful accounts based on a combination of reserves calculated based on underlying characteristics of receivables (such as the age of the related receivable) as well as specifically identified amounts believed to be uncollectible. A receivable is written off against the allowance for doubtful accounts if collection attempts fail.

Goodwill

Goodwill is assigned to our reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics. The reporting units are aligned with our reporting segments. Goodwill is not amortized, but we test goodwill for impairment each year as of October 1, or more frequently should facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than the carrying amount. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with a quantitative assessment. The quantitative assessment involves calculating an estimated fair value of each reporting unit based on projected future cash flows, and comparing the estimated fair values of the reporting units to their carrying amounts, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, including goodwill, no impairment is recognized. However, if the carrying amount of a reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to the excess, limited to the total goodwill balance of the reporting unit.

We have not recognized any impairment on goodwill during the years ended December 31, 2018, 2017 and 2016.

Indefinite-Lived Intangible Assets

Through prior business combinations we have obtained intangible assets related to our Americas Best Value Inn, Canadas Best Value Inn, Guesthouse, Knights Inn, and Red Lion brands. At the time of each acquisition, the brands were assigned a fair value based on the relief from royalty method. As there are no limitations on the useful lives of these assets, we have determined they

38


are indefinite-lived intangible assets that will not be amortized. Annually, on October 1, we reassess the useful lives of each asset to determine if they should continue to be classified as indefinite and we additionally test the assets for impairment. Impairment may also be tested at any point in which facts and circumstances indicate that it is more likely than not that the fair value of the asset is less than the carrying amount. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the asset is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with a quantitative assessment. The quantitative assessment involves calculating an estimated fair value of the asset using the relief from royalty method, and comparing the estimated fair value of the asset to its carrying amount. If the estimated fair value of the asset exceeds its carrying value, no impairment is recognized. However, if the carrying amount of the asset exceeds its fair value, an impairment loss is recognized in an amount equal to the excess.

As of October 1, 2018, we recognized an impairment loss on the Guesthouse brand indefinite-lived intangible asset of $3.5 million included in Asset impairment in the Consolidated Statements of Comprehensive Income (Loss) and reclassified the $2.1 million remaining fair value from an indefinite-lived intangible asset to a finite-lived intangible asset. See further discussion of the impairment and reclassification at Note 6, Goodwill and Intangible Assets within Item 8. Financial Statements and Supplementary Data. No impairment expense on indefinite-lived intangible assets was recognized during the years ended December 31, 2017 or 2016.

Valuation of Long-Lived Assets Including Finite-Lived Intangible Assets

We test long-lived asset groups, including finite-lived intangible assets, for recoverability when changes in circumstances indicate the carrying value may not be recoverable. For example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, or significant negative industry or economic trends. We also perform a test for recoverability when management has committed to a plan to sell or otherwise dispose of an asset group. We evaluate recoverability of an asset group by comparing its carrying value to the future net undiscounted cash flows that we expect will be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value. When we recognize an impairment loss for assets to be held and used, we depreciate the adjusted carrying amount of those assets over their remaining useful life.

During the year ended December 31, 2018, we recognized an impairment loss on the Baltimore joint venture property of $7.1 million included in Asset impairment in the Consolidated Statements of Comprehensive Income (Loss). See further discussion of the impairment at Note 5, Property and Equipment within Item 8. Financial Statements and Supplementary Data. No impairment expense on long-lived assets was recognized during the years ended December 31, 2017 and 2016.

Variable Interest Entities

We analyze the investments we make in joint venture entities based on the accounting guidance for variable interest entities (VIEs). These joint ventures are evaluated to determine whether (1) sufficient equity at risk exists for the legal entity to finance its activities without additional subordinated financial support or, (2) as a group, the holders of the equity investment at risk lack one of the following characteristics (a) the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance or, (b) the obligation to absorb the expected losses of the legal entity or (c) the right to receive expected residual returns of the legal entity, or (3) the voting rights of some equity investors are not proportional to their obligations to absorb the losses or the right to receive benefits and substantially all of the activities either involve or are conducted on behalf of an investor with disproportionately few voting rights. If any one of the above three conditions are met then the joint venture entities are considered to be VIEs.

We consolidate the results of any such VIE in which we determine that we are the primary beneficiary, having both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive the benefits from, the VIE that could be potentially significant to the VIE.

Business Combinations

When acquiring other businesses or participating in mergers or joint ventures in which we are deemed to be the acquirer, we generally recognize identifiable assets acquired, liabilities assumed and any noncontrolling interests at their acquisition date fair values, and separately from any goodwill that may be required to be recognized.  Goodwill, when recognizable, would be measured as the excess amount of any consideration transferred, which is generally measured at fair value, over the acquisition date fair values of the identifiable assets acquired and liabilities assumed.


39


Accounting for such transactions requires us to make significant assumptions and estimates.  These include, among others, any estimates or assumptions that may be made for the amounts of future cash flows that will result from any identified intangible assets, the useful lives of such intangible assets, the amount of any contingent liabilities, including contingent consideration, to record at the time of the acquisition and the fair values of any tangible assets acquired and liabilities assumed.  Although we believe any estimates and assumptions we make to be reasonable and appropriate at the time they are made, unanticipated events and circumstances may arise that affect their accuracy, causing actual results to differ from those estimated by us.

New and Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies for information on new and recent U.S. GAAP accounting pronouncements, within Item 8. Financial Statements and Supplementary Data.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from outstanding debt. As of December 31, 2018, our outstanding line of credit and debt, including current maturities and excluding unamortized origination fees, was $44.5 million, which is under a line of credit and term loans subject to variable rates however, $25.2 million of our outstanding debt is subject to interest rate caps.

We enter into derivative transactions to hedge our exposure to interest rate fluctuations, and not for trading purposes. At December 31, 2018, $25.2 million of our outstanding debt was subject to interest rate caps which effectively cap the associated LIBOR reference rates and reduces our exposure to the impact of changing interest rates and future cash outflows for interest. See Note 9 Derivative Financial Instruments within Item 8. Financial Statements and Supplementary Data.

A 100 basis point change in the underlying interest rates on our $19.4 million of variable rate debt not subject to interest rate caps would result in approximately a $0.2 million increase or decrease in annual long-term debt interest expense.

We do not foresee any changes of significance in our exposure to fluctuations in interest rates, although we will continue to manage our exposure to this risk by monitoring available financing alternatives.

The below table summarizes the principal payment requirements on our debt obligations at December 31, 2018 on our Consolidated Balance Sheet (in thousands):
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
 
Fair Value
Total debt
 
$
25,168

 
$
—

 
$
—

 
$
—

 
$
19,355

 
$
—

 
$
44,523

 
$
43,880

Average interest rate
 
 
 
 
 
 
 
 
 
 
 
 
 
6.8
%
 
 

Item 8.
Financial Statements and Supplementary Data

See Item 15 of this annual report for certain information with respect to the financial statements filed as a part hereof, including financial statements filed pursuant to the requirements of this Item 8.

40



The following table sets forth supplementary financial data (in thousands except per share data) for each quarter for the years ended December 31, 2018 and 2017, derived from our unaudited financial statements. The data set forth below should be read in conjunction with and is qualified in its entirety by reference to our consolidated financial statements.
 
Year Ended December 31, 2018 (unaudited)
 
First
 
Second
 
Third
 
Fourth
 
 
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Total
Revenue:
 
 
 
 
 
 
 
 
 
Royalty
$
4,275

 
$
5,770

 
$
6,530

 
$
5,734

 
$
22,309

Marketing, reservations and reimbursables
5,256

 
7,027

 
7,591

 
6,074

 
25,948

Other franchise
592

 
804

 
1,016

 
3,125

 
5,537

Company operated hotels
22,896

 
25,005

 
20,857

 
13,263

 
82,021

Other
20

 
6

 
6

 
2

 
34

Total revenues
33,039

 
38,612

 
36,000

 
28,198

 
135,849

Operating expenses:
 
 
 
 
 
 
 
 
 
Marketing, reservations and reimbursables
5,559

 
7,214

 
7,453

 
6,651

 
26,877

Company operated hotels
20,255

 
18,618

 
16,051

 
12,390

 
67,314

Selling, general, administrative and other expenses
7,210

 
8,268

 
8,112

 
8,532

 
32,122

Depreciation and amortization
4,392

 
4,701

 
3,621

 
4,289

 
17,003

Asset impairment
—

 
—

 
7,100

 
3,482

 
10,582

Gain on asset dispositions, net
(14,043
)
 
(1,855
)
 
(26,196
)
 
73

 
(42,021
)
Acquisition and integration costs
104

 
1,997

 
95

 
23

 
2,219

Total operating expenses
23,477

 
38,943

 
16,236

 
35,440

 
114,096

Operating income (loss)
9,562

 
(331
)
 
19,764

 
(7,242
)
 
21,753

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(2,247
)
 
(1,702
)
 
(1,417
)
 
(843
)
 
(6,209
)
Loss on early retirement of debt
—

 
—

 
(794
)
 
—

 
(794
)
Other income (loss), net
158

 
22

 
34

 
51

 
265

Total other income (expense)
(2,089
)
 
(1,680
)
 
(2,177
)
 
(792
)
 
(6,738
)
Income (loss) from continuing operations before taxes
7,473

 
(2,011
)
 
17,587

 
(8,034
)
 
15,015

Income tax expense (benefit)
135

 
(348
)
 
(26
)
 
168

 
(71
)
Net income (loss) from continuing operations
7,338

 
(1,663
)
 
17,613

 
(8,202
)
 
15,086

Net income (loss) from discontinued operations
—

 
—

 
—

 
—

 
—

Net income (loss)
7,338

 
(1,663
)
 
17,613

 
(8,202
)
 
15,086

Net (income) loss attributable to noncontrolling interest
(4,750
)
 
(659
)
 
(8,670
)
 
950

 
(13,129
)
Net income (loss) attributable to RLH Corporation
$
2,588

 
$
(2,322
)
 
$
8,943

 
$
(7,252
)
 
$
1,957

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
0.11

 
$
(0.10
)
 
$
0.36

 
$
(0.30
)
 
$
0.08

Diluted earnings (loss) per share
$
0.10

 
$
(0.10
)
 
$
0.35

 
$
(0.30
)
 
$
0.08



41


 
Year Ended December 31, 2017 (unaudited)
 
First
 
Second
 
Third
 
Fourth
 
 
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Total
Revenue:
 
 
 
 
 
 
 
 


Royalty
$
4,188

 
$
4,457

 
$
4,711

 
$
4,202

 
$
17,558

Marketing, reservations and reimbursables
6,196

 
6,993

 
7,264

 
5,726

 
26,179

Other franchise
520

 
977

 
739

 
2,586

 
4,822

Company operated hotels
25,622

 
33,341

 
38,298

 
25,839

 
123,100

Other
55

 
61

 
12

 
139

 
267

Total revenues
36,581

 
45,829

 
51,024

 
38,492

 
171,926

Operating expenses:
 
 
 
 
 
 
 
 


Marketing, reservations and reimbursables
6,579

 
7,073

 
6,687

 
5,096

 
25,435

Company operated hotels
22,365

 
24,799

 
26,365

 
22,202

 
95,731

Selling, general, administrative and other expenses
6,856

 
7,007

 
7,016

 
8,874

 
29,753

Depreciation and amortization
4,510

 
4,572

 
4,660

 
5,082

 
18,824

Asset impairment
—

 
—

 
—

 
—

 
—

Gain on asset dispositions, net
(119
)
 
(102
)
 
(113
)
 
(115
)
 
(449
)
Acquisition and integration costs
(175
)
 
186

 
1,235

 
283

 
1,529

Total operating expenses
40,016

 
43,535

 
45,850

 
41,422

 
170,823

Operating income (loss)
(3,435
)
 
2,294

 
5,174

 
(2,930
)
 
1,103

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(1,958
)
 
(2,037
)
 
(2,119
)
 
(2,138
)
 
(8,252
)
Other income (loss), net
175

 
49

 
338

 
256

 
818

Total other income (expense)
(1,783
)
 
(1,988
)
 
(1,781
)
 
(1,882
)
 
(7,434
)
Income (loss) from continuing operations before taxes
(5,218
)
 
306

 
3,393

 
(4,812
)
 
(6,331
)
Income tax expense (benefit) (1)
77

 
193

 
34

 
(4,966
)
 
(4,662
)
Net income (loss) from continuing operations
(5,295
)
 
113

 
3,359

 
154

 
(1,669
)
Discontinued operations:
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued business unit, net of income tax expense
172

 
(38
)
 
268

 
23

 
425

Loss on sale of business unit, net of income tax expense
—

 
—

 
—

 
(244
)
 
(244
)
Net income (loss) from discontinued operations
172

 
(38
)
 
268

 
(221
)
 
181

Net income (loss)
(5,123
)
 
75

 
3,627

 
(67
)
 
(1,488
)
Net (income) loss attributable to noncontrolling interest
1,519

 
(141
)
 
(871
)
 
1,562

 
2,069

Net income (loss) attributable to RLH Corporation
$
(3,604
)
 
$
(66
)
 
$
2,756

 
$
1,495

 
$
581

 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
 
 
 
 
 
 
 
 
Continuing operations
$
(0.16
)
 
$
—

 
$
0.11

 
$
0.07

 
$
0.01

Discontinued operations
0.01

 
—

 
0.01

 
(0.01
)
 
0.01

 
$
(0.15
)
 
$
—

 
$
0.12

 
$
0.06

 
$
0.02

Diluted earnings (loss) per share
 
 
 
 
 
 
 
 
 
Continuing operations
$
(0.16
)
 
$
—

 
$
0.10

 
$
0.07

 
$
0.01

Discontinued operations
0.01

 
—

 
0.01

 
(0.01
)
 
0.01

 
$
(0.15
)
 
$
—

 
$
0.11

 
$
0.06

 
$
0.02

(1)  Reflects $3.8 million of income tax benefit primarily due to tax law changes from the 2017 Tax Act.

42


Financial Statements
The 2018 Consolidated Financial Statements of Red Lion Hotels Corporation are
presented on pages 44 to 90 of this annual report.


43




Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Red Lion Hotels Corporation
Denver, Colorado

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Red Lion Hotels Corporation (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 8, 2019 expressed an unqualified opinion thereon.

Change in Accounting Method Related to Revenue Recognition

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for recognition of revenues and related disclosures in 2018 due to the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ BDO USA, LLP

We have served as the Company's auditor since 2001.

Spokane, Washington
March 8, 2019




44


RED LION HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2018 and 2017
 
 
2018
 
2017
 
 
 
 
(Revised)
 
 
(In thousands, except share data)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents ($4,564 and $6,487 attributable to VIEs)
 
$
17,034

 
$
32,429

Restricted cash ($2,652 and $12,326 attributable to VIEs)
 
2,755

 
12,429

Accounts receivable, net of an allowance for doubtful accounts $2,345 and $1,436, respectively ($1,064 and $3,200 attributable to VIEs)
 
18,575

 
13,143

Accounts receivable from related parties
 
—

 
1,520

Notes receivable, net
 
2,103

 
1,098

Other current assets ($680 and $1,252 attributable to VIEs)
 
6,218

 
5,305

Assets held for sale ($0 and $34,359 attributable to VIEs)
 
—

 
34,359

Total current assets
 
46,685

 
100,283

Property and equipment, net ($74,250 and $137,479 attributable to VIEs)
 
115,522

 
165,302

Goodwill
 
18,595

 
9,404

Intangible assets, net
 
60,910

 
50,749

Other assets, net ($705 and $174 attributable to VIEs)
 
8,075

 
1,976

Total assets
 
$
249,787

 
$
327,714

LIABILITIES
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable ($650 and $1,810 attributable to VIEs)
 
$
5,322

 
$
4,100

Accrued payroll and related benefits ($369 and $1,453 attributable to VIEs)
 
5,402

 
7,457

Other accrued liabilities ($1,092 and $2,184 attributable to VIEs)
 
4,960

 
4,094

Long-term debt, due within one year ($25,056 and $62,914 attributable to VIEs)
 
25,056

 
62,914

Contingent consideration for acquisition due to related party, due within one year
 
—

 
9,289

Total current liabilities
 
40,740

 
87,854

Long-term debt, due after one year, net of debt issuance costs ($0 and $48,483 attributable to VIEs)
 
9,114

 
48,483

Line of credit, due after one year
 
10,000

 
—

Deferred income and other long-term liabilities ($480 and $772 attributable to VIEs)
 
2,245

 
1,554

Deferred income taxes
 
772

 
2,219

Total liabilities
 
62,871

 
140,110

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
RLH Corporation stockholders' equity:
 
 
 
 
Preferred stock - 5,000,000 shares authorized; $0.01 par value; no shares issued or outstanding
 
—

 
—

Common stock - 50,000,000 shares authorized; $0.01 par value; 24,570,158 and 23,651,212 shares issued and outstanding
 
246

 
237

Additional paid-in capital, common stock
 
182,018

 
178,028

Accumulated deficit
 
(16,512
)
 
(18,042
)
Total RLH Corporation stockholders' equity
 
165,752

 
160,223

Noncontrolling interest
 
21,164

 
27,381

Total stockholders' equity
 
186,916

 
187,604

Total liabilities and stockholders' equity
 
$
249,787

 
$
327,714

The accompanying notes are an integral part of the consolidated financial statements.

45


RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2018, 2017, and 2016
 
 
2018
 
2017
 
2016
 
 
(In thousands, except per share data)
Revenue:
 
 
 
 
 
 
Royalty
 
$
22,309

 
$
17,558

 
$
7,472

Marketing, reservations and reimbursables
 
25,948

 
26,179

 
14,087

Other franchise
 
5,537

 
4,822

 
3,075

Company operated hotels
 
82,021

 
123,100

 
123,589

Other
 
34

 
267

 
128

Total revenues
 
135,849

 
171,926

 
148,351

Operating expenses:
 
 
 
 
 
 
Marketing, reservations and reimbursables
 
26,877

 
25,435

 
16,426

Company operated hotels
 
67,314

 
95,731

 
97,666

Selling, general, administrative and other expenses
 
32,122

 
29,753

 
18,634

Depreciation and amortization
 
17,003

 
18,824

 
16,095

Asset impairment
 
10,582

 
—

 
—

Gain on asset dispositions, net
 
(42,021
)
 
(449
)
 
(2,436
)
Acquisition and integration costs
 
2,219

 
1,529

 
2,112

Total operating expenses
 
114,096

 
170,823

 
148,497

Operating income (loss)
 
21,753

 
1,103

 
(146
)
Other income (expense):
 
 
 
 
 
 
Interest expense
 
(6,209
)
 
(8,252
)
 
(6,752
)
Loss on early retirement of debt
 
(794
)
 
—

 
—

Other income (loss), net
 
265

 
818

 
326

Total other income (expense)
 
(6,738
)
 
(7,434
)
 
(6,426
)
Income (loss) from continuing operations before taxes
 
15,015


(6,331
)
 
(6,572
)
Income tax benefit
 
(71
)
 
(4,662
)
 
(478
)
Net income (loss) from continuing operations
 
15,086

 
(1,669
)
 
(6,094
)
Discontinued operations:
 
 
 
 
 
 
Income from discontinued business unit, net of income tax expense of $0, $221 and $790
 
—

 
425

 
1,254

Loss on sale of business unit, net of income tax expense of $1,127
 
—

 
(244
)
 
—

Net income from discontinued operations
 
—

 
181

 
1,254

Net income (loss)
 
15,086

 
(1,488
)
 
(4,840
)
Net (income) loss attributable to noncontrolling interest
 
(13,129
)
 
2,069

 
163

Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
$
1,957

 
$
581

 
$
(4,677
)
 
 
 
 
 
 
 
Earnings (loss) per share - basic
 
 
 
 
 
 
Income (loss) from continuing operations attributable to RLH Corporation
 
$
0.08

 
$
0.01

 
$
(0.29
)
Income from discontinued operations
 
—

 
0.01

 
0.06

Net income (loss) attributable to RLH Corporation
 
$
0.08

 
$
0.02

 
$
(0.23
)
 
 
 
 
 
 
 
Earnings (loss) per share - diluted
 
 
 
 
 
 
Income (loss) from continuing operations attributable to RLH Corporation
 
$
0.08

 
$
0.01

 
$
(0.29
)
Income from discontinued operations
 
—

 
0.01

 
0.06

Net income (loss) attributable to RLH Corporation
 
$
0.08

 
$
0.02

 
$
(0.23
)
 
 
 
 
 
 
 
Weighted average shares - basic
 
24,392

 
23,669

 
20,427

Weighted average shares - diluted
 
25,477

 
24,253

 
20,427

The accompanying notes are an integral part of the consolidated financial statements.

46


RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2018, 2017, and 2016
 
 
Red Lion Hotels Corporation Stockholders' Equity
 
 
 
 
 
 
Common Stock
 
Retained
Earnings (Accumulated Deficit)
(Revised)
 
RLH Corporation Total Equity
(Revised)
 
Equity Attributable to Non-controlling Interest
 
 
 
 
Shares
 
Amount
 
Additional
Paid-In Capital
 
 
 
 
Total
Equity
(Revised)
 
 
(In thousands, except share data)
Balances, January 1, 2016
20,051,145

 
$
201

 
$
143,901

 
$
(13,946
)
 
$
130,156

 
$
33,609

 
$
163,765

 
Net loss
—

 
—

 
—

 
(4,677
)
 
(4,677
)
 
(163
)
 
(4,840
)
 
Shared based payment activity
193,336

 
1

 
2,466

 
—

 
2,467

 
—

 
2,467

 
Contribution of joint venture interests
—

 
—

 
539

 
—

 
539

 
2,654

 
3,193

 
Shares issued for Vantage acquisition purchase price
690,000

 
7

 
5,748

 
—

 
5,755

 
—

 
5,755

 
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(3,593
)
 
(3,593
)
 
Proceeds from issuance of common stock, net of offering costs
2,499,999

 
25

 
18,435

 
—

 
18,460

 
—

 
18,460

Balances, December 31, 2016
23,434,480

 
234

 
171,089

 
(18,623
)
 
152,700

 
32,507

 
185,207

 
Net income (loss)
—

 
—

 
—

 
581

 
581

 
(2,069
)
 
(1,488
)
 
Shared based payment activity
216,732

 
3

 
3,358

 
—

 
3,361

 
—

 
3,361

 
Shares allocated for Vantage acquisition purchase price
—

 
—

 
3,581

 
—

 
3,581

 
—

 
3,581

 
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(3,057
)
 
(3,057
)
Balances, December 31, 2017
23,651,212

 
237

 
178,028

 
(18,042
)
 
160,223

 
27,381

 
187,604

 
Net income
—

 
—

 
—

 
1,957

 
1,957

 
13,129

 
15,086

 
Cumulative effect of the adoption of Topic 606
—

 
—

 
—

 
(427
)
 
(427
)
 
—

 
(427
)
 
Shared based payment activity
228,946

 
2

 
3,535

 
—

 
3,537

 
—

 
3,537

 
Shares issued for Vantage continent consideration
690,000

 
7

 
2,870

 
—

 
2,877

 
—

 
2,877

 
Buyout of noncontrolling interest
—

 
—

 
(2,415
)
 
—

 
(2,415
)
 
2,111

 
(304
)
 
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(21,457
)
 
(21,457
)
Balances, December 31, 2018
24,570,158

 
$
246

 
$
182,018

 
$
(16,512
)
 
$
165,752

 
$
21,164

 
$
186,916

The accompanying notes are an integral part of the consolidated financial statements.

47


RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2018, 2017, and 2016
 
 
2018
 
2017
 
2016
 
 
(In thousands)
Operating activities:
 
 
 
 
 
 
Net income (loss)
 
$
15,086

 
$
(1,488
)
 
$
(4,840
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
17,003

 
18,888

 
16,281

Amortization of debt issuance costs
 
942

 
1,187

 
1,166

Amortization of key money and contract costs
 
748

 
—

 
—

Amortization of contract liabilities
 
(753
)
 
—

 
—

Gain on asset dispositions, net
 
(42,021
)
 
(449
)
 
(2,437
)
Loss on early retirement of debt
 
794

 
—

 
—

Asset impairment
 
10,582

 
—

 
—

Loss on sale of entertainment business
 
—

 
244

 
—

Deferred income taxes
 
(1,302
)
 
(3,497
)
 
249

Equity in investments
 
—

 
—

 
(157
)
Stock based compensation expense
 
3,955

 
3,309

 
2,640

Provision for doubtful accounts
 
1,014

 
528

 
433

Fair value adjustments to contingent consideration
 
581

 
1,670

 
339

Change in current assets and liabilities, net of business acquired:
 
 
 
 
 
 
Accounts receivable
 
(3,644
)
 
(4,130
)
 
(3,183
)
Notes receivable
 
(19
)
 
(88
)
 
(110
)
Other current assets
 
(6,907
)
 
(1,229
)
 
(2,075
)
Accounts payable
 
1,249

 
(2,543
)
 
(1,006
)
Other accrued liabilities
 
(822
)
 
2,114

 
(1,738
)
Net cash provided by (used in) operating activities
 
(3,514
)
 
14,516

 
5,562

Investing activities:
 
 
 
 
 

Capital expenditures
 
(8,615
)
 
(9,779
)
 
(33,511
)
Acquisition of Knights Inn
 
(27,249
)
 
—

 
—

Acquisition of Vantage Hospitality
 
—

 
—

 
(22,603
)
Net payments related to the sale of entertainment business
 
—

 
(6,679
)
 
—

Net proceeds from disposition of property and equipment
 
113,748

 
28

 
5,898

Collection of notes receivable related to property sales
 
62

 
694

 
2,309

Advances on notes receivable
 
(1,048
)
 
(409
)
 
(943
)
Proceeds from sales of short-term investments
 
—

 
—

 
18,085

Other, net
 
—

 
—

 
77

Net cash provided by (used in) investing activities
 
76,898

 
(16,145
)
 
(30,688
)
Financing activities:
 
 
 
 
 
 
Borrowings on long-term debt
 
30,000

 
3,297

 
24,766

Repayment of long-term debt
 
(107,999
)
 
(1,373
)
 
(4,939
)
Proceeds from line of credit borrowing
 
10,000

 
—

 
—

Debt issuance costs
 
(1,282
)
 
(41
)
 
(181
)
Buyout of joint venture interest
 
(304
)
 
—

 
—

Proceeds from sale of interests in joint ventures
 
—

 
—

 
3,193

Distributions to noncontrolling interest
 
(21,457
)
 
(3,057
)
 
(3,593
)
Contingent consideration paid for Vantage Hospitality acquisition
 
(7,000
)
 
—

 
—

Stock-based compensation awards canceled to settle employee tax withholding
 
(647
)
 
(361
)
 
(353
)
Proceeds from common stock offering, net
 
—

 
—

 
18,460

Stock option and stock purchase plan issuances, net and other
 
236

 
413

 
180

Net cash provided by (used in) financing activities
 
(98,453
)
 
(1,122
)
 
37,533

Change in cash, cash equivalents and restricted cash:
 
 
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
 
(25,069
)
 
(2,751
)
 
12,407

Cash, cash equivalents and restricted cash at beginning of year
 
44,858

 
47,609

 
35,202

Cash, cash equivalents and restricted cash at end of year
 
$
19,789

 
$
44,858

 
$
47,609


48


RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
For the Years Ended December 31, 2018, 2017, and 2016

 
 
2018
 
2017
 
2016
 
 
(In thousands)
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
Cash paid during years for:
 
 
 
 
 
 
Income taxes
 
$
963

 
$
189

 
$
111

Interest on debt
 
$
6,338

 
$
7,016

 
$
5,485

Non-cash operating, investing and financing activities:
 
 
 
 
 
 
Acquisition of property and equipment through capital lease and other LT obligations
 
$
328

 
$
542

 
$
1,352

Property and equipment, purchases not yet paid
 
$
27

 
$
402

 
$
2,238

Shares issued for Vantage acquisition
 
$
2,877

 
$
—

 
$
5,755

Accrual of contingent consideration for Vantage acquisition
 
$
—

 
$
—

 
$
10,861

Assumption of contingent consideration obligation from acquisition
 
$
—

 
$
—

 
$
965


The accompanying notes are an integral part of the consolidated financial statements.

49


RED LION HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
Organization

Red Lion Hotels Corporation ("RLH Corporation", "RLHC", "we", "our", "us", or "our company") is a NYSE-listed hospitality and leisure company (ticker symbol: RLH) doing business as RLH Corporation and primarily engaged in the franchising and ownership of hotels under the following proprietary brands: Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse, Settle Inn, Americas Best Value Inn, Canadas Best Value Inn, Signature and Signature Inn, Knights Inn, and Country Hearth Inns & Suites.

A summary of our properties as of December 31, 2018, including the approximate number of available rooms, is provided below:
 
 
Upscale Service Brand
 
Select Service Brand
 
Total
 
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
Ending quantity, December 31, 2018
 
112

 
15,900

 
1,215

 
69,800

 
1,327

 
85,700



On May 14, 2018, Red Lion Hotels Franchising, Inc., a wholly-owned subsidiary of RLH Corporation (RLH Franchising) completed the purchase of all of the issued and outstanding shares of capital stock of Knights Franchise Systems, Inc. (KFS), and the purchase of certain operating assets from, and assumption of certain liabilities relating to the business of franchising Knights Inn branded hotels to hotel owners from Wyndham Hotel Group Canada, ULC and Wyndham Hotel Group Europe Limited, pursuant to an Amended and Restated Purchase Agreement, dated May 1, 2018, for an aggregate purchase price of $27.2 million. See Note 17, Acquisitions and Dispositions for further discussion.

2.
Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in accordance with generally accepted accounting principles in the United States of America (GAAP) and include all accounts and wholly and majority-owned subsidiaries' accounts. All significant inter-company and inter-segment transactions and accounts have been eliminated upon consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates.

Reclassifications

Beginning with the fourth quarter of 2018, we have disaggregated and reclassified the presentation of certain items in the Statements of Comprehensive Income (Loss) for the years ended December 31, 2017 and 2016. We have disaggregated royalty revenues from other franchise revenues, combined revenues from company operated hotels and other revenues from managed properties, combined operating expenses from company operated hotels, other costs from managed properties, and hotel facility and land lease, and reclassified amounts previously allocated as operating expenses for franchised and company operated hotels into selling, general and administrative and marketing, reservations, and reimbursable expenses. These costs continue to be allocated to their respective segments as presented in Note 3, Business Segments.


50


We believe these classifications better reflect our results of operations as we have changed our business model to focus on the franchising of hotels. Additionally, we believe these reclassifications will allow better comparison with financial statements of peer companies. The reclassifications had no impact on total revenue, total operating expenses, operating income, net income, earnings per share, total assets, total equity, or cash flows for any period. The following tables show the impact of the reclassifications on previously reported financial statements for each year presented (in thousands):

 
 
For the Year Ended December 31, 2017
 
 
As Previously Reported
 
Reclassifications
 
As Currently Presented
Revenue:
 
 
Company operated hotels
$
119,186

 
$
3,914

 
$
123,100

 
Other revenues from managed properties
3,914

 
(3,914
)
 
—

 
Franchised hotels
48,559

 
(48,559
)
 
—

 
Other
267

 
—

 
267

 
Royalty
—

 
17,558

 
17,558

 
Marketing, reservations and reimbursables
—

 
26,179

 
26,179

 
Other franchise
—

 
4,822

 
4,822

 
Total revenues
$
171,926

 
$
—

 
$
171,926

 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
Company operated hotels
$
91,622

 
$
4,109

 
$
95,731

 
Other costs from managed properties
3,914

 
(3,914
)
 
—

 
Franchised hotels
34,794

 
(34,794
)
 
—

 
Depreciation and amortization
18,824

 
—

 
18,824

 
Hotel facility and land lease
4,806

 
(4,806
)
 
—

 
Gain on asset dispositions, net
(449
)
 
—

 
(449
)
 
General, administrative, and other expenses
15,783

 
(15,783
)
 
—

 
Acquisition and integration costs
1,529

 
—

 
1,529

 
Marketing, reservations and reimbursables
—

 
25,435

 
25,435

 
Selling, general, administrative and other expenses
—

 
29,753

 
29,753

 
Total operating expenses
$
170,823

 
$
—

 
$
170,823


51



 
 
For the Year Ended December 31, 2016
 
 
As Previously Reported
 
Reclassifications
 
As Currently Presented
Revenue:
 
 
Company operated hotels
$
117,641

 
$
5,948

 
$
123,589

 
Other revenues from managed properties
5,948

 
(5,948
)
 
—

 
Franchised hotels
24,634

 
(24,634
)
 
—

 
Other
128

 
—

 
128

 
Royalty
—

 
7,472

 
7,472

 
Marketing, reservations and reimbursables
—

 
14,087

 
14,087

 
Other franchise
—

 
3,075

 
3,075

 
Total revenues
$
148,351

 
$
—

 
$
148,351

 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
Company operated hotels
$
91,572

 
$
6,094

 
$
97,666

 
Other costs from managed properties
5,948

 
(5,948
)
 
—

 
Franchised hotels
19,315

 
(19,315
)
 
—

 
Depreciation and amortization
16,095

 
—

 
16,095

 
Hotel facility and land lease
4,740

 
(4,740
)
 
—

 
Gain on asset dispositions, net
(2,436
)
 
—

 
(2,436
)
 
General, administrative, and other expenses
11,151

 
(11,151
)
 
—

 
Acquisition and integration costs
2,112

 
—

 
2,112

 
Marketing, reservations and reimbursables
—

 
16,426

 
16,426

 
Selling, general, administrative and other expenses
—

 
18,634

 
18,634

 
Total operating expenses
$
148,497

 
$
—

 
$
148,497



Revision of Previously Issued Financial Statements for Immaterial Misstatements

During the fourth quarter of 2018, we identified an error affecting previous periods as leasehold improvements for our Red Lion Hotel Seattle Airport property acquired on December 31, 1999 were assigned a useful life in excess of the lease term of the associated land lease for the property. As a result, we have understated depreciation expense by approximately $165,000 in each of the past 19 years. We have assessed the effects of these errors to our previously issued financial statements and based upon quantitative and qualitative factors, determined that the errors were not material to our previously issued financial statements. We have corrected the $2.6 million cumulative understatement of depreciation expense as of January 1, 2016, through a reduction in property and equipment, net and accumulated deficit and revised prior period balances accordingly. We also recognized the remaining $0.5 million understatement of depreciation expense from 2016 through the third quarter of 2018 in depreciation expense during the fourth quarter of 2018. The following table shows the impact of the revision on the December 31, 2017 Consolidated Balance Sheet (in thousands):


52


 
 
As Previously Reported
 
Adjustment
 
As Revised
ASSETS
 
 
 
 
 
 
Property and equipment, net ($134,843 attributable to VIEs)
 
$
167,938

 
$
(2,636
)
 
$
165,302

Total assets
 
330,350

 
(2,636
)
 
327,714

 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
RLH Corporation stockholders' equity:
 
 
 
 
 
 
Accumulated deficit
 
$
(15,406
)
 
$
(2,636
)
 
$
(18,042
)
Total RLH Corporation stockholders' equity
 
162,859

 
(2,636
)
 
160,223

Total stockholders' equity
 
190,240

 
(2,636
)
 
187,604

Total liabilities and stockholders' equity
 
330,350

 
(2,636
)
 
327,714


The following table shows the impact of the revision on the Consolidated Statements of Changes in Stockholders' Equity for the periods presented (in thousands):

 
 
As Previously Reported
 
Adjustment
 
As Revised
Retained Earnings (Accumulated Deficit) as of January 1, 2016
 
$
(11,310
)
 
$
(2,636
)
 
$
(13,946
)
Retained Earnings (Accumulated Deficit) as of December 31, 2016
 
(15,987
)
 
(2,636
)
 
(18,623
)
Retained Earnings (Accumulated Deficit) as of December 31, 2017
 
(15,406
)
 
(2,636
)
 
(18,042
)


Revenue Recognition for 2018

Revenue is generally recognized as services are provided. Revenues are primarily derived from franchise contracts with third-party hotel owners, as well as from individual hotel guests and corporate patrons at our owned and leased hotels. Revenues are also derived from management of third-party owned hotels. The majority of compensation received for our performance obligations is variable consideration from our management and franchise contracts or fixed transactional guest consideration through our owned and leased hotels. We recognize the variable fees as the services to which they relate are delivered, applying the prescribed variable consideration allocation guidance. In certain circumstances we defer consideration and recognize consideration over time as the related performance obligations are satisfied.

Franchised hotels revenue

We identified the following services as one performance obligation in connection with our franchise contracts:

•
Intellectual Property (IP) licenses grant a non-exclusive, limited revocable license to the RLH trademarks and hotel names.
•
Manual and Training Services provide operational assistance unique to the RLH brands, business model and standards.
•
Reservation Services are provided through direct or indirect system access.
•
Marketing Services and Arrangements benefit the overall hotel network and include brand promotions, direct guest marketing, brand name marketing and various other programs targeted at advertising to guests.
•
Brand Conference is provided typically annually for third party owners to gather and attend educational seminars and brand informational presentations.

The performance obligation related to franchise revenues is delivered over time. While the underlying services may vary from day to day, the nature of the promises are the same each day, other than the Brand Conference, which is recognized in the month the service is provided, and the property owner can independently benefit from each day's services. Franchise fees are typically based on the sales or usage of the underlying hotel, with the exception of fixed upfront fees that usually represent an insignificant portion of the transaction price. In addition, we have certain franchise agreements that contain a declining royalty rate over the term of the contract. Revenue for these contracts cannot be recognized based on the underlying sales or usage of the hotel, but are instead accounted for as variable consideration recognized ratably over the term of the agreements.

Franchised hotels revenue represent fees earned in connection with the licensing of one of our brands, usually under long-term contracts with the property owner, and include the following:

53



•
Royalty fees are generally based on a percentage of a hotel's monthly gross room revenue or a fixed monthly fee based on room count. These fees are typically billed and collected monthly, and revenue is generally recognized at the same time the fees are billed.
•
Marketing, reservations and reimbursables are associated with our brands and shared services, which are paid from fees collected by us from the franchised properties. Revenue is generally recognized on a gross basis as fees are billed, which are based on the underlying hotel's sales or usage (e.g., gross room revenues and number of reservations processed) and expenses are expected to equal the revenues over time.
•
Other franchise fees are primarily charges for services provided to franchised properties for revenue management, brand conference, and quality assurance inspections. In addition, this includes application, initiation and other fees that are charged when: (i) new hotels enter our system, (ii) there is a change of ownership, or (iii) contracts with properties already in our system are extended or modified. These fees are typically fixed and collected upfront and are recognized as revenue over the term of the franchise contract.

Any consideration paid or anticipated to be paid to incentivize hotel owners to enter into franchise contracts is capitalized and reduces revenues as amortized. The commission or direct costs of acquiring the contract or modification are recorded as contract acquisition costs and are recognized in franchise costs when amortized on a straight-line basis over the length of the contract.

Company operated hotels revenue

We identified the following performance obligations in connection with our owned and leased hotel revenues, for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services to the hotel customer or guest:

•
Room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs.
•
Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest.
•
Hotel management fees represent fees earned from hotels that we manage, usually under long-term contracts with the property owner and are generally based on a percentage of a hotel's monthly gross revenue. Base fees are typically billed and collected monthly, and revenue is generally recognized at the same time the fees are billed.
•
Other revenue from managed properties represent direct reimbursements including payroll and related costs and certain other operating costs of the managed properties' operations, which are contractually reimbursed to us by the property owners as expenses are incurred. Revenue is recognized based on the amount of expenses incurred by us that are included in Company operated hotels operating expenses in our Consolidated Statements of Comprehensive Income (loss). These expenses are then reimbursed by the property owner typically on a monthly basis, which results in no net effect on operating income (loss) or net income (loss).

Company operated hotels revenue primarily consist of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking) related to owned, leased and consolidated non-wholly owned (joint venture) hotel properties and hotel management fees and related direct reimbursement of certain operating costs for managed properties. Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. The management fees from third-party hotel owners earned under the contract relate to a specific outcome of providing the services (e.g., hotel room sales). We use time as the measure of progress to recognize as revenue the fees that are allocated to the period earned per the contract.

Other revenues

Other revenues include revenues generated by the incidental support of hotel operations for owned, leased, managed and franchised hotels, including purchasing operations, and other operating income.


54


Taxes and fees collected on behalf of governmental agencies

We are required to collect certain taxes and fees from customers on behalf of governmental agencies and remit these back to the applicable governmental agencies on a periodic basis. We have a legal obligation to act as a collection agent. We do not retain these taxes and fees and, therefore, they are not included in our measurement of transaction prices. We have elected to present revenue net of sales taxes and other similar taxes. We record a liability when the amounts are collected and relieve the liability when payments are made to the applicable taxing authority or other appropriate governmental agency.

Revenue Recognition for 2017 and 2016

Revenue is generally recognized as services are provided. When payments from customers are received before services have been performed, the amount received is recorded as deferred revenue until the service has been completed. We recognize revenue from the following sources:

Franchised hotels revenue

Fees received in connection with the franchise and marketing of our brand names. Franchise revenues are recognized as earned in accordance with the contractual terms of the franchise agreements. These include Royalty, Other franchise, and Marketing, reservations, and reimbursables.

Company operated hotels revenue

Room rental and food and beverage sales from majority owned and leased hotels and management fees from hotels under management contract. Revenues are recognized when services have been performed, generally at the time of the hotel stay or guest's visit to the restaurant or at the time the management services are provided. We recognize other revenue and costs from managed properties when we incur the related reimbursable costs. These costs primarily consist of payroll and related expenses at managed properties where we are the employer. As these costs have no added markup, the revenue and related expense have no impact on either our operating or net income.

Other revenues

Other revenues include revenues generated by the incidental support of hotel operations for owned, leased, managed and franchised hotels, including purchasing operations, and other operating income.

Taxes and fees collected on behalf of governmental agencies

Indirect taxes, e.g., sales tax, occupancy tax, etc., are recognized on a net basis (excluded from revenues).

Cash and Cash Equivalents

All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. At times, cash balances at banks and other financial institutions may be in excess of federal insurance limits.

Restricted Cash

In accordance with our various borrowing arrangements, cash is often restricted and held primarily as reserves for debt service (interest only), property improvements and other requirements from the lenders.

Allowance for Doubtful Accounts

The ability to collect individual accounts receivable is reviewed on a routine basis. An allowance for doubtful accounts is recognized based on a combination of reserves calculated based on underlying characteristics of receivables (such as the age of the related receivable) as well as specifically identified amounts believed to be uncollectible. If actual collection experience changes, revisions to the allowance may be required and if all attempts to collect a receivable fail, it is recorded against the allowance. The estimate of the allowance for doubtful accounts may be impacted by, among other things, national and regional economic conditions. Acquired accounts receivable from business acquisitions are recorded at fair value, based on amounts expected to be collected, therefore no allowance for doubtful accounts related to these accounts is recorded at the acquisition date.

55



The following schedule summarizes the activity in the allowance account for trade accounts receivable for the past three years for continuing operations (in thousands):
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
Allowance for doubtful accounts, continuing operations
 
 
Balance, beginning of year
$
1,436

 
$
944

 
$
657

 
Additions to allowance
1,014

 
528

 
358

 
Write-offs, net of recoveries
(105
)
 
(36
)
 
(71
)
 
Balance, end of year
$
2,345

 
$
1,436

 
$
944


Accounts Receivable from Related Parties

Amounts receivable from related parties relate to outstanding amounts billed to the owners of hotels we manage for reimbursement of costs of the operations of those hotels. We have a related party relationship with these owners, and there is no allowance for doubtful accounts associated with these receivables.

Notes Receivable

We carry notes receivable at their estimated collection amount, and they are classified as either current or long-term depending on the expected collection date. Interest income on notes receivable is recognized using the interest method.

Other Current Assets

Other current assets primarily includes prepaid and other expenses such as prepaid insurance, prepaid taxes, deposits, advertising costs and prepaid costs related to our brand conferences. Other current assets also consists of inventories, which are mostly food and beverage products held for sale at the company operated restaurants and guest supplies. Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or net realizable value.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. The cost of improvements that extend the life of property and equipment is capitalized. Repairs and maintenance charges are recognized as incurred.

Depreciation is provided using the straight-line method over the estimated useful life of each asset, which ranges as follows:
 
 
Buildings
25 to 39 years
Equipment
2 to 15 years
Furniture and fixtures
2 to 15 years
Landscaping and improvements
15 years
 
Leasehold improvements are capitalized and depreciated over the term of the applicable lease, including renewable periods if reasonably assured to be exercised based on economic conditions and factors, or over the useful lives, whichever is shorter.

Assets Held for Sale

We consider a property to be an asset held for sale when all of the following criteria are met:
•
management commits to a plan to sell the property;
•
it is unlikely that the disposal plan will be significantly modified or discontinued;
•
the property is available for immediate sale in its present condition;
•
actions required to complete the sale of the property have been initiated;
•
sale of the property is probable, we expect the completed sale will occur within one year; and
•
the property is actively being marketed for sale at a price that is reasonable given its current market value.

Upon designation as an asset held for sale, we record the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and cease depreciation.

56



Goodwill

Goodwill is assigned to our reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics. The reporting units are aligned with our reporting segments. Goodwill is not amortized, but we test goodwill for impairment each year as of October 1, or more frequently should facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than the carrying amount. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with a quantitative assessment. The quantitative assessment involves calculating an estimated fair value of each reporting unit based on projected future cash flows, and comparing the estimated fair values of the reporting units to their carrying amounts, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, including goodwill, no impairment is recognized. However, if the carrying amount of a reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to the excess, limited to the total goodwill balance of the reporting unit.

We have not recognized any impairment on goodwill during the years ended December 31, 2018, 2017 and 2016.

Indefinite-Lived Intangible Assets

Through prior business combinations we have obtained intangible assets related to our Americas Best Value Inn, Canadas Best Value Inn, Guesthouse, Knights Inn, and Red Lion brands. At the time of each acquisition, the brands were assigned a fair value based on the relief from royalty method. As there are no limitations on the useful lives of these assets, we have determined they are indefinite-lived intangible assets that will not be amortized. Annually, on October 1, we reassess the useful lives of each asset to determine if they should continue to be classified as indefinite and we additionally test the assets for impairment. Impairment may also be tested at any point in which facts and circumstances indicate that it is more likely than not that the fair value of the asset is less than the carrying amount. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the asset is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with a quantitative assessment. The quantitative assessment involves calculating an estimated fair value of the asset using the relief from royalty method, and comparing the estimated fair value of the asset to its carrying amount. If the estimated fair value of the asset exceeds its carrying value, no impairment is recognized. However, if the carrying amount of the asset exceeds its fair value, an impairment loss is recognized in an amount equal to the excess.

As of October 1, 2018, we recognized an impairment loss on the Guesthouse brand indefinite-lived intangible asset of $3.5 million included in Asset impairment in the Consolidated Statements of Comprehensive Income (Loss) and reclassified the $2.1 million remaining fair value from an indefinite-lived intangible asset to a finite-lived intangible asset. See further discussion of the impairment and reclassification at Note 6, Goodwill and Intangible Assets. No impairment expense on indefinite-lived intangible assets was recognized during the years ended December 31, 2017 or 2016.

Valuation of Long-Lived Assets Including Finite-Lived Intangible Assets

We test long-lived asset groups, including finite-lived intangible assets, for recoverability when changes in circumstances indicate the carrying value may not be recoverable. For example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, or significant negative industry or economic trends. We also perform a test for recoverability when management has committed to a plan to sell or otherwise dispose of an asset group. We evaluate recoverability of an asset group by comparing its carrying value to the future net undiscounted cash flows that we expect will be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value. When we recognize an impairment loss for assets to be held and used, we depreciate the adjusted carrying amount of those assets over their remaining useful life.

During the year ended December 31, 2018, we recognized an impairment loss on the Baltimore property of $7.1 million included in Asset impairment in the Consolidated Statements of Comprehensive Income (Loss). See further discussion of the impairment at Note 5, Property and Equipment. No impairment expense on long-lived assets was recognized during the years ended December 31, 2017 and 2016.


57


Variable Interest Entities

We analyze the investments we make in joint venture entities based on the accounting guidance for variable interest entities (VIEs). These joint ventures are evaluated to determine whether (1) sufficient equity at risk exists for the legal entity to finance its activities without additional subordinated financial support or, (2) as a group, the holders of the equity investment at risk lack one of the following characteristics (a) the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance or, (b) the obligation to absorb the expected losses of the legal entity or (c) the right to receive expected residual returns of the legal entity, or (3) the voting rights of some equity investors are not proportional to their obligations to absorb the losses or the right to receive benefits and substantially all of the activities either involve or are conducted on behalf of an investor with disproportionately few voting rights. If any one of the above three conditions are met then the joint venture entities are considered to be VIEs.

We consolidate the results of any such VIE in which we determine that we are the primary beneficiary. We are considered to be the primary beneficiary of an entity if we have both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive the benefits from, the VIE that could be potentially significant to the VIE.

Business Combinations

On the date of acquisition, the assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree are recorded at their fair values. The acquiree's results of operations are also included in our consolidated results as of the date of acquisition. Intangible assets that arise from contractual/legal rights, or are capable of being separated are measured and recorded at fair value, and amortized over the estimated useful life. If practicable, assets acquired and liabilities assumed arising from contingencies are measured and recorded at fair value. If the valuation of any contingent assets or liabilities is not practicable, such assets and liabilities are measured and recorded when it is probable that a gain or loss has occurred and the amount can be reasonably estimated. The residual balance of the purchase price, after fair value allocations to all identified assets and liabilities, represents goodwill. Acquisition-related costs are recognized as incurred. Restructuring costs associated with an acquisition are generally recognized in periods subsequent to the acquisition date, and changes in deferred tax asset valuation allowances and acquired income tax uncertainties, including penalties and interest, after the measurement period are recognized as a component of the provision for income taxes. Our acquisitions may include contingent consideration, which require us to recognize the fair value of the estimated liability at the time of the acquisition. Subsequent changes in the estimate of the amount to be paid under the contingent consideration arrangement are recognized in the Consolidated Statements of Comprehensive Income (Loss). Cash payments for contingent or deferred consideration up to the amount of liability recognized on the acquisition date are classified within cash flows from financing activities within the Consolidated Statements of Cash Flows and any excess is classified as cash flows from operating activities.

Other Assets

Other assets primarily consist of key money arrangements with certain of our franchisees and IT system implementation and license costs, for both our franchisees and our company operated hotels. We recognize key money paid in conjunction with entering into long-term franchise agreements as prepaid expenses and amortize the amount paid as a reduction of revenue over the term of the franchise agreements. IT system implementation and license costs represent costs incurred to implement, operate and maintain RevPak, our proprietary guest management system application and are amortized over the initial term of the software license arrangement or the current license period, as applicable.

Fair Value Measurements

Applicable accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure our assets and liabilities using inputs from the following three levels of the fair value hierarchy:
•
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
•
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
•
Level 3 includes unobservable inputs that reflect assumptions about what factors market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.

58



Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning, and results of recent operations. At December 31, 2018 and 2017, a partial valuation allowance was recorded to reduce our deferred tax assets to an amount that is more likely than not to be realized. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

We classify any interest expense and penalties related to underpayment of taxes and any interest income on tax overpayments as components of income tax expense.

We record uncertain tax positions in accordance with Accounting Standards Codification (ASC) 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. See Note 14, Income Taxes.

Advertising and Promotion

Costs associated with advertising and promotional efforts are generally recognized as incurred. During the years ended December 31, 2018, 2017 and 2016, we incurred approximately $2.7 million, $5.6 million and $5.3 million, respectively, in advertising expense included in Marketing, reservations, and reimbursables expense in the Consolidated Statements of Comprehensive Income (Loss).

Discontinued Operations

When an asset group meets the criteria to be classified as held-for-sale or is disposed of by sale, and the disposal represents a strategic shift that has or will have a major impact on our financial statements, we classify the results of operations as discontinued operations in our Consolidated Statements of Comprehensive Income (Loss) for all periods presented.

On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. The transaction represented a strategic shift that had a major impact on our financial statements. In accordance with this strategic shift, the results of the entertainment segment are reported as discontinued operations for all periods presented in this annual report on Form 10-K. See Note 17 Acquisitions and Dispositions, for further discussion.

Basic and Diluted Earnings (Loss) Per Share

Basic earnings (loss) per share attributable to RLH Corporation is computed by dividing income (loss) attributable to RLH Corporation by the weighted-average number of shares outstanding during the period. Diluted earnings (loss) per share attributable to RLH Corporation gives effect to all dilutive potential shares that are outstanding during the period and include outstanding stock options, other outstanding employee equity grants, warrants and amounts contingently issuable in association with the Vantage acquisition contingent consideration, by increasing the weighted-average number of shares outstanding by their effect. See Note 13 Earnings (Loss) Per Share.

New Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as

59


either finance or operating, with classification affecting the pattern of expense recognition in the income statement. We have adopted the standard on January 1, 2019 and applied the package of practical expedients included therein. The standard was adopted using the modified retrospective transition method and we did not apply the standard to the comparative periods presented in the year of adoption.

Due to the existence of certain operating lease obligations as of January 1, 2019, we anticipate the recognition of approximately $51 million of ROU assets and corresponding lease liabilities of approximately $52 million, with reductions of other accrued liabilities and deferred income and other long-term liabilities of approximately $1 million. However, the Consolidated Statement of Comprehensive Income (Loss) recognition of lease expenses is not expected to materially change from the current methodology.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments, which will change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU will replace the current "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For trade and other receivables, held to maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. The ASU is effective in the first quarter of 2020. We are currently evaluating the effects of this ASU on our financial statements, and such effects have not yet been determined.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which provides modifications to the disclosure requirements over fair value measurements. The ASU is effective in the first quarter of 2020, with early adoption permitted. We are currently evaluating the effects of this ASU on our financial statements, and such effects have not yet been determined.

We have assessed the potential impact of other recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to us or are not anticipated to have a material impact on our consolidated financial statements.

New Accounting Pronouncements Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. We adopted the requirements of Topic 606 on January 1, 2018 using the modified retrospective method, as permitted by the standard, resulting in a cumulative adjustment to Accumulated deficit of $0.4 million. In implementation, we applied the transition guides to franchise agreements originated by us. No contract liability was recorded for franchise contracts that were acquired in prior business combinations or asset purchases.

The provisions of Topic 606 affected our revenue recognition as follows:

•
Application, initiation and other fees are recognized over the enforceable period of the franchise contract, rather than upon execution of the contract. These fees are recognized in Other franchise revenues.

•
Certain contract acquisition costs related to our management and franchise contracts are recognized over the term of the contracts rather than upon execution of the contract. The amortization of these costs is recognized in Selling, general, administrative and other expenses over the enforceable period of the franchise contract.


60


Information below represents the effect of the adoption of Topic 606 on our Consolidated Balance Sheet as of December 31, 2018 and our Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2018 (in thousands, except per share data).
 
 
As Reported
 
Adjustment
 
Balances without adoption of topic 606
ASSETS
 
 
 
 
 
 
Other current assets
 
$
6,218

 
$
(288
)
 
$
5,930

Other assets, net
 
8,075

 
(887
)
 
7,188

Total assets
 
249,787

 
(1,175
)
 
248,612

 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
Other accrued liabilities
 
$
4,960

 
$
(679
)
 
$
4,281

Deferred income and other long-term liabilities
 
2,245

 
(1,183
)
 
1,062

Deferred income taxes
 
772

 
38

 
810

Total liabilities
 
62,871

 
(1,824
)
 
61,047

 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
RLH Corporation stockholders' equity:
 
 
 
 
 
 
Accumulated deficit
 
$
(16,512
)
 
$
649

 
$
(15,863
)
Total RLH Corporation stockholders' equity
 
165,752

 
649

 
166,401

Total stockholders' equity
 
186,916

 
649

 
187,565

Total liabilities and stockholders' equity
 
249,787

 
(1,175
)
 
248,612


Year Ended December 31, 2018
 
As Reported
 
Adjustment
 
Balances without adoption of topic 606
Revenue:
 
 
 
 
 
 
Other franchise
 
$
5,537

 
$
537

 
$
6,074

Total revenues
 
135,849

 
537

 
136,386

 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
Selling, general, administrative and other expenses
 
32,122

 
422

 
32,544

Total operating expenses
 
114,096

 
422

 
114,518

Operating income (loss)
 
21,753

 
115

 
21,868

 
 
 
 
 
 
 
Income (loss) from continuing operations before taxes
 
15,015

 
115

 
15,130

Income tax benefit
 
(71
)
 
28

 
(43
)
Net income (loss) from continuing operations
 
15,086

 
87

 
15,173

Net income (loss)
 
15,086

 
87

 
15,173

Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
1,957

 
87

 
2,044

 
 
 
 
 
 
 
Basic earnings (loss) per share from continuing operations
 
$
0.08

 
$
—

 
$
0.08

Diluted earnings (loss) per share from continuing operations
 
$
0.08

 
$
—

 
$
0.08



In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments to address diversity in practice for eight specific topics: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies

61


(including bank-owned life insurance policies); (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. We adopted this guidance as of January 1, 2018, as required, and there was no material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (ASU 2017-01), which narrows the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If this initial test is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output. We adopted this guidance as of January 1, 2018, as required, and there was no material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test that requires the determination of the fair value of individual assets and liabilities of a reporting unit. ASU 2017-04 requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We early adopted this guidance as of October 1, 2018, as allowed, for our annual goodwill impairment testing and there was no material impact on our financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.  ASU 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset and provides guidance for the partial sale of nonfinancial assets. The guidance was effective for us as of January 1, 2018 in conjunction with our adoption of Topic 606. We implemented this ASU on a modified retrospective basis and there was no material impact on our consolidated financial statements.

3.
Business Segments

We have two operating segments: franchised hotels and company operated hotels. The "other" segment consists of miscellaneous revenues and expenses, cash and cash equivalents, certain receivables, certain property and equipment and general and administrative expenses, which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense, income taxes and certain corporate expenses; therefore, they have not been allocated to the operating segments. We allocate direct selling, general, administrative and other expenses to our operating segments. All balances have been presented after the elimination of inter-segment and intra-segment revenues and expenses.

The results of operations of the entertainment segment were treated as discontinued operations, due to the sale of the business completed on October 3, 2017. As a result, the revenue and operating expenses of the entertainment segment are excluded from the segment disclosures below.

Selected financial information is provided below (in thousands):
Year Ended December 31, 2018
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
53,794

 
$
82,021

 
$
34

 
$
135,849

Operating expenses:
 
 
 
 
 
 
 
 
Segment and other operating expenses
 
36,203

 
70,899

 
19,211

 
126,313

Depreciation and amortization
 
4,110

 
11,007

 
1,886

 
17,003

Asset impairment
 
3,482

 
7,100

 
—

 
10,582

Gain on asset dispositions, net
 
—

 
(41,943
)
 
(78
)
 
(42,021
)
Acquisition and integration costs
 
2,219

 
—

 
—

 
2,219

Operating income (loss)
 
$
7,780

 
$
34,958

 
$
(20,985
)
 
$
21,753

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
438

 
$
2,235

 
$
6,311

 
$
8,984

Identifiable assets as of December 31, 2018
 
$
101,863

 
$
123,527

 
$
24,397

 
$
249,787



62


Year Ended December 31, 2017
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
48,559

 
$
123,100

 
$
267

 
$
171,926

Operating expenses:
 
 
 
 
 
 
 
 
Segment and other operating expenses
 
34,897

 
100,342

 
15,680

 
150,919

Depreciation and amortization
 
2,434

 
15,020

 
1,370

 
18,824

Asset impairment
 
—

 
—

 
—

 
—

Gain on asset dispositions, net
 
—

 
(461
)
 
12

 
(449
)
Acquisition and integration costs
 
1,426

 
—

 
103

 
1,529

Operating income (loss)
 
$
9,802

 
$
8,199

 
$
(16,898
)
 
$
1,103

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
650

 
$
4,718

 
$
3,103

 
$
8,471

Identifiable assets as of December 31, 2017
 
$
70,035

 
$
239,023

 
$
18,656

 
$
327,714


Year Ended December 31, 2016
 
Franchised Hotels
 
Company Operated Hotels
 
Other
 
Total
Revenue
 
$
24,634

 
$
123,589

 
$
128

 
$
148,351

Operating expenses:
 
 
 
 
 
 
 
 
Segment and other operating expenses
 
21,191

 
102,260

 
9,275

 
132,726

Depreciation and amortization
 
890

 
14,176

 
1,029

 
16,095

Asset impairment
 
—

 
—

 
—

 
—

Gain on asset dispositions, net
 
—

 
(2,043
)
 
(393
)
 
(2,436
)
Acquisition and integration costs
 
237

 
—

 
1,875

 
2,112

Operating income (loss)
 
$
2,316

 
$
9,196

 
$
(11,658
)
 
$
(146
)
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
—

 
$
31,738

 
$
2,972

 
$
34,710

Identifiable assets as of December 31, 2016
 
$
66,601

 
$
257,947

 
$
17,351

 
$
341,899



4.
Variable Interest Entities

Our joint venture entities have been determined to be variable interest entities (VIEs), and RLH Corporation has been determined to be the primary beneficiary of each VIE. Therefore, we consolidate the assets, liabilities, and results of operations of (1) RL Venture LLC (RL Venture), (2) RLS Balt Venture LLC (RLS Balt Venture), (3) RLS Atla Venture LLC (RLS Atla Venture) and (4) RLS DC Venture LLC (RLS DC Venture). In October 2018, we purchased the outstanding noncontrolling interest of RLS Balt Venture, making the entity a wholly owned subsidiary that is no longer a variable interest entity. This transaction is described further below.

RL Venture

We own a 55% interest in RL Venture, with the remaining 45% owned by Shelbourne Falcon RLHC Hotel Investors LLC (Shelbourne Falcon), an entity that is led by Shelbourne Capital LLC (Shelbourne). The hotels owned by RL Venture were managed by RL Management, one of our wholly-owned subsidiaries, subject to a management agreement until December 2018, at which point management of the hotels was outsourced to a third party management company. RL Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RL Venture's activities are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over two of the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon, which does not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our 55% equity interest and management fees. As a result, we consolidate RL Venture. The equity interest owned by Shelbourne Falcon is reflected as a noncontrolling interest in the condensed consolidated financial statements.

In February 2018, five of the RL Venture properties were sold for an aggregate sale price of $47.2 million. In April 2018, one of the RL Venture properties sold for $5.5 million. In May 2018, one of the RL Venture properties sold for $9.3 million. In July 2018,

63


two additional RL Venture properties sold for $54.5 million. As of December 31, 2018, RL Venture holds two remaining properties. See further discussion of these sales in Note 17, Acquisitions and Dispositions. Proceeds from these sales were used to repay in full the RL Venture term loan as discussed further in Note 8, Debt and Line of Credit.
Cash distributions may be made periodically based on calculated distributable income. For the year ended December 31, 2018, RL Venture made cash distributions of $47.6 million, of which we received $26.2 million. For the year ended December 31, 2017, RL Venture made cash distributions of $6.8 million, of which we received $3.7 million. Under our credit agreement with Deutsche Bank AG New York Branch (DB), Capital One, National Association and Raymond James Bank, N.A., as lenders and DB as the administrative agent dated as of May 14, 2018, as amended, (DB Credit Agreement), these funds must be deposited into a cash collateral account and may be used to pay down the principal outstanding on the Senior Secured Term Loan. In August 2018, RLH Corporation deposited the $20.6 million received from RL Venture in a cash collateral account controlled by DB and used the funds to make a prepayment on the balance outstanding under the Senior Secured Term Loan under the DB Credit Agreement.

RLS Balt Venture

RLS Balt Venture owns the Hotel RL Baltimore Inner Harbor. Prior to October 2018, we owned a 73% interest in RLS Balt Venture, with the remaining 27% owned by Shelbourne Falcon II. In October 2018, we signed an agreement with Shelbourne Falcon Charm City Investors LLC (Shelbourne Falcon II), an entity led by Shelbourne, in which we dissolved the joint venture relationship in exchange for consideration of $0.3 million and gives RLH Corporation 100% ownership of RLS Balt Venture LLC. The buyout impacted the balance sheet through an increase in the noncontrolling interest balance of $2.1 million and a decrease in additional paid in capital of $2.4 million. Subsequent to the buyout, RLS Balt Venture is now a fully consolidated subsidiary of the Company and is no longer a variable interest entity.

Previously, RLS Balt Venture was considered a variable interest entity because our voting rights were not proportional to our financial interest and substantially all of RLS Balt Venture's activities were conducted on our behalf. We were the primary beneficiary as (a) we exerted power over the entity's key activities (hotel operations and property renovations) and shared power over the remaining key activities with Shelbourne Falcon II, which did not have the unilateral ability to exercise kick-out rights, and (b) we had the obligation to absorb losses and right to receive benefits that could be significant to the entity through our 73% equity interest and management fees. As a result, we consolidated RLS Balt Venture. The equity interest owned by Shelbourne Falcon II was reflected as a noncontrolling interest in the condensed consolidated financial statements.

In May 2017 and 2018, RLH Corporation provided $2.8 million and $2.0 million, respectively, to RLS Balt Venture to fund operating losses. There were no cash distributions made during the years ended December 31, 2018 or 2017.

RLS Atla Venture

We own a 55% interest in RLS Alta Venture and Shelbourne Falcon Big Peach Investors LLC (Shelbourne Falcon III), an entity led by Shelbourne, owns a 45% interest. RLH Atlanta LLC (RLH Atlanta), which is wholly-owned by RLS Atla Venture, owns a hotel adjacent to the Atlanta International Airport that opened in April 2016 as the Red Lion Hotel Atlanta International Airport, which is managed by RL Management. RLS Atla Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RLS Atla Venture's activities are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon III, which does not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our 55% equity interest and management fees. As a result, we consolidate RLS Atla Venture. The equity interest owned by Shelbourne Falcon III is reflected as a noncontrolling interest in the consolidated financial statements.

Cash distributions may be made periodically based on calculated distributable income. There were no cash distributions made during the years ended December 31, 2018 or 2017.

On August 9, 2018 we announced that we would be marketing for sale the Red Lion Hotel Atlanta International Airport owned by RLH Atlanta.

RLS DC Venture

We own a 55% of RLS DC Venture, and Shelbourne Falcon DC Investors LLC (Shelbourne Falcon IV), an entity led by Shelbourne, owns 45%. RLC DC LLC, which is wholly-owned by RLS DC Venture, owns a Hotel RL in Washington DC, which was managed by RL Management until December 2018, at which point management of the hotel was outsourced to a third party management company. RLS DC Venture is considered a variable interest entity because our voting rights are not proportional to our financial

64


interest, and substantially all of RLS DC Venture's activities are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon IV, which does not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our 55% equity interest and management fees. As a result, we consolidate RLS DC Venture. The equity interest owned by Shelbourne Falcon IV is reflected as a noncontrolling interest in the consolidated financial statements.

In May 2017, RLH Corporation provided $950,000 to RLS DC Venture to fund restricted cash required by its loan agreement with Pacific Western Bank. In May 2018, RLH Corporation provided $450,000 to RLS DC Venture to be used as a principal payment on the debt to Pacific Western Bank to bring the loan into compliance with the loan to value debt covenant requirement of the loan agreement. These fundings were not treated as a loan or as a capital contribution. Rather, it is preferred capital of RLS DC Venture and will be repaid only when the DC hotel property is sold, when RLS DC Venture is liquidated, or the restricted cash is released per the loan agreement. Upon such an event, RLH Corporation will receive the preferred capital plus a preferred return of 9% on the May 2017 preferred capital and 11% on the May 2018 preferred capital, compounded annually, prior to any liquidation proceeds being returned to the members.

In May 2018, the loan was also amended to add a $4.5 million principal guarantee by RLH Corporation. The amendment also allows future debt service coverage ratio covenant defaults to be cured by an increase in the RLH Corporation principal guarantee. This option can be exercised a maximum of two times during the remaining term of the loan. In December 2018, the loan was further amended to add an additional $6.0 million principal guarantee by RLH Corporation, remediating Q3 2018 breaches in the debt service coverage ratio and the required loan to value ratio through May 31, 2019.

Cash distributions may be made periodically based on calculated distributable income. There were no cash distributions made during the years ended December 31, 2018 or 2017.

5.
Property and Equipment

Property and equipment used in continuing operations is summarized as follows (in thousands):
 
 
December 31,
 
 
2018
 
2017
Buildings and equipment
 
$
150,072

 
$
216,618

Furniture and fixtures
 
19,746

 
29,132

Landscaping and land improvements
 
2,713

 
5,104

 
 
172,531

 
250,854

Less accumulated depreciation
 
(82,240
)
 
(121,524
)
 
 
90,291

 
129,330

Land
 
19,372

 
31,710

Construction in progress
 
5,859

 
4,262

Property and equipment, net
 
$
115,522

 
$
165,302



In the third quarter of 2018, we recognized a $7.1 million impairment on our Baltimore property. The default on the RL Baltimore loan (described further in Note 8, Debt and Line of Credit), coupled with challenging cash flow results for the asset gave rise to the impairment. The fair value of the asset was determined by a third-party valuation that included an analysis of selling prices for similar assets as well as a discounted cash flow analysis, which are Level 3 fair value measurements. Key inputs to the fair value measurement for these assets included forecasted revenues expected to be generated by the hotel, factoring in the market it serves, as well as forecasted operating costs and capital expenditures that would be incurred by a market participant. Other inputs included sales data for similarly situated hotels in the market, adjusted to reflect known differences in the assets.

During the year ended December 31, 2018, we sold nine hotel properties for a total gain of $40.7 million. See further discussion of these dispositions at Note 17, Acquisitions and Dispositions.

6.
Goodwill and Intangible Assets

During the fourth quarter of 2018, as part of our annual impairment testing of indefinite lived intangible assets, we identified an impairment of $3.5 million on our Guesthouse indefinite lived brand name in our franchised hotels segment as the brand has

65


encountered lower growth than previously expected, mostly due to the addition of other offerings in our portfolio. The impairment loss is included in the Asset Impairment caption in the Consolidated Statements of Comprehensive Income (Loss).

The inputs used to measure the fair value of the Guesthouse brand name were largely unobservable, and accordingly, this measure is classified as Level 3. The fair value of the Guesthouse brand name was estimated based on the relief from royalty method, which models the cash flows from the brand intangibles assuming royalties were received under a licensing arrangement. This discounted cash flow analysis uses inputs such as forecasted future revenues attributable to the brand, assumed royalty rates and a risk-adjusted discount rate that approximates the estimated cost of capital. The unobservable inputs used in this valuation included projected revenue growth rates, royalty rates, and the discount rate. The Company used a discount rate of 11%. Additionally, we have reclassified the remaining $2.1 million balance to a finite lived brand name with a remaining useful life of 6.3 years as of December 31, 2018.

Aside from the impairment of indefinite lived intangible assets described above, changes in the goodwill and other intangible asset balances from December 31, 2017 to December 31, 2018 relate to the Knights Inn acquisition on May 14, 2018 as described in Note 17, Acquisitions and Dispositions and continuing amortization of finite lived intangible assets.

The following table summarizes the balances of goodwill and other intangible assets (in thousands):
 
 
December 31,
 
 
2018
 
2017
Goodwill
$
18,595

 
$
9,404

 
 
 
 
 
Intangible assets
 
 
 
 
Brand name - indefinite lived
$
41,278

 
$
39,160

 
Trademarks - indefinite lived
128

 
128

 
Brand name - finite lived, net
4,326

 
2,814

 
Customer contracts - finite lived, net
15,178

 
8,647

Total intangible assets
$
60,910

 
$
50,749



Goodwill and other intangible assets attributable to each of our business segments at December 31, 2018 and 2017 were as follows (in thousands):  
 
December 31,
 
2018
 
2017
 
 
 
Intangible
 
 
 
Intangible
 
Goodwill
 
Assets
 
Goodwill
 
Assets
Company operated hotels
$
—

 
$
4,660

 
$
—

 
$
4,660

Franchised hotels
18,595

 
56,250

 
9,404

 
46,089

Total
$
18,595

 
$
60,910

 
$
9,404

 
$
50,749



The following table summarizes the balances of amortized customer contracts and finite-lived brand names (in thousands):
 
December 31,
 
2018
 
2017
Customer contracts(1)
$
20,773

 
$
11,673

Brand name - finite lived(2)
5,395

 
3,295

Accumulated amortization
(6,664
)
 
(3,507
)
Net carrying amount
$
19,504

 
$
11,461


(1) Customer contracts are being amortized on a straight-line basis over useful remaining lives ranging from 6.3 years to 15.0 years, with a weighted average remaining life of 13.3 years.
(2) Brand name - finite lived are being amortized on a straight-line basis over useful remaining lives ranging from 6.3 years to 7.8 years, with a weighted average remaining life of 7.1 years.


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Amortization of our finite lived intangible assets was $3.2 million, $2.1 million and $0.8 million for the years ended December 31, 2018, 2017, and 2016, respectively.

As of December 31, 2018, estimated future amortization expenses related to customer contracts and finite-lived brand names is as follows (in thousands):
Years Ending December 31,
Amount
2019
$
3,552

2020
3,055

2021
2,643

2022
2,306

2023
2,008

Thereafter
5,940

Total
$
19,504



7.
Revenue from Contracts with Customers

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
 
 
December 31, 2018
Accounts receivable
 
$
18,575

Key money disbursed
 
6,409

Capitalized contract costs
 
1,172

Contract liabilities
 
1,981


Significant changes in the key money disbursements, capitalized contract costs, and contract liabilities balances during the period are as follows (in thousands):
 
 
Key Money Disbursed
 
Capitalized Contract Costs
 
Contract Liabilities
Balance as of January 1, 2018
 
$
1,148

 
$
750

 
$
1,444

Key money disbursed
 
5,695

 
—

 
—

Costs incurred to acquire contracts
 
—

 
736

 
—

Cash received in advance
 
—

 
—

 
1,290

Revenue or expense recognized that was included in the January 1, 2018 balance
 
(207
)
 
(244
)
 
(526
)
Revenue or expense recognized in the period for the period
 
(227
)
 
(70
)
 
(227
)
Balance as of December 31, 2018
 
$
6,409

 
$
1,172

 
$
1,981



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Estimated revenues and expenses expected to be recognized related to performance obligations that were unsatisfied as of December 31, 2018, including revenues related to application, initiation and other fees are as follows (in thousands):
Years Ending December 31,
 
 Revenue
 
Contra Revenue
 
 Expense
2019
 
$
693

 
$
482

 
$
291

2020
 
474

 
475

 
258

2021
 
312

 
432

 
163

2022
 
243

 
412

 
132

2023
 
133

 
390

 
86

Thereafter
 
126

 
4,218

 
242

Total
 
$
1,981

 
$
6,409

 
$
1,172



We did not estimate revenues expected to be recognized related to our unsatisfied performance obligations for our: (i) royalty fees, as they are considered sales-based royalty fees recognized as hotel room sales occur in exchange for licenses of our brand names over the terms of the franchise contracts; and (ii) hotel management fees since they are allocated entirely to the wholly unsatisfied promise to transfer management services, which form part of a single performance obligation in a series, over the term of the management contract. Therefore, there are no amounts included in the table above related to these revenues.

8.
Debt and Line of Credit

The current and noncurrent portions of long-term debt as of December 31, 2018 and 2017 are as follows (in thousands):
 
December 31,
 
2018
 
2017
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Line of Credit
$
—

 
$
10,000

 
$
—

 
$
—

Senior Secured Term Loan
—

 
9,355

 
—

 
—

RL Venture
—

 
—

 
40,602

 
32,625

RL Baltimore
—

 
—

 
13,300

 
—

RLH Atlanta
9,225

 
—

 
9,360

 
—

RLH DC
15,943

 
—

 
332

 
16,303

Total debt
25,168

 
19,355

 
63,594

 
48,928

Unamortized debt issuance costs
(112
)
 
(241
)
 
(680
)
 
(445
)
Long-term debt net of debt issuance costs
$
25,056

 
$
19,114

 
$
62,914

 
$
48,483



The collateral for each of the borrowings within the joint venture entities is the assets and proceeds of each respective entity. Each of our debt agreements contain customary reporting, financial and operating covenants. We were in compliance with all of the financial covenants of our debt agreements at December 31, 2018, unless further described below.

Senior Secured Term Loan and Line of Credit

In May 2018, RLH Corporation and certain of its direct and indirect wholly-owned subsidiaries entered into a credit agreement with Deutsche Bank AG New York Branch (DB), Capital One, National Association and Raymond James Bank, N.A., as lenders and DB as the administrative agent (DB Credit Agreement). The DB Credit Agreement provided for a $30.0 million senior secured term loan facility (Senior Secured Term Loan) and a $10.0 million senior secured revolving credit facility (Line of Credit). The principal amount of the Senior Secured Term Loan was distributed at closing to fund the KFS acquisition.

The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default, cross-default provisions, and restrictions on payment of dividends. Our obligations under the DB Credit Agreement are (i) guaranteed by all of our direct and indirect wholly-owned subsidiaries, and (ii) secured by all of the present and after-acquired accounts, inventory, equipment, intellectual property, contractual rights and other tangible or intangible assets of RLH Corporation and the subsidiary guarantors. 


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The default of RL Baltimore LLC on August 10, 2018 under the terms of the Baltimore Note, as described below, created a default under our DB Credit Agreement. On August 31, 2018, we entered into a First Amendment (Amendment) and Waiver (Waiver) to the DB Credit Agreement. Pursuant to the Waiver, the Lenders agreed to waive the default of RLH Corporation under the DB Credit Agreement caused by the default of RL Baltimore LLC under the terms of the Baltimore Note, with the waiver to be effective August 10, 2018.

The Amendment also authorized our purchase of the Baltimore Note through our wholly owned subsidiary RLH Balt Acquisition, as described below, and added RLH Balt Acquisition as a Guarantor under the Credit Agreement. Our equity interest in RLH Balt Acquisition, and its interest in the Baltimore Note, were pledged to Lenders to secure the obligations of the Company under the Credit Agreement. In addition, the Amendment provided that there would be no cross default under the DB Credit Agreement with respect to the Baltimore Note for a period of 180 days, and clarified that no cross default under the DB Credit Agreement would occur in the event RLH Balt Acquisition waives any default under the Baltimore Note after such date.

In August 2018, we deposited $20.6 million from asset sale proceeds and related joint venture distributions into a cash collateral account controlled by the lender. We subsequently used these funds to make a prepayment on the balance outstanding under the Senior Secured Term Loan, reducing the outstanding balance of the Senior Secured Term Loan to $9.4 million at December 31, 2018. In August 2018, we also drew the full $10.0 million available to us on the Line of Credit. This amount remains outstanding as of December 31, 2018 and we have no further borrowing capacity through the Line of Credit. Due to the August 2018 prepayment described above, there are no further scheduled principal payments due until maturity.

The loans and credit commitments mature in May 2023. Due to the August 2018 prepayment described above, there are no further scheduled principal payment due until maturity. Outstanding amounts under the Senior Secured Term Loan and Line of Credit will bear interest at our election of 1-month, 2- month, 3-month, or 6-month LIBOR plus 3.00% with interest payable at the end of each elected 1-month, 2-month, 3-month, or 6-month elected term. As of December 31, 2018 we have elected a 1-month LIBOR rate resulting in an interest rate of 5.3%.

In addition, the DB Credit Agreement includes mandatory prepayment of the Senior Secured Term Loan using any proceeds from incurred or issued indebtedness, and, starting with the full fiscal quarter ending March 31, 2019, requires prepayments in an amount equal to (x) 50% of all distributions received by RLH Corporation or its subsidiary guarantors from their respective subsidiaries and joint venture interests during any such fiscal quarter, minus (y) the amount of the amortization payment required to be made by RLH Corporation for such fiscal quarter, capped at $5.0 million. In addition, all net proceeds received by RLH Corporation from non-ordinary course asset sales and other specified dispositions of property, including the RL Venture property sales, must be maintained in a cash collateral account controlled by DB, subject to the right of RLH Corporation to prepay the Senior Secured Term Loan in whole or in part at any time with such proceeds. 

RL Venture

In January 2015, RL Venture Holding LLC, a wholly-owned subsidiary of RL Venture entered into a loan agreement with Pacific Western Bank, which was secured by the hotels owned by RL Venture. The original principal amount of the loan was $53.8 million with an additional $26.2 million to be drawn over a two-year period to cover improvements related to the original hotels owned by the subsidiary.

In 2018, nine of the RL Venture properties were sold for $116.5 million. Using proceeds from the hotel sales and restricted cash associated with the debt, during the year ended December 31, 2018, RL Venture repaid the full $73.2 million principal outstanding under its loan agreement with Pacific Western Bank. Due to the extinguishment of this debt, we recognized a Loss on early retirement of debt of $0.7 million, from the write off of unamortized debt issuance costs. This debt is no longer outstanding as of December 31, 2018.

RL Baltimore

In April 2015, RL Baltimore obtained a mortgage loan from PFP Holding Company IV LLC, an affiliate of Prime Finance, secured by the Hotel RL Baltimore Inner Harbor. The initial principal amount of the loan was $10.1 million, and the lender agreed to advance an additional $3.2 million to cover expenses related to improvements to the hotel, which we drew during the year ended December 31, 2015.

In May 2018, RL Baltimore executed a three-month extension for its outstanding loan with PFP Holding Company IV (PFP). In connection with the extension, RLH Corporation agreed to allow RLS Balt Venture to transfer $2.0 million of costs owed to RLH Corporation for management fees and other operating costs into a preferred capital balance. The PFP loan matured and became due on August 10, 2018. Prior to the maturity date of the RL Baltimore loan, we were engaged in negotiations with our joint

69


venture partner in RLS Balt Venture, LLC and the lender to evaluate options to address the maturity including, but not limited to, extending the agreement, amending the agreement, or paying off the loan with currently available cash, however, the parties were unable to reach agreement prior to the maturity date and accordingly the loan went into default.

In September 2018, RLH Corporation, through our wholly owned subsidiary RLH Baltimore Loan Acquisition LLC (RLH Balt Acquisition), purchased the outstanding promissory note, in the original principal amount of $13.3 million (Baltimore Note) for a total purchase price of $13.6 million, resulting in a Loss on early retirement of debt of $0.1 million, from the write off of unamortized debt issuance costs. RL Baltimore is a wholly owned subsidiary of RLS Balt Venture LLC, a consolidated subsidiary of RLH Corporation in which, at the time of the transaction, we held a 73% interest.

On October 25, 2018, RLH Corporation signed an agreement with Shelbourne Falcon II, which dissolves the joint venture relationship and gives RLH Corporation 100% ownership of RLS Balt Venture LLC. This debt is no longer outstanding as of December 31, 2018.

RLH Atlanta

In September 2015, RLH Atlanta obtained a mortgage loan from PFP Holding Company IV LLC, an affiliate of Prime Finance, secured by a hotel adjacent to the Atlanta International Airport, which opened in April 2016 as the Red Lion Hotel Atlanta International Airport. The initial principal amount of the loan was $6.0 million, and the lender has agreed to advance an additional $3.4 million to cover expenses related to improvements to the hotel, which we drew during the first quarter of 2016.

The loan matures in September 2019. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 6.35%. Monthly principal payments of $10,000 began in September 2017 and increased to $15,000 beginning October 2018. The interest rate as of December 31, 2018 was 9.8%. We are currently evaluating options regarding the upcoming maturing including, but not limited to, disposal of the property prior to maturity or negotiation of replacement debt.

The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default. The liability of RLH Atlanta under the loan agreement is generally non-recourse. However, the lender may obtain a monetary judgment against RLH Atlanta if the lender suffers losses under certain circumstances listed in the loan agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations. RLH Corporation has guaranteed these recourse obligations of RLH Atlanta and agreed to customary reporting and operating covenants. We were in compliance with all financial covenants at December 31, 2018.

RLH DC

In October 2015, RLH DC obtained a new mortgage loan from Pacific Western Bank secured by the Hotel RL Washington DC. The initial principal amount of the loan was $15.2 million, and the lender agreed to advance an additional $2.3 million to cover expenses related to improvements to the hotel. At December 31, 2018, there were unamortized debt issuance costs of $0.1 million. The interest rate as of December 31, 2018 was 7.0%.

In May 2018 the loan was amended. With the amendment, RLH Corporation provided approximately $450,000 to RLS DC Venture to be used as a principal payment on the debt. The loan was also amended to add a $4.5 million principal guarantee by RLH Corporation. The amendment also allows future debt service coverage ratio covenant defaults to be cured by an increase in the RLH Corporation principal guarantee. This option can be exercised a maximum of two times during the remaining term of the loan.

As of September 30, 2018, RLH DC did not meet the debt service coverage ratio and loan to value ratio covenants and received notice from the lender that RLH DC was in default on the loan. On December 14, 2018, RLH DC and RLH Corporation executed an amendment to the mortgage loan agreement to increase the RLH Corporation principal guarantee to $10.5 million, remediating the debt service coverage ratio default, and increased the required loan to value ratio through May 31, 2019, remediating the loan to value ratio covenant default.

The loan matures in October 2019. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 4.55%. Monthly principal payments began in November 2017 in an amount that would repay the outstanding principal balance over a 25-year amortization period. We are currently evaluating options regarding the upcoming maturing including, but not limited to, disposal of the property prior to maturity or negotiation of replacement debt.

The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default. The liability of RLH DC under the loan agreement is generally non-

70


recourse.  However, the lender may obtain a monetary judgment against RLH DC if the lender suffers losses under certain circumstances listed in the loan agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations. RLH Corporation has guaranteed these recourse obligations of RLH DC and agreed to customary reporting and operating covenants. We were in compliance with all financial covenants at December 31, 2018.

Contractual maturities for long-term debt outstanding at December 31, 2018, for the next five years, are summarized by the year as follows (in thousands):
Years Ending December 31,
 
Amount
2019
 
$
25,168

2020
 
—

2021
 
—

2022
 
—

2023
 
19,355

Thereafter
 
—

Total
 
$
44,523



9.
Derivative Financial Instruments

We enter into derivative transactions to hedge our exposure to interest rate fluctuations, and not for trading purposes. We manage our floating rate debt using interest rate caps in order to reduce our exposure to the impact of changing interest rates and future cash outflows for interest. We estimate the fair value of our interest rate caps via calculations that use as their basis readily available observable market parameters. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service, which is a Level 2 input. Changes in fair value of these instruments are recognized in interest expense on the Consolidated Statements of Comprehensive Income (Loss). At December 31, 2018 and December 31, 2017, the valuation of the interest rate caps resulted in the recognition of assets with minimal values both individually and in the aggregate, which are included within Other assets, net on the Consolidated Balance Sheets. We were entered into cap rate transactions as described in the table below as of December 31, 2018 and December 31, 2017.

Subsidiary
 
Institution
 
Original Notional Amount
 
LIBOR Reference Rate Cap
 
Expiration
 
 
 
 
(In millions)
 
 
 
 
RLH Atlanta
 
SMBC Capital Markets, Inc.
 
$
9.3

 
3
%
 
September 2019
RLH DC
 
Commonwealth Bank of Australia
 
$
16.0

 
3
%
 
October 2019


10.    Operating and Capital Lease Commitments
We have both operating and capital leases in the normal course of business. The operating leases relate to four of our company operated hotel properties and our headquarters. We are obligated under capital leases for certain hotel equipment at our company operated hotel locations. The capital leases typically have a five-year term and are recorded in Other accrued liabilities and Deferred income and other long-term liabilities on the Consolidated Balance Sheets. The equipment assets are included within our Property and equipment, net balance and are depreciated over the lease term.


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Total future minimum payments due under all current term operating and capital leases at December 31, 2018 are as indicated below (in thousands):
Years Ending December 31,
 
Operating Lease Obligation
 
Capital
Lease Obligation
 
Total
Lease Obligation
2019
 
$
5,035

 
$
137

 
$
5,172

2020
 
4,730

 
131

 
4,861

2021
 
4,761

 
65

 
4,826

2022
 
4,792

 
34

 
4,826

2023
 
4,755

 
11

 
4,766

Thereafter
 
251,434

 
—

 
251,434

Total
 
$
275,507

 
$
378

 
$
275,885



Two leases comprise $248.8 million of future minimum lease payments beyond 2023. One is a ground lease for our Hotel RL Washington DC property with a term through 2080 and the other is a ground lease for our Red Lion Anaheim property with a lease term through 2021, but includes renewal options through 2106 that are reasonably assured to be exercised.

Total rent expense from continuing operations, under leases for the years ended December 31, 2018, 2017 and 2016 was $5.8 million, $6.3 million, and $5.7 million, respectively, which are recorded in Company operated hotels and Selling, general, administrative and other expenses on our Consolidated Statements of Comprehensive Income (Loss).

11.
Commitments and Contingencies

At any given time we are subject to claims and actions incidental to the operations of our business. Based on information currently available, we do not expect that any sums we may receive or have to pay in connection with any legal proceeding would have a materially adverse effect on our consolidated financial position or net cash flow.

12.
Stock Based Compensation

Stock Incentive Plans

The 2015 Stock Incentive Plan (2015 Plan) authorizes the grant or issuance of various option and other awards including restricted stock units and other stock-based compensation. The 2015 Plan was approved by our shareholders in 2015 and provided for awards of 1.4 million shares, subject to adjustments for stock splits, stock dividends and similar events. In May 2017, our shareholders approved an amendment to the 2015 Plan to authorize and additional 1.5 million shares, for a total authorized of 2.9 million shares. As of December 31, 2018, there were 1,051,643 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2015 Plan.

Stock based compensation expense reflects the fair value of stock based awards measured at grant date, including an estimated forfeiture rate, and is recognized over the relevant service period. For the years ended December 31, 2018, 2017 and 2016 stock-based compensation expense is as follows:
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In thousands)
Stock options
 
$
82

 
$
69

 
$
51

Restricted stock units
 
2,887

 
2,582

 
2,135

Performance stock units
 
442

 
180

 
—

Unrestricted stock awards
 
498

 
434

 
419

Employee Stock Purchase Plan
 
46

 
44

 
35

Total stock-based compensation
 
$
3,955

 
$
3,309

 
$
2,640




72


Stock Options

Stock options issued are valued based upon the Black-Scholes option pricing model and we recognize this value as an expense over the periods in which the options vest. Use of the Black-Scholes option-pricing model requires that we make certain assumptions, including expected volatility, forfeiture rate, risk-free interest rate, expected dividend yield and expected life of the options, based on historical experience. Volatility is based on historical information with terms consistent with the expected life of the option. The risk free interest rate is based on the quoted daily treasury yield curve rate at the time of grant, with terms consistent with the expected life of the option. In 2016 there were 81,130 shares of stock options granted, and no stock options granted in 2018 or 2017.

Stock option fair value assumptions are as follows for stock options granted for year ended December 31, 2016:
Grant Date
 
Volatility
 
Forfeiture Rate
 
Risk-free Interest Rate
 
Dividend Yield
 
Expected Life (Years)
March 28, 2016
 
61.12%
 
21.07%
 
1.37%
 
—%
 
5


A summary of stock option activity for the year ended December 31, 2018, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Exercise
Price
Balance, January 1, 2018
 
90,827

 
$
8.26

Options granted
 
—

 
—

Options exercised
 
(5,265
)
 
$
8.74

Options forfeited
 
(4,432
)
 
$
8.74

Balance, December 31, 2018
 
81,130

 
$
8.20

Exercisable, December 31, 2018
 
40,566

 
$
8.20



Additional information regarding stock options outstanding and exercisable as of December 31, 2018, is presented below.

Exercise
Price
 
Number
Outstanding
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Expiration
Date
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value(1)
 
Number
Exercisable
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value(1)
$8.20
 
81,130

 
7.24
 
2026
 
$
8.20

 
$
—

 
40,566

 
$
8.20

 
$
—

(1) The aggregate intrinsic value, in thousands, is before applicable income taxes and represents the amount option recipients would have received if all options had been exercised on the last trading day of 2018, based upon our closing stock price of $8.20.

Restricted Stock Units, Shares Issued as Compensation

During 2018, 2017 and 2016, we granted 514,512, 483,020 and 297,989 unvested restricted stock units, respectively, to executive officers and other key employees, which typically vest 25% each year for four years on each anniversary of the grant date. While all of the shares are considered granted, they are not considered issued or outstanding until vested. As of December 31, 2018, 2017 and 2016 there were 1,288,714, 1,246,966 and 1,036,680 unvested restricted stock units outstanding, respectively. Since we began issuing restricted stock units, approximately 21.3% of total restricted stock units granted have been forfeited.

73



A summary of restricted stock unit activity for the year ended December 31, 2018, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Balance, January 1, 2018
 
1,246,966

 
$
7.23

Granted
 
514,512

 
$
10.45

Vested
 
(215,170
)
 
$
7.02

Forfeited
 
(257,594
)
 
$
7.66

Balance, December 31, 2018
 
1,288,714

 
$
8.47



We issued 215,170 shares of common stock to employees in 2018 as their restricted stock units vested. Under the terms of the 2006 and 2015 plans and upon issuance, we authorized a net settlement of distributable shares to employees after consideration of individual employees' tax withholding obligations, at the election of each employee. The fair value of restricted stock that vested during 2018, 2017 and 2016 was approximately $2.2 million, $1.1 million and $1.1 million, respectively.

During 2018, 2017 and 2016, we recognized approximately $2.9 million, $2.6 million and $2.1 million, respectively, in compensation expense related to these grants, and expect to recognize an additional $5.4 million in compensation expense over the remaining weighted average vesting periods of approximately 34 months.

Performance Stock Units, Shares Issued as Compensation

During 2018 and 2017 we granted 158,431 and 171,993 performance stock units (PSUs) to certain of our executives. These PSUs include both performance vesting conditions and a service vesting condition. The performance vesting conditions are based on a combination of (1) an annual earnings goal tied to Adjusted EBITDA for 2018 and 2017 issuances, and (2) a goal tied to the number of signed franchise license agreements in the year for 2017 issuances. Each performance condition has a minimum, a target and a maximum share amount based on the level of attainment of the performance condition with payouts of 25% to 50% at the minimum, 100% at the target, and 160% at the maximum. The service period for each grant is three years. Compensation expense, net of estimated forfeitures, is calculated based on the estimated full year attainment of the performance conditions during the performance period and recognized on a straight-line basis over the performance and service periods, adjusted for actual performance after it is attained. Based on these assumptions, PSU compensation expense recognized for the years ended December 31, 2018 and 2017 was $0.4 million and $0.2 million, respectively for each period. The remaining compensation expense related to PSUs of approximately $1.1 million will be recognized over the next 24 months.

A summary of performance stock unit activity based on target shares for the year ended December 31, 2018, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Balance, January 1, 2018
 
171,993

 
6.45

Granted
 
158,431

 
$
9.75

Vested
 
—

 
—

Forfeited
 
(121,223
)
 
$
7.69

Balance, December 31, 2018
 
209,201

 
$
8.23



74



Unrestricted Stock Awards

Unrestricted stock awards are granted to members of our Board of Directors as part of their compensation. Awards are fully vested and expense is recognized when granted. The fair value of unrestricted stock awards is the market close price of our common stock on the date of the grant. During 2018, 2017 and 2016, we recognized approximately $0.5 million, $0.4 million and $0.4 million, respectively, in compensation expense related to these grants.

The following table summarizes unrestricted stock award activity for the years ended December 31:
 
 
2018
 
2017
 
2016
Shares of unrestricted stock granted
 
46,068

 
55,600

 
54,864

Weighted average grant date fair value per share
 
$
10.81

 
$
7.81

 
$
7.67



Employee Stock Purchase Plan

Under the employee stock purchase plan (ESPP) as approved in 2008, 300,000 shares of common stock were authorized for purchase by eligible employees. In May 2017, our shareholders authorized an additional 300,000 shares for a total of 600,000 shares authorized under the ESPP plan. As of December 31, 2018, 317,729 shares were available for grant. Eligible employees may purchase shares of our common stock at a 15% discount through payroll deductions. No employee may purchase more than $25,000 worth of shares, or more than 10,000 total shares, in any calendar year. As allowed under the ESPP, a participant may elect to withdraw from the plan, effective for the purchase period in progress at the time of the election with all accumulated payroll deductions returned to the participant at the time of withdrawal. During 2018, 2017 and 2016, there were 27,118, 33,925 and 29,795 shares, respectively, issued, and approximately $46,000, $44,000 and $35,000 was recognized in compensation expense related to the discount associated with the plan in each year, respectively.
 
 
2018
 
2017
 
2016
Shares of stock sold to employees
 
27,118

 
33,925

 
29,795

Weighted average fair value per ESPP award
 
$
7.18

 
$
6.16

 
$
5.97



Warrants

In January 2015, in connection with Shelbourne Falcon’s purchase of equity interests in RL Venture, we issued Shelbourne warrants to purchase 442,533 shares of common stock. The warrants have a five-year term from the date of issuance and a per share exercise price of $6.78. The warrants have been classified as equity due to required share settlement upon exercise. Accordingly, the estimated fair value of the warrants was recognized in additional paid in capital upon issuance, and we do not recognize subsequent changes in fair value in our financial statements. As of December 31, 2018 all warrants were still outstanding.


75


13.     Earnings (Loss) Per Share

The following table presents a reconciliation of the numerators and denominators used in the basic and diluted net income (loss) per share computations for the years ended December 31, 2018, 2017 and 2016 (in thousands, except per share amounts):
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
Numerator - basic and diluted:
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
15,086

 
$
(1,669
)
 
$
(6,094
)
Net (income) loss attributable to noncontrolling interest
 
(13,129
)
 
2,069

 
163

Net income (loss) from continuing operations attributable to RLH Corporation
 
1,957

 
400

 
(5,931
)
Net income from discontinued operations
 
—

 
181

 
1,254

Net income (loss) attributable to RLH Corporation
 
$
1,957

 
$
581

 
$
(4,677
)
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
Weighted average shares - basic
 
24,392

 
23,669

 
20,427

Weighted average shares - diluted
 
25,477

 
24,253

 
20,427

 
 
 
 
 
 
 
Earnings (loss) per share - basic
 
 
 
 
 
 
Net income (loss) from continuing operations attributable to RLH Corporation
 
$
0.08

 
$
0.01

 
$
(0.29
)
Net income from discontinued operations
 
$
—

 
$
0.01

 
$
0.06

Net income (loss) attributable to RLH Corporation
 
$
0.08

 
$
0.02

 
$
(0.23
)
 
 
 
 
 
 
 
Earnings (loss) per share - diluted
 
 
 
 
 
 
Net income (loss) from continuing operations attributable to RLH Corporation
 
$
0.08

 
$
0.01

 
$
(0.29
)
Net income from discontinued operations
 
$
—

 
$
0.01

 
$
0.06

Net income (loss) attributable to RLH Corporation
 
$
0.08

 
$
0.02

 
$
(0.23
)


For the years ended December 31, 2017 and 2016, contingently issuable shares related to the Vantage acquisition are excluded from the calculation of diluted earnings per share as it would be antidilutive.


76


The following table presents options to purchase common shares, restricted stock units outstanding, performance stock units outstanding, warrants to purchase common shares and contingently issuable shares included in the earnings per share calculation, as well as the amount excluded from the dilutive earnings per share calculation if they were considered antidilutive, for the years ended December 31, 2018, 2017 and 2016.
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
Stock Options (1)
 
 
 
 
 
 
Dilutive awards outstanding
 
9,845

 
11,767

 
—

Antidilutive awards outstanding
 
71,285

 
79,060

 
132,868

Total awards outstanding
 
81,130

 
90,827

 
132,868

 
 
 
 
 
 
 
Restricted Stock Units (2)
 
 
 
 
 
 
Dilutive awards outstanding
 
800,201

 
524,016

 
—

Antidilutive awards outstanding
 
488,513

 
722,950

 
1,036,680

Total awards outstanding
 
1,288,714

 
1,246,966

 
1,036,680

 
 
 
 
 
 
 
Performance Stock Units (3)
 
 
 
 
 
 
Dilutive awards outstanding
 
108,889

 
—

 
—

Antidilutive awards outstanding
 
100,312

 
171,993

 
—

Total awards outstanding
 
209,201

 
171,993

 
—

 
 
 
 
 
 
 
Warrants (4)
 
 
 
 
 
 
Dilutive awards outstanding
 
166,121

 
48,594

 
—

Antidilutive awards outstanding
 
276,412

 
393,939

 
442,533

Total awards outstanding
 
442,533

 
442,533

 
442,533

 
 
 
 
 
 
 
Shares for Vantage Contingent Consideration (5)
 
 
 
 
 
 
Dilutive awards outstanding
 
—

 
—

 
—

Antidilutive awards outstanding
 
—

 
483,000

 
690,000

Total awards outstanding
 
—

 
483,000

 
690,000

 
 
 
 
 
 
 
Total dilutive awards outstanding
 
1,085,056

 
584,377

 
—

(1) All stock options or the year ended December 31, 2016 were anti-dilutive as a result of the RLH Corporation weighted average share price during the reporting periods, in addition to the net loss in 2016.
(2) Restricted stock units were anti-dilutive for the year ended December 31, 2016 due to the net loss attributable to RLH Corporation in the reporting period. If we had reported net income for the year ended December 31, 2016 then 512,263 restricted stock units would have been dilutive.
(3) Performance stock units are not included in the weighted average diluted shares outstanding until the performance targets are met. Certain performance stock unit grants were antidilutive for each year ended December 31, 2018 and 2017 as their respective targets had not been achieved as of the end of each year.
(4) For the year ended December 31, 2016 all warrants were anti-dilutive due to the net loss attributable to RLH Corporation in the reporting period. If we had reported net income for the year ended December 31, 2016 then 49,510 warrants, would have been dilutive.
(5) As part of the Vantage Hospitality Group, Inc. (Vantage Hospitality, Vantage) acquisition, up to an additional 690,000 shares could be issued with the one-year and two-year contingent consideration earn outs (see Note 16, Related Party Transactions). These shares are not included in basic shares outstanding until the period the contingency is resolved, which was September 30, 2017 for the 414,000 shares related to the year-one contingent consideration earn out and May 2018 for the 276,000 share year-two earnout. As of December 31, 2018 no shares are contingent as the remaining 276,000 shares were issued in the fourth quarter of 2018. For the years ended December 31, 2017 and 2016, all of the contingent consideration shares were anti-dilutive due to the net loss from continuing operations attributable to RLH Corporation in the reporting periods. If we had reported net income for the years ended December 31, 2017 and 2016, 414,000 and zero shares would have been dilutive, respectively.


77


14.
Income Taxes

Major components of the income tax expense from continuing and discontinued operations for the years ended December 31, 2018, 2017 and 2016, are as follows (in thousands):
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
Current:
 
 
 
 
 
 
  Federal (benefit) expense
$
424

 
$
—

 
$
—

 
  State (benefit) expense
718

 
119

 
63

 
  Foreign (benefit) expense
88

 
58

 
—

Deferred (benefit) expense
(1,301
)
 
(3,491
)
 
249

Income tax (benefit) expense
$
(71
)
 
$
(3,314
)
 
$
312

Less: tax expense of discontinued operations
—

 
1,348

 
790

Income tax benefit from continuing operations
$
(71
)
 
$
(4,662
)
 
$
(478
)


The differences from continuing operations between income taxes expected at the U.S. federal statutory income tax rate of 21% for 2018 and 34% for 2017 and 2016, and the reported income tax (benefit) expense are summarized as follows (in thousands, except percentages):
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
Amount
%
 
Amount
%
 
Amount
%
(Benefit) expense provision at federal statutory rate
$
3,187

21.0
 %
 
$
(2,152
)
34.0
 %
 
$
(2,235
)
34.0
 %
State/foreign tax expense
82

0.5
 %
 
147

-2.3
 %
 
70

-1.1
 %
Effect of tax credits
(490
)
-3.1
 %
 
(26
)
0.4
 %
 
10

-0.2
 %
Non-controlling interest
(2,804
)
-17.9
 %
 
703

-11.1
 %
 
163

-2.5
 %
Impact of change in tax law and rates
—

—
 %
 
393

-6.3
 %
 
—

—
 %
Other
134

0.9
 %
 
109

-1.7
 %
 
(468
)
7.1
 %
Valuation allowance
(180
)
-1.9
 %
 
(3,836
)
60.6
 %
 
1,982

-30.2
 %
Income tax benefit from continuing operations
$
(71
)
-0.5
 %
 
$
(4,662
)
73.6
 %
 
$
(478
)
7.1
 %


On December 22, 2017, the President signed into law H.R. 1 known as the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act). The 2017 Tax Act made significant changes to existing U.S. tax law, most notably a reduction in the top U.S. corporate income tax rate from 34% to 21% effective January 1, 2018. The 2017 Tax Act also imposes a one-time tax on historic deferred foreign income, modifies the future taxation of foreign earnings, repeals the corporate alternative minimum tax, provides for full expensing of qualified purchased assets and limits a company’s use of net interest expense and net operating losses generated on or after January 1, 2018.

RLHC recognized the income tax effects of the 2017 Tax Act in our consolidated financial statements for the year ended December 31, 2017.

We applied a three-step process to be applied to each reporting period to account for and qualitatively disclose income tax effects attributable to the enactment of the 2017 Tax Act: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (including subsequent adjustments to those amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with the law prior to the enactment of the 2017 Tax Act.

RLHC measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to reverse. Accordingly, RLH Corporation’s deferred tax assets and liabilities were remeasured to reflect a reasonable estimate of the impact of the tax law and the reduction in the U.S. corporate income tax rate from 34% to 21%. The provisional tax benefit may be impacted by changes in estimates used (i.e. joint venture and other activities) upon the filing of the 2018 corporate return.

78



Significant components of the net deferred tax assets and liabilities from continuing operations at December 31, 2018 and 2017, are as follows (in thousands):
 
December 31,
 
2018
 
2017
 
Assets
Liabilities
 
Assets
Liabilities
Property and equipment
$
1,564

$
—

 
$
—

$
726

Brand name
—

4,211

 
—

4,647

RL Venture
—

75

 
—

1,672

RL Baltimore
—

—

 
—

66

RLH DC
118

—

 
151

—

RL Atlanta
—

202

 
—

168

Gain on sale leaseback
14

—

 
456

—

Tax credit carryforwards
2,696

—

 
4,548

—

Federal and state net operating losses
682

—

 
2,869

—

Other
7,198

—

 
4,902

—

Valuation allowance
(8,556
)
—

 
(7,866
)
—

Total
$
3,716

$
4,488


$
5,060

$
7,279



At December 31, 2018 we had used the federal operating loss in its entirety. At December 31, 2017, we had federal gross operating loss carryforwards from continuing operations of approximately $9.1 million. At December 31, 2018 and 2017, we had state gross operating loss carryforwards from continuing operations of approximately $10.6 million and $15.4 million, respectively; and federal and state tax credit carryforwards from continuing operations of approximately $2.7 million and $4.5 million, respectively. The state net operating loss carryforwards will expire beginning in 2019; the tax credit carryforwards will begin to expire in 2024.

On January 1, 2018 the Company adopted Topic 606 using the modified retrospective method, resulting in a cumulative adjustment to accumulated deficit of $0.4 million. A deferred tax asset of $0.1 million was recorded on the cumulative adjustment.

We assess the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. Due to changes in the tax laws associated with the enactment of the 2017 Tax Act, RLH Corporation has determined that a full valuation allowance is no longer required. Therefore as of December 31, 2018, the total valuation allowance of $8.6 million was recorded to reduce deferred tax assets to an amount that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as forecasted taxable income and our projections for growth. Should we determine we will be able to realize additional deferred tax assets, the tax benefits relating to any reversal of the valuation allowance will be accounted for as a reduction of income tax expense.

A summary of our valuation allowance activity as it relates to continuing operations for the years ended December 31 is as follows (in thousands):
 
 
Valuation Allowance(1)
Balances, January 1, 2016
 
$
7,876

Increase during period
 
3,826

Balances, December 31, 2016
 
11,702

Decrease during period
 
(3,836
)
Balances, December 31, 2017
 
7,866

Increase during period
 
690

Balances, December 31, 2018
 
$
8,556

(1)  The change in the valuation allowance shown in this table does not correspond to the annual valuation allowance amounts shown in the rate reconciliation table for 2016 due to items required to be recognized through equity.



79


We classify any interest expense and penalties related to tax positions and any interest income on tax overpayments as components of income tax expense.

We recognize the financial statement effect of a tax position when it is more likely than not to be sustained on the basis of its technical merits. We have no material uncertain tax positions at December 31, 2018 and 2017, and do not anticipate a significant change in any unrecognized tax benefits over the next twelve months. Accordingly, we have not provided for any unrecognized tax benefits or related interest and penalties. With limited exception, we are no longer subject to U.S. federal, state and local income tax examinations by taxing authorities for years prior to 2014. Additionally, the year 2012 is subject to examination, to the extent that net operating loss and income tax credit carryforwards from that year were utilized in 2014 and later years.

15.
Fair Value

Applicable accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure our assets and liabilities using inputs from the Level 1, Level 2 and Level 3 of the fair value hierarchy.

Cash, Restricted Cash and Accounts Receivable carrying values approximate fair value due to the short-term nature of these items.
We estimate the fair value of our notes receivable using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. We estimate the fair value of our long-term debt and capital lease obligations using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. The fair values provided below are not necessarily indicative of the amounts we or the debt holders could realize in a current market exchange. In addition, potential income tax ramifications related to the realization of gains and losses that would be incurred in an actual sale or settlement have not been taken into consideration. Estimated fair values of financial instruments (in thousands) are shown in the table below.
 
 
December 31,
 
 
2018
 
2017
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
Notes receivable
 
$
2,103

 
$
2,103

 
$
1,098

 
$
1,098

Financial liabilities:
 
 
 
 
 
 
 
 
Total debt
 
$
44,523

 
$
43,880

 
$
110,598

 
$
112,117

Total capital lease obligations
 
378

 
378

 
1,147

 
1,147



16. Related Party Transactions

All four of our joint ventures - RL Venture, RLS Atla Venture, RLS Balt Venture and RLS DC Venture - have agreed to pay to Shelbourne an investor relations fee each month equal to 0.50% of its total aggregate revenue. Shelbourne is the entity that leads Shelbourne Falcon, Shelbourne Falcon II, Shelbourne Falcon III and Shelbourne Falcon IV, the minority interest holder in these joint ventures. The amount Shelbourne Capital earned from all four joint ventures during the year ended December 31, 2018, 2017 and 2016 totaled $211,000, $435,000, and $423,000, respectively. Columbia Pacific Opportunity Fund, LP (CP), previously one of our largest shareholders, is an investor in Shelbourne Falcon, our minority partner in RL Venture. For the years ended December 31, 2018, 2017, and 2016 Shelbourne Capital earned $161,000, $366,000, and $366,000 respectively, from RL Venture.

In 2015, RL Venture agreed to pay CPA Development, LLC, an affiliate of CP, a construction management fee of $200,000 related to the renovation projects. RL Venture paid the remaining balance of $78,000 during the year ended December 31, 2016, fully satisfying the commitment.

On April 17, 2018, we entered into a commitment letter with CP that described the general terms and conditions for a single advance term loan of $20 million. Upon execution of the commitment letter, we paid CP a non-refundable commitment fee of $200,000, and agreed to reimburse CP for all reasonable out-of-pocket costs and expenses, including reasonable legal fees, whether or not the loan was funded. The commitment was not used and terminated on May 31, 2018. At the time of the transaction, CP held beneficial ownership of 1,510,105 shares of our common stock, and 442,533 shares of common stock subject to a warrant held by an entity in which an affiliate of CP holds an indirect interest. CP is also an investor in Shelbourne Falcon, which holds a 45% interest in RL Venture.

In 2015, we entered into a management agreement with the owner (the LLC entity) of Red Lion Hotel Woodlake Conference Center Sacramento. A member of our board of directors is a 0.50% owner of the entity that serves as the manager member of the

80


LLC entity. During the year ended December 31, 2016, we recognized management fee and brand marketing fee revenue from the LLC entity of $107,000. On December 12, 2016 the LLC permanently closed the Red Lion Hotel Woodlake.

Effective March 2016, our wholly owned subsidiary, RL Management entered into a one-year contract to manage the Hudson Valley Resort and Spa, a hotel located in Kerhonkson, New York. Following the initial one-year term, we continue to manage the property on a month-to-month basis. The hotel is owned by HNA Hudson Valley Resort & Training Center LLC, an affiliate of HNA RLH Investments LLC, previously one of our largest shareholders, and is controlled by HNA Group North America LLC, for which Enrico Marini Fichera, previously one of our directors, serves as the Head of Investments. Under that contract, our subsidiary is entitled to a monthly management fee equal to $8,333 or three percent of the hotel’s gross operating revenues, whichever is greater. During the years ended December 31, 2018, 2017, and 2016 we recognized management fee revenue from HNA Hudson Valley Resort & Training Center LLC of $75,000, $110,000 and $87,000, respectively. On June 12, 2018, HNA RLH Investments LLC sold their common shares in RLH to a third party and Enrico Marini Fichera resigned from the Board effective June 18, 2018, no longer making them a related party.

The total amounts receivable from related parties, primarily related to hotel management agreements, were $1.5 million at December 31, 2017, and are classified within Accounts receivable from related parties on our Consolidated Balance Sheets. We do not consider HNA Hudson Valley Resort & Training Center LLC to be a related party as of December 31, 2018.

On September 30, 2016, we completed our acquisition of the operating assets and assumption of certain liabilities (the Assets) relating to specified hotel brands and brand extensions from Thirty-Eight Street, Inc. (TESI), Vantage Hospitality Group, Inc. (Vantage Hospitality) and certain other parties, pursuant to an Asset Purchase Agreement dated September 13, 2016 (the Purchase Agreement). The Assets were acquired for $22.6 million in cash, after the working capital adjustment, and the issuance of 690,000 shares of the Company’s common stock. Of the cash consideration, $10.3 million (less approximately $250,000 that was placed into an indemnity escrow account) was paid to Vantage Hospitality, and the balance of $12.3 million was paid to TESI. The 690,000 shares of the Company’s common stock were issued to TESI. In connection with the acquisition of the Assets, our board appointed Bernard T. Moyle, as our Executive Vice President and Chief Operating Officer and Roger J. Bloss as our Executive Vice President and President of Global Development.

We were informed that each of Messrs. Bloss and Moyle holds 50% of the outstanding common shares of TESI. Pursuant to the Purchase Agreement’s post-closing contingent consideration provisions, upon the achievement of certain performance measures as of the first anniversary of the closing date, additional consideration was to be paid to TESI in an aggregate amount of (i) $4.0 million in cash and (ii) 414,000 shares of the Company’s common stock (the First Earn-out Payment). TESI is also entitled to earn additional consideration if certain performance measures have been met as of the second anniversary of the closing date in an aggregate amount of up to (i) $3.0 million in cash and (ii) 276,000 shares of the Company’s common stock (the Second Earn-out Payment).

In January 2018, we settled the first portion (Year 1) of contingent consideration in the amount of $7.6 million, including (i) $4.0 million in cash and (ii) 414,000 shares of the Company's common stock. In October 2018, we settled the second and final portion (Year 2) of the Vantage contingent consideration in an aggregate amount of $3.0 million in cash and 276,000 shares of the Company’s common stock.

In connection with the acquisition of the Assets from Vantage Hospitality and TESI, we entered into a transition services agreement with Vantage Hospitality, under which we provided accounting and transition services on behalf of Vantage Hospitality and TESI from October 1, 2016 through June 30, 2017. Vantage Hospitality was billed $80,000 for these services in 2017.

Messrs. Bloss and Moyle each additionally indirectly own a 5.7% equity interest in a limited liability company that owns the Lexington Hotel and Conference Center in Jacksonville, Florida. During the years ended December 31, 2018 and 2017, the Company billed the property approximately $328,000 and $211,000 for franchise fees and related services, including royalty and marketing. This hotel, along with the Lexington Inn & Suites, Daytona Beach and the ABVI Las Vegas, are managed by Cal-Vegas, Ltd. (Cal-Vegas), of which TESI (owned by Messrs. Bloss and Moyle) is the General Partner and holds a 2% general partner interest, and Mr. Moyle serves as the Chief Operating Officer and Chief Financial Officer. The Company and Cal-Vegas are not parties to any agreement with respect to these properties, as the management contracts are between Cal-Vegas and the Company’s franchisees, who are unrelated third parties. Cal-Vegas, Ltd. is also the lessee of the ABVI Las Vegas hotel. Franchise fees billed by the Company to each of these properties for the years ended December 31, 2018 and 2017 were as follows: Lexington Inn & Suites, Daytona Beach, $41,000 and $77,000, respectively, and ABVI Las Vegas, $1,000 and $2,000, respectively.

Effective May 31, 2018, Messrs. Bloss and Moyle entered into consulting agreements through December 31, 2020, ending their employment with the Company. They are no longer considered related parties to the Company subsequent to the end of their employment.

81



During 2018, we transitioned management of our company operated Hotel RL Baltimore Inner Harbor and Hotel RL Washington DC from RL Management, Inc., to HEI Hotels and Resorts, of which one of the members of our Board of Directors, Ted Darnall, is currently the Chief Executive Officer. During the year ended December 31, 2018, we paid $22,000 in management fees to HEI Hotels and Resorts for management of these properties.

On January 14, 2019, the Company announced the appointment of Julie Shiflett as Chief Financial Officer of RLH. Prior to this appointment, the Company paid consulting fee to NorthWest CFO, a consulting firm of which Ms. Shiflett is a Principal. During the years ended December 31, 2018, 2017 and 2016 we paid consulting fees of $394,000, $206,000, and $235,000 to NorthWest CFO.

17. Acquisitions and Dispositions

Acquisitions

Knights Inn Acquisition

On May 14, 2018, RLH Franchising completed the purchase of all of the issued and outstanding shares of capital stock of KFS, and the purchase of certain operating assets from, and assumption of certain liabilities relating to the business of franchising Knights Inn branded hotels to hotel owners from Wyndham Hotel Group Canada, ULC and Wyndham Hotel Group Europe Limited, pursuant to the Amended and Restated Purchase Agreement, dated May 1, 2018, for an aggregate purchase price of $27.2 million. The purchase price was financed through borrowing under the DB Credit Agreement. See Note 8, Debt and Line of Credit for discussion of the DB Credit Agreement.

The acquisition of KFS was treated as a business combination under U.S. GAAP. During the second quarter, we estimated the allocation of the purchase price to the assets acquired and liabilities assumed based on estimated fair value assessments. The allocation of the purchase price is preliminary pending the completion of various analyses and the finalization of estimates primarily pertaining to the fair value assessment of accounts receivable. During the measurement period (which is not to exceed one year from the acquisition date), additional assets or liabilities may be recognized if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. The preliminary allocation may be adjusted after obtaining additional information regarding, among other things, asset valuations, liabilities assumed and revisions of previous estimates, and these adjustments may be significant. The following reflects our preliminary purchase price allocation as of December 31, 2018 (in thousands):
 
 
Fair Value
Current assets
 
$
1,288

Intangible assets
 
16,800

Goodwill
 
9,191

Total assets acquired
 
27,279

 
 
 
Current liabilities
 
30

Total liabilities acquired
 
30

 
 
 
Total net assets acquired
 
$
27,249



Current assets are comprised of $4.6 million in contractual value of acquired receivables, less a fair value adjustment of $3.3 million based on expected collectability.

Intangible assets acquired are as follows (in thousands):
 
Fair Value
 
Useful Life
Brand names
$
7,700

 
Indefinite
Customer contracts
9,100

 
15 years
Total intangible assets
$
16,800

 
 



82


We recognized $9.2 million in goodwill as the result of the acquisition, recorded within our franchise reporting segment. The goodwill is deductible for income tax purposes. The factors that make up the goodwill are primarily expected synergies from combining the operations of Knights Inn with our own.

The following table presents the revenues and earnings from Knights Inn's operations that are included in the Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2018 (in thousands):
 
Year Ended December 31, 2018
Revenue
$
4,265

Net income (loss) from continuing operations before income taxes
2,874



The following supplemental pro forma results are based on the individual historical results of RLH Corporation and KFS, with adjustments to give effect to the combined operations as if the acquisition had been consummated on January 1, 2017 (in thousands, except per share data) (unaudited):
 
 
Years Ended December 31,
 
 
2018
 
2017
Revenue
 
$
138,478

 
$
179,506

Net income
 
17,017

 
4,792

Net income and comprehensive income attributable to RLH Corporation
 
3,887

 
6,831

Earnings per share attributable to RLH Corporation - basic
 
$
0.18

 
$
0.29

Earnings per share attributable to RLH Corporation - diluted
 
$
0.17

 
$
0.28



We recognized acquisition related expenses of $2.2 million during the year ended December 31, 2018, and they are included within Acquisition and integration costs on our Consolidated Statements of Comprehensive Income (Loss).

Vantage Acquisition

On September 30, 2016 (the close date), we (i) acquired selected assets and assumed certain liabilities of Vantage Hospitality Group, Inc. (Vantage), a subsidiary of Thirty-Eight Street, Inc. (TESI) and (ii) acquired one brand name asset from TESI. Vantage is a hotel franchise company, and the addition of the Vantage assets substantially increased our number of franchise properties and provided us with a broader presence in the United States and Canada. We acquired over 1,000 hotel franchise and membership license agreements, as well as multiple brand names, including Americas Best Value Inn, Canadas Best Value Inn, Lexington Hotels & Inns, America's Best Inns & Suites, Jameson Inns, Country Hearth Inns & Suites, Vantage Hotels, Value Inn Worldwide, Value Hotel Worldwide, 3 Palms Hotels and Resorts and Signature Inn.

The purchase price totaled $40.2 million, including the following (in thousands):
 
 
Purchase Price
Cash paid to Vantage at close date
 
$
10,300

Cash paid to TESI at close date
 
12,300

Total cash consideration at close date
 
22,600

Value of 690,000 shares to TESI at close date
 
5,800

Total consideration at close date
 
28,400

 
 
 
Fair value of contingent consideration
 
10,900

Assumption of Vantage obligation
 
900

Total purchase price
 
$
40,200



The acquisition was funded at closing with $22.6 million of cash on hand, of which $10.3 million was paid to Vantage and $12.3 million was paid to TESI and 690,000 shares of RLH Corporation stock paid to TESI, which was valued at $5.8 million, based on the closing price of RLH Corporation stock of $8.34 on the close date. The total purchase price was $40.2 million, which included the estimated fair value of $0.9 million for the assumption of an obligation related to a previous business acquisition of Vantage and the fair value of $10.9 million of primarily contingent consideration, the total of which will be paid to TESI at the

83


first and second anniversaries of the close date, based on the attainment of certain performance criteria. A minimum of $2.0 million of the additional consideration was not contingent and was required to be paid in equal amounts at the first and second anniversaries of the close date. Payment of the contingent consideration was dependent on the retention of Vantage properties under franchise or membership license agreements, as determined by the room count at the first and second year anniversary dates when compared with the room count at the close date.

The contingent consideration was measured at each anniversary date independent of the other measurement period and is recorded as a liability due to the expected payment of cash and a variable number of shares. Changes in the obligation were recognized within Acquisition and integration costs in the Consolidated Statements of Comprehensive Income (Loss). At each reporting period, we are required to assess the fair value of the liability and record any changes in fair value in our Consolidated Statements of Comprehensive Income (Loss). Based on our periodically updated assessments, we recognized expense of $0.2 million, $1.4 million, and $0.3 million, for the years ended December 31, 2018, 2017, and 2016, respectively.

In January 2018, we settled the first portion (Year 1) of contingent consideration in the amount of $7.6 million, including $4.0 million in cash and 414,000 shares of the Company's common stock. In October 2018, we settled the second and final portion (Year 2) of the Vantage contingent consideration in an aggregate amount of $3.0 million in cash and 276,000 shares of the Company’s common stock.

Following the closing of the acquisition Roger J. Bloss and Bernard T. Moyle were appointed to executive management positions at RLH Corporation, and Messrs. Bloss and Moyle also have ownership interests in TESI. Therefore, the contingent consideration obligations are classified as related party liabilities within our Consolidated Balance Sheets. Both Messrs. Bloss and Moyle resigned as officers effective May 31, 2018, but have executed consulting agreements with RLH Corporation through December 31, 2020.

Dispositions

Company Operated Hotel Dispositions

During the year ended December 31, 2018, we began execution of a hotel asset sales initiative consistent with our previously stated business strategy to focus on moving towards operations as primarily a franchise company, and disposed of nine hotels from our company operated hotels segment, comprising net assets of $70.7 million, for net cash proceeds of $116.5 million. These dispositions resulted in a combined gain of $40.7 million. These dispositions did not meet the criteria for discontinued operations.

The following summarizes the results of operations for the nine properties sold during 2018 (in thousands):
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
Pre-tax income (loss)
$
38,673

 
$
889

 
$
2,147

Net (income) loss attributable to noncontrolling interest
(17,403
)
 
(400
)
 
(966
)
Net income (loss) attributable to RLHC
$
21,270

 
$
489

 
$
1,181



At December 31, 2018, we have no properties meeting the criteria to be classified as held for sale on our Consolidated Balance Sheets.

At December 31, 2017, we had six hotel properties from our company operated hotels segment that met the criteria to be classified as held for sale on our Consolidated Balance Sheets. The following table presents the assets of the Hotel business segment included in the Consolidated Balance Sheets as Assets held for sale at December 31, 2017 (in thousands):
 
 
December 31, 2017
Other current assets
$
156

Property and equipment, net
34,143

Other assets, net
60

Assets held for sale
$
34,359



During the year ended December 31, 2016, we disposed of one hotel from our company operated hotels segment for net cash proceeds of $5.7 million. This disposition resulted in a gain of $1.5 million.


84


WestCoast Entertainment and TicketsWest Disposition

During the year ended December 31, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our entertainment segment, previously composed of WestCoast Entertainment and TicketsWest. As such, the results of the entertainment business are reported as discontinued operations. We recognized a loss on sale of $0.2 million net of tax of $1.1 million in the fourth quarter of 2017, based on cash proceeds of $6.0 million, less transaction costs of $0.7 million, and $4.4 million of net assets.

The WestCoast Entertainment and TicketsWest disposal represented a strategic shift that had a major impact on our financial statements. This was considered to be a strategic shift as we chose to exit the business segment entirely and focus on our growing franchise segment. In accordance with this strategic shift, the results of the entertainment business are reported as discontinued operations, and the assets and liabilities are classified as held for sale for all periods presented in this annual report on Form 10-K.

The following summarizes the results of the entertainment segment included in the Consolidated Statements of Comprehensive Income (Loss) as discontinued operations (in thousands).
 
 
Years Ended December 31,
 
 
2017
 
2016
Entertainment revenue
 
$
9,125

 
$
15,719

Operating expenses:
 
 
 
 
Entertainment
 
8,412

 
13,635

Depreciation and amortization
 
64

 
186

Gain on asset dispositions, net
 
3

 
(1
)
Total operating expenses
 
8,479

 
13,820

Operating income
 
646

 
1,899

Interest expense
 
—

 
(12
)
Other income (loss), net
 
—

 
157

Income tax expense
 
221

 
790

Income from discontinued operations
 
$
425

 
$
1,254


The following table represents the cash flow items associated with discontinued operations of the entertainment segment for the years ended December 31, 2017 and 2016 (in thousands).
 
 
Years Ended December 31,
 
 
2017
 
2016
Depreciation and amortization
 
$
64

 
$
186

Capital expenditures
 
$
101

 
$
104




85


18.
Parent Company Financial Statements

RED LION HOTELS CORPORATION
CONDENSED BALANCE SHEETS
(Parent Company Only)
December 31, 2018 and 2017
 
 
2018
 
2017
 
 
(In thousands)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
12,470

 
$
25,942

Restricted cash
 
103

 
103

Accounts receivable, net
 
25,049

 
25,233

Accounts receivable from related parties
 
—

 
1,520

Notes receivable, net
 
2,102

 
1,098

Other current assets
 
5,538

 
4,054

Assets held for sale
 
—

 
—

Total current assets
 
45,262

 
57,950

Investment in subsidiaries
 
27,220

 
40,129

Property and equipment, net
 
41,433

 
27,991

Goodwill
 
18,595

 
9,404

Intangible assets, net
 
60,910

 
50,749

Other assets, net
 
7,370

 
1,801

Total assets
 
$
200,790

 
$
188,024

LIABILITIES
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
4,487

 
$
7,597

Accrued payroll and related benefits
 
5,033

 
6,005

Other accrued liabilities
 
3,868

 
1,909

Long-term debt, due within one year
 
—

 
—

Contingent consideration for acquisition due to related party, due within one year
 
—

 
9,289

Total current liabilities
 
13,388

 
24,800

Long-term debt, due after one year, net of debt issuance costs
 
9,114

 
—

Line of credit, due after one year
 
10,000

 
—

Deferred income and other long-term liabilities
 
1,764

 
782

Deferred income taxes
 
772

 
2,219

Total liabilities
 
35,038

 
27,801

Commitments and contingencies
 


 


STOCKHOLDERS’ EQUITY
 
 
 
 
RLH Corporation stockholders' equity
 
 
 
 
Preferred stock
 
—

 
—

Common stock
 
246

 
237

Additional paid-in capital, common stock
 
182,018

 
178,028

Accumulated deficit
 
(16,512
)
 
(18,042
)
Total stockholders’ equity
 
165,752

 
160,223

Total liabilities and stockholders’ equity
 
$
200,790

 
$
188,024


The accompanying notes are an integral part of these condensed financial statements.



86


RED LION HOTELS CORPORATION
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Parent Company Only)
For the Years Ended December 31, 2018, 2017 and 2016
 
 
2018
 
2017
 
2016
 
 
(In thousands)
Revenue:
 
 
 
 
 
 
Royalty
 
$
22,309

 
$
17,558

 
$
7,472

Marketing, reservations and reimbursables
 
25,948

 
26,179

 
14,087

Other Franchise
 
6,790

 
4,822

 
3,075

Company operated hotels
 
56,413

 
71,333

 
74,297

Other
 
34

 
267

 
128

Total revenues
 
111,494

 
120,159

 
99,059

Operating expenses:
 
 
 
 
 
 
Marketing, reservations and reimbursables
 
26,877

 
25,383

 
16,516

Company operated hotels
 
46,694

 
59,076

 
63,002

Selling, general, administrative and other expenses
 
32,098

 
29,806

 
18,543

Depreciation and amortization
 
10,073

 
6,679

 
4,790

Asset impairment
 
3,482

 
—

 
—

Gain on asset dispositions, net
 
(478
)
 
(455
)
 
(856
)
Acquisition and integration costs
 
2,219

 
1,529

 
2,112

Total operating expenses
 
120,965

 
122,018

 
104,107

Operating income (loss)
 
(9,471
)
 
(1,859
)
 
(5,048
)
Other income (expense):
 
 
 
 
 
 
Interest expense
 
(940
)
 
(5
)
 
(100
)
Loss on early retirement of debt
 
(794
)
 
—

 
—

Equity in income of subsidiaries
 
12,461

 
(3,150
)
 
(1,367
)
Other income (loss), net
 
630

 
752

 
106

Total other income (expense)
 
11,357

 
(2,403
)
 
(1,361
)
Income (loss) from continuing operations before taxes
 
1,886

 
(4,262
)
 
(6,409
)
Income tax expense (benefit)
 
(71
)
 
(4,662
)
 
(478
)
Net income (loss) from continuing operations
 
1,957

 
400

 
(5,931
)
Discontinued operations:
 
 
 
 
 
 
Income from discontinued business unit, net of income tax expense
 
—

 
425

 
1,254

Loss on sale of business unit, net of income tax expense
 
—

 
(244
)
 
—

Net income from discontinued operations
 
—

 
181

 
1,254

Net income (loss) and comprehensive income (loss)
 
$
1,957

 
$
581

 
$
(4,677
)

The accompanying notes are an integral part of these condensed financial statements.


87


RED LION HOTELS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Parent Company Only)
For the Years Ended December 31, 2018, 2017, and 2016
 
 
2018
 
2017
 
2016
 
 
(In thousands)
Operating activities:
 
 
 
 
 
 
Net income (loss)
 
$
1,957

 
$
581

 
$
(4,677
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
10,005

 
6,735

 
4,968

Amortization of debt issuance costs, key money and contract costs, and contract liabilities
 
1,142

 
—

 
—

 Gain on asset dispositions, net
 
(376
)
 
(211
)
 
(857
)
Asset impairment
 
3,482

 
—

 
—

Deferred income taxes
 
(1,302
)
 
(3,497
)
 
288

Equity in investments
 
(13,098
)
 
2,760

 
1,356

Stock based compensation expense
 
3,955

 
3,309

 
2,640

Provision for doubtful accounts
 
856

 
496

 
429

Fair value adjustments to contingent consideration
 
581

 
1,670

 
339

Change in current assets and liabilities, net of business acquired:
 
 
 
 
 
 
Accounts receivable
 
1,771

 
(12,167
)
 
(9,500
)
Notes receivable
 
(18
)
 
(88
)
 
(110
)
Other current assets
 
(6,471
)
 
(1,101
)
 
(2,200
)
Accounts payable and other accrued liabilities
 
(4,076
)
 
2,715

 
3,902

Net cash provided by (used in) operating activities
 
(1,592
)
 
1,202

 
(3,422
)
Investing activities:
 
 
 
 
 
 
Capital expenditures
 
(7,033
)
 
(4,870
)
 
(3,512
)
Acquisition of Knights Inn
 
(27,249
)
 
—

 
—

Acquisition of Vantage Hospitality
 
—

 
—

 
(22,603
)
Purchases of interests in investments in joint venture entities
 
—

 
(950
)
 
—

Consolidation of Baltimore joint venture
 
2,763

 
—

 
—

Distributions from investments in joint ventures
 
26,226

 
3,736

 
4,393

Contribution to / purchase of preferred equity of Baltimore joint venture
 
(15,906
)
 
—

 
—

Net proceeds (payments) from disposition of property and equipment
 
—

 
(6,672
)
 
400

Buyout of joint venture interest
 
(304
)
 
—

 
—

Collection of notes receivable related to property sales
 
62

 
694

 
2,309

Advances on notes receivable
 
(1,048
)
 
(409
)
 
(943
)
Proceeds from sales of short-term investments
 
—

 
—

 
18,085

Other, net
 
—

 
—

 
77

Net cash used in investing activities
 
(22,489
)
 
(8,471
)
 
(1,794
)
Financing activities:
 
 
 
 
 
 
Borrowings on long-term debt and line of credit
 
40,000

 
—

 
—

Repayment of long-term debt
 
(20,645
)
 
—

 
—

Debt issuance costs
 
(1,335
)
 
—

 
—

Proceeds from sale of interests in joint ventures
 
—

 
—

 
3,218

Contingent consideration paid for Vantage Hospitality acquisition
 
(7,000
)
 
—

 
—

Stock-based compensation awards canceled to settle employee tax withholding
 
(647
)
 
(346
)
 
(353
)
Proceeds from common stock offering, net
 
—

 
(15
)
 
18,460

Stock option and stock purchase plan issuances, net and other
 
236

 
413

 
155

Net cash provided by financing activities
 
10,609

 
52

 
21,480

Change in cash, cash equivalents and restricted cash:
 
 
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
 
(13,472
)
 
(7,217
)
 
16,264

Cash, cash equivalents and restricted cash at beginning of year
 
26,045

 
33,262

 
16,998

Cash, cash equivalents and restricted cash at end of year
 
$
12,573

 
$
26,045

 
$
33,262

 
 
 
 
 
 
 
Noncash operating, investing and financing activities:
 
 
 
 
 
 
Conversion of accounts receivable to preferred equity
 
$
450

 
$
—

 
$
—


The accompanying notes are an integral part of these condensed financial statements.

88


RED LION HOTELS CORPORATION
(Parent Company Only)
NOTES TO CONDENSED FINANCIAL STATEMENTS

A.
Organization

Principles of Consolidation

The condensed parent company only financial statements include only the accounts of Red Lion Hotels Corporation (the Company) and its wholly-owned subsidiaries. Investments in the Company's joint venture entities are accounted for under the equity method in these condensed financial statements.

Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted since this information is included in the Company’s consolidated financial statements included elsewhere in this annual report on Form 10-K.


B.
Commitments and Contingencies

At any given time we are subject to claims and actions incidental to the operations of our business. Based on information currently available, we do not expect that any sums we may receive or have to pay in connection with any legal proceeding would have a materially adverse effect on our consolidated financial position or net cash flow.

Total future minimum payments due under all current term operating and capital leases at December 31, 2018, are as indicated below (in thousands):
Years Ending December 31,
 
Operating Lease Obligation
 
Capital
 Lease Obligation
 
Total
 Lease Obligation
2019
 
$
4,069

 
$
32

 
$
4,101

2020
 
3,765

 
36

 
3,801

2021
 
3,795

 
36

 
3,831

2022
 
3,826

 
34

 
3,860

2023
 
3,789

 
11

 
3,800

Thereafter
 
196,395

 
—

 
196,395

Total
 
$
215,639

 
$
149

 
$
215,788




89


19. Subsequent Events

In March 2019, $2.8 million of previous cash contributions by RLH Corporation to RLS Alta Venture, were classified as preferred capital and will be repaid only when the Atlanta hotel property is sold or when RLS Alta is liquidated. Upon such an event RLH Corporation will receive the $2.8 million plus a preferred return of 9%, compounded annually, prior to any liquidation proceeds being returned to members.


90


Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None.

Item 9A.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of December 31, 2018, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of December 31, 2018 to ensure that material information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within time periods specified in Securities and Exchange Commission rules and forms.

Management's Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over our financial reporting, which is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

Because of its inherent limitations, any system of internal controls over financial reporting, no matter how well designed, may not prevent or detect misstatements due to the possibility that a control can be circumvented or overridden or that misstatements due to error or fraud may occur that are not detected. Also, because of changes in conditions, internal control effectiveness may vary over time.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018, using criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and concluded that we have maintained effective internal control over financial reporting as of December 31, 2018, based on these criteria.

Remediation of Material Weakness

As of December 31, 2017, management determined our internal control over financial reporting was not effective due to multiple material weaknesses in the design and operating effectiveness of our controls relating to control environment, risk assessment, monitoring, and financial close and reporting. These deficiencies were pervasive in nature and created a reasonable possibility that a material misstatement of the annual or interim financial statements would not have been prevented or detected on a timely basis.

During 2018, management executed a remediation plan that included significant changes to the Company’s accounting and internal audit staffing. Remediation efforts included a formal risk assessment performed by internal audit and senior management and included an internal review of all internal control processes, which resulted in the identification of new internal controls to address design gaps, the re-design of certain existing controls, and the elimination of redundant or unnecessary controls. During 2018, we completed our remediation plan and successfully completed testing of the new control environment. As a result of our internal control testing, we have concluded that the material weaknesses have been remediated as of December 31, 2018.

Our internal controls over financial reporting as of December 31, 2018 have been audited by BDO USA, LLP, our independent registered public accounting firm, as stated in their attestation report, which is included herein.

Changes in Internal Control Over Financial Reporting

In addition to the remediation actions discussed above, during 2018, the Company centralized personnel and controls from a number of remote locations throughout the United States to primarily our corporate office in Denver, Colorado. While the centralization was not in response to any of the previously identified material weaknesses, it resulted in a more effective control environment. The centralization facilitated enhanced documentation of certain internal control processes and procedures, modifications to control design and more effective operation of controls. These modifications were included in our testing of internal control over financial reporting and were found to be designed and operating effectively as of December 31, 2018.


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During 2018, the Company also implemented internal controls to ensure it has adequately assessed the impact of the new accounting standard related to leasing (Topic 842) to prepare for adoption on January 1, 2019. The adoption and new controls have been designed to address risks associated with accounting for operating and financing leases under the new standard.

Except for the remediation of material weaknesses described above, there have been no changes in our internal control over financial reporting which occurred during the fourth quarter of 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Red Lion Hotels Corporation
Denver, Colorado

Opinion on Internal Control over Financial Reporting

We have audited Red Lion Hotels Corporation’s (the “Company’s”) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated March 8, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ BDO USA, LLP
Spokane, Washington
March 8, 2019


93


Item 9B.
Other Information

None.

PART III

Item 10.
Directors, Executive Officers and Corporate Governance

Name
 
Age
 
Position
Gregory T. Mount
 
 
58

 
 
President and Chief Executive Officer
Gary Sims
 
 
60

 
 
Executive Vice President, Chief Operating Officer
Julie Shiflett
 
 
51

 
 
Executive Vice President, Chief Financial Officer, Treasurer
William J. Linehan
 
 
53

 
 
Executive Vice President, Chief Marketing Officer
Harry G. Sladich
 
 
57

 
 
Executive Vice President, Franchise Operations and Global Sales
Thomas L. McKeirnan
 
 
50

 
 
Executive Vice President, General Counsel and Secretary
Paul Sacco
 
 
49

 
 
Executive Vice President, President of Global Development

Gregory T. Mount. Mr. Mount joined our company as President and Chief Executive Officer in January 2014. Mr. Mount brings more than 25 years of experience to RLH Corporation. Prior to joining the company from November 2009 to January 2014, Mr. Mount served as President of Richfield Hospitality, Inc. a hotel management company based in Denver, Colorado. Prior to Richfield Hospitality, Inc., Mr. Mount held various senior leadership positions with Sceptre Hospitality and Richfield Hospitality China, where he executed a number of strategic deals including the acquisition and merger of Whiteboards Labs into Sceptre Hospitality. Previously, he held senior roles at Sage Hospitality, as well as Starwood Hotels & Resorts Worldwide, where he led the full-service division responsible for developing franchises and management contracts for the Westin, Sheraton, Four Points by Sheraton, Le Meridien, and Luxury Collection brands in the United States, Canada and the Caribbean. Before joining Starwood, Mount held senior operating positions at Interstate Hotels Corporation and Marriott International Hotels, working his way up through a number of hotel and regional management positions before moving into Development.

Gary Sims. Mr. Sims joined RLH Corporation in 2018 as Executive Vice President and Chief Operating Officer overseeing all franchise operations, sales, hotel management and human resources. Mr. Sims has over 30 years of experience with notable brands around the globe including over ten years of franchise and management sales experience at Starwood Hotels and Resorts. Prior to joining RLH Corporation, Mr. Sims was managing director at Omni La Costa Resort & Spa in southern California, a 650-room luxury golf resort from 2013 - 2018. He led all operations and strategy for the resort, driving incremental revenue and exceptional service.

Julie Shiflett. Ms. Shiflett returns to RLH Corporation after having served as the company’s Vice President of Finance from October 2010 to September 2011, and as Chief Financial Officer from September 2011 to October 2014. Since December 2014, Ms. Shiflett served as Principal of NorthWest CFO, an outsourced financial expert consultancy she founded in 2008, where she provided financial consulting services and support to RLH Corporation for various strategic initiatives. Ms. Shiflett currently serves on the Board of Directors of Northwest Farm Credit Services. Ms. Shiflett holds an MBA from University of Phoenix and a BA from Eastern Washington University.

William J. Linehan. Mr. Linehan joined our company as Executive Vice President and Chief Marketing Officer in February 2014. From 2009 until he joined RLH Corporation, Mr. Linehan served as Chief Marketing Officer of Richfield Hospitality, Inc., a hotel management company based in Denver, Colorado. From 2006 to 2008, he served as Vice President, Global Marketing of InterContinental Hotels Group. From 2002 to 2006, Mr. Linehan was the Global Vice President of Marketing, Brand Alignment and Partnership at Starwood Hotels & Resorts Worldwide, Inc. From 1997 until joining Starwood in 2002, he held various hotel management positions.

Harry G. Sladich.   Mr. Sladich serves as Executive Vice President of Franchise Operations for RLH Corporation and is the driving force behind companywide franchise operational and owner initiatives for more than 1,300 hotels nationwide and in three countries. Prior to this position Mr. Sladich served as our Executive Vice President Hotel Operations and Sales beginning in February 2014. From 2010 to 2014, he served as our Executive Vice President of Sales, Marketing and Distribution. Mr. Sladich recently served on two prominent national industry boards, including the U.S. Travel Association and Destination & Travel Foundation Board of Trustees. Additionally, former Washington State Governor Christine Gregoire appointed Mr. Sladich to the Motion Picture Competitiveness board and to the Washington State Convention Center Board of Directors. He has also served on the board for

94


the Western Association of Convention & Visitors Bureaus (WACVB). A 36-year veteran of the hospitality industry, Mr. Sladich has also served as President and Chief Executive Officer of the Spokane Regional Convention and Visitors Bureau (CVB) where he played a key role in building and selling the City of Spokane and Washington State to prospective meeting planners, associations and individual travelers. Mr. Sladich has spent years 26 years in hotel operations & sales prior to the CVB having served in the capacity of Vice President, Regional Operations Manager, VP of Sales, General Manager, and other front-line positions with extensive experience in rooms division, sales and food and beverage, for hotel developers and operators of multiple franchises including Sterling Hospitality, Sheraton, IHG, Hilton and Choice hotels.

Thomas L. McKeirnan.   Mr. McKeirnan has been with RLH Corporation since 2003 and serves as our Executive Vice President, General Counsel and Secretary. Mr. McKeirnan has been actively involved in executive management since shortly after joining the company. Prior to joining us, Mr. McKeirnan was in private practice for eight years at Riddell Williams P.S. in Seattle, WA and Paine Hamblen Coffin Brooke & Miller, LLP in Spokane, WA, focused on corporate, transactional, real estate and securities law, with an emphasis on the hospitality industry. While in private practice, Mr. McKeirnan represented RLH Corporation as outside counsel on various strategic and transactional matters and also represented WestCoast Hotels, Inc. prior to our acquisition of that company. Mr. McKeirnan earned his law degree with honors from the University of Washington and his MBA from Gonzaga University, both in 1995.

Paul Sacco. Mr. Sacco has been with RLH Corporation since October 2017 and serves as Executive Vice President, President of Global Development. Mr. Sacco leads and directly oversees all franchise growth efforts for RLH Corporation brands worldwide, with a focus on organic growth. Mr. Sacco was most recently President & Chief Development Officer at TPG Hotels & Resorts from 2013 through 2017, where he had been driving the company strategy and hotel portfolio growth via acquisitions, management contracts, mergers and new construction projects. Mr. Sacco also has senior development experience at Pyramid Hotel Group and led North America growth and development efforts for all 10 Starwood Hotels & Resorts Worldwide brands, both managed and franchised.

The remainder of the information required by this item will be contained in, and is incorporated by reference from, the definitive proxy statement for our 2019 Annual Meeting of Shareholders under the captions “Proposal 1: Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance.” This proxy statement will be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2018 pursuant to Regulation 14A under the Securities Exchange Act of 1934.

We make available free of charge on our website (www.rlhco.com) the charters of all of the standing committees of our board of directors (including those of the audit, nominating and corporate governance and compensation committees), the code of business conduct and ethics for our directors, officers and employees, and our corporate governance guidelines. We will furnish copies of these documents to any shareholder upon written request sent to our General Counsel, Red Lion Hotels Corporation, 1550 Market St. #350, Denver, Colorado 80202.

Item 11.
Executive Compensation

The information required by this item will be contained in, and is incorporated by reference from, the definitive proxy statement for our 2019 Annual Meeting of Shareholders under the captions “Compensation Discussion and Analysis,” “Executive Compensation,” “Director Compensation” and "Compensation Committee Interlocks and Insider Participation."

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

A portion of the information required by this item will be contained in, and is incorporated by reference from, the definitive proxy statement for our 2019 Annual Meeting of Shareholders under the caption “Security Ownership of Certain Beneficial Owners and Management.”

See Item 5 of this Annual Report on Form 10-K for information regarding our equity compensation plans.

Item 13.
Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be contained in, and is incorporated by reference from, the definitive proxy statement for our 2019 Annual Meeting of Shareholders under the captions “Certain Relationships and Related Transactions,” and “Corporate Governance - Director Independence.”


95


Item 14.
Principal Accounting Fees and Services

The information required by this item will be contained in, and is incorporated by reference from, the definitive proxy statement for our 2019 Annual Meeting of Shareholders under the caption “Principal Accounting Fees and Services.”


96


PART IV

Item 15.
Exhibits

List of documents filed as part of this report:

1. Index to Red Lion Hotels Corporation financial statements:
 
 
Page 
 
 
 
a.
Consolidated Balance Sheets
45
 
 
 
b.
Consolidated Statements of Comprehensive Income (Loss)
46
 
 
 
c.
Consolidated Statements of Changes in Stockholders' Equity
47
 
 
 
d.
Consolidated Statements of Cash Flows
48
 
 
 
e.
Notes to Consolidated Financial Statements
50

2. Index to financial statement schedules:

All schedules for which provisions are made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are not applicable, or the information is contained in the Financial Statements.

3. Index to exhibits:
Exhibit Number
Description
 
 
3.1
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.2 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on May 25, 2011)
 
 
3.2
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 in the Current Report on Form 8-K (Commission File No. 001-13957) filed on August 3, 2017)
 
 
4.1
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 in the Form S‑3/A (Commission File No. 333-133287) filed on May 15, 2006)
 
 
 
Executive Compensation Plans and Agreements
 
 
2006 Stock Incentive Plan (incorporated by reference to Appendix C to the Schedule 14A (Commission File No. 001‑13957) filed on April 20, 2006)
 
 
First Amendment to 2006 Stock Incentive Plan (incorporated by reference to Appendix A to the Schedule 14A (Commission File No. 001‑13957) filed on April 22, 2009)
 
 
Form of Restricted Stock Unit Agreement -- Notice of Grant for the 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on November 22, 2006)
 
 
Form of Notice of Grant of Stock Options and Option Agreement for the 2006 Stock Incentive Plan (incorporated by reference to Exhibit 20.1 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on August 14, 2006)
 
 
2015 Stock Incentive Plan (incorporated by reference to Appendix C to the Schedule 14A (Commission File No. 001‑13957) filed on April 20, 2015)
 
 
First Amendment to 2015 Stock Incentive Plan (incorporated by reference to Appendix D to the Schedule 14A (Commission File No. 001-13957) filed on April 20, 2017)
 
 
Form of Restricted Stock Unit Agreement -- Notice of Grant for the 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 in the Current Report on Form 8‑K (Commission File No. 001‑13957) filed on May 25, 2017)
 
 

97


Exhibit Number
Description
 
 
Form of Notice of Grant of Stock Options and Option Agreement for the 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 in the Annual Report on Form 10‑K (Commission File No. 001‑13957) filed on March 1, 2016)
 
 
Form of Performance Based Restricted Stock Unit Agreement - Notice of Grant (incorporated by reference to Exhibit 10.2 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on May 25, 2017)
 
 
2008 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Schedule 14A (Commission File No. 001‑13957) filed on April 22, 2008)
 
 
First Amendment to 2008 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.8 in the Annual Report on Form 10‑K (Commission File No. 001‑13957) filed on March 11, 2010)
 
 
Second Amendment to 2008 Employee Stock Purchase Plan (incorporated by reference to Appendix E to the Schedule 14A (Commission File No. 001‑13957) filed on April 20, 2017)
 
 
Executive Officer’s Incentive Pay Plan Effective January 1, 2014 (incorporated by reference to Exhibit 10.10 in the Annual Report on Form 10‑K (Commission File No. 001‑13957) filed on March 5, 2014)
 
 
2017 RLHC Executive Officers Bonus Plan (incorporated by reference to Exhibit 10.1 in the current report on Form 8-K (Commission File No. 001-13957) filed on April 3, 2017)
 
 
2018 RLHC Executive Officers Bonus Plan (incorporated by reference to Exhibit 10.1 in the current report on Form 8-K (Commission File No. 001-13957) filed on June 21, 2018)
 
 
Employment offer letter of Gregory T. Mount, as amended and restated on February 27, 2015 (incorporated by reference to Exhibit 10.10 in the Annual Report on Form 10‑K (Commission File No. 001‑13957) filed on February 27, 2015)
 
 
Separation and Release Agreement effective April 8, 2016 between the registrant and James A. Bell (incorporated by reference to Exhibit 10.2 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on August 3, 2016)
 
 
Employment offer letter of William J. Linehan, as amended and restated on February 27, 2015 (incorporated by reference to Exhibit 10.12 in the Annual Report on Form 10‑K (Commission File No. 001‑13957) filed on February 27, 2015)
 
 
Amended Offer Letter of William J. Linehan effective December 5, 2018
 
 
Executive Employment Agreement between the Registrant and Thomas L. McKeirnan, as amended and restated on February 27, 2015 (incorporated by reference to Exhibit 10.13 in the Annual Report on Form 10‑K (Commission File No. 001‑13957) filed on February 27, 2015)
 
 
Employment offer letter of Harry G. Sladich, as amended and restated on February 27, 2015 (incorporated by reference to Exhibit 10.14 in the Annual Report on Form 10‑K (Commission File No. 001‑13957) filed on February 27, 2015)
 
 
Employment offer letter of David Wright, as amended and restated effective April 11, 2016 (incorporated by reference to Exhibit 10.3 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on August 3, 2016)
 
 
Employment offer letter of Roger J. Bloss effective as of October 1, 2016 (incorporated by reference to Exhibit 10.1 in the Quarterly Report on Form 10-Q (Commission File No. 001-13957) filed on November 9, 2016)
 
 
Independent Contractor Agreement with Roger Bloss dated May 21, 2018 (incorporated by reference to Exhibit 10.1 in the current report on Form 8-K (Commission File No. 001-13957) filed on May 22, 2018)
 
 
Employment offer letter of Bernard T. Moyle effective as of October 1, 2016 (incorporated by reference to Exhibit 10.2 in the Quarterly Report on Form 10-Q (Commission File No. 001-13957) filed on November 9, 2016)
 
 
Independent Contractor Agreement with Bernie Moyle dated May 21, 2018 (incorporated by reference to Exhibit 10.2 in the current report on Form 8-K (Commission File No. 001-13957) filed on May 22, 2018)
 
 

98


Exhibit Number
Description
 
 
Employment offer letter of Douglas L. Ludwig dated March 1, 2017 (incorporated by reference to Exhibit 10.1 in the Quarterly Report on Form 10-Q (Commission File No. 001-13957) filed on May 10, 2017)
 
 
Employment offer letter of Nate Troup dated April 5, 2018 (incorporated by reference to Exhibit 10.6 in the Quarterly Report on Form 10-Q (Commission File No. 001-13957) filed on August 9, 2018)
 
 
Employment offer letter of Gary L. Sims dated May 25, 2018 (incorporated by reference to Exhibit 10.7 in the Quarterly Report on Form 10-Q (Commission File No. 001-13957) filed on August 9, 2018)
 
 
Employment promotion letter of Paul Sacco dated June 14, 2018 (incorporated by reference to Exhibit 10.8 in the Quarterly Report on Form 10-Q (Commission File No. 001-13957) filed on August 9, 2018)
 
 
10.31 *
Employment offer letter of Julie Shiflett dated January 14, 2019
 
 
 
Other Material Contracts
 
 
Asset Contribution Agreement dated January 15, 2015 among the registrant, twelve of its indirect wholly owned subsidiaries, and RL Venture Holding LLC (incorporated by reference to Exhibit 10.1 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on May 8, 2015). Specific items in this exhibit have been redacted, as marked by three asterisks [***], because confidential treatment for those items was granted by the SEC. The redacted material has been separately filed with the SEC.
 
 
10.33 **
Loan Agreement dated January 15, 2015 between RL Venture Holding LLC and twelve of its wholly owned subsidiaries, as borrowers, and Pacific Western Bank, as lender
 
 
Amended and Restated Limited Liability Company Agreement of RL Venture LLC dated January 16, 2015 (incorporated by reference to Exhibit 10.3 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on May 8, 2015)
 
 
Membership Interest Purchase Agreement dated January 16, 2015 between the registrant and Shelbourne Falcon RLHC Investors LLC (incorporated by reference to Exhibit 10.4 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on May 8, 2015)
 
 
Registration Rights Agreement dated June 15, 2015 between the registrant and HNA RLH Investments LLC (incorporated by reference to Exhibit 10.1 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on August 5, 2015)
 
 
Investor Agreement dated June 15, 2015 among the registrant, HNA RLH Investments LLC and HNA Investment Management LLC (incorporated by reference to Exhibit 10.2 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on August 5, 2015)
 
 
Asset Purchase Agreement dated April 23, 2015 among the registrant, GuestHouse International, L.L.C. and Brendan Watters (incorporated by reference to Exhibit 10.3 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on August 5, 2015)
 
 
Asset Purchase Agreement, dated as of September 13, 2016, by and among Red Lion Hotels Franchising, Inc. and Red Lion Hotels Canada Franchising, Inc. Thirty-Eight Street, Inc., Vantage Hospitality Group, Inc., Vantage Franchising, Inc., Vantage Franchising (Canada) Inc., Vantage Hospitality (Canada) Inc., LHINDI, Inc., Van Asia (Korea) Ltd., and Van Asia, Ltd. (incorporated by reference to Exhibit 2.1 in the Current Report on Form 8-K (Commission File No. 001-13957) filed on September 14, 2016)
 
 
First Amendment to Asset Purchase Agreement dated May 21, 2018 by and among Red Lion Hotels Franchising, Inc. and Red Lion Hotels Canada Franchising, Inc. Thirty-Eight Street, Inc., Vantage Hospitality Group, Inc., Vantage Franchising, Inc., Vantage Franchising (Canada) Inc., Vantage Hospitality (Canada) Inc., LHINDI, Inc., Van Asia (Korea) Ltd., and Van Asia, Ltd. (incorporated by reference to Exhibit 10.4 in the current report on Form 8-K (Commission File No. 001-13957) filed on May 22, 2018)
 
 
Letter Agreement regarding Earn-Out dated May 21, 2018 (incorporated by reference to Exhibit 10.3 in the current report on Form 8-K (Commission File No. 001-13957) filed on May 22, 2018)
 
 
Form of Voting Agreement between Red Lion Hotels Corporation and Thirty-Eight Street, Inc. and certain stockholders of Thirty-Eight Street, Inc. (incorporated by reference to Exhibit 10.1 in the Current Report on Form 8-K (Commission File No. 001-13957) filed on September 14, 2016)
 
 

99


Exhibit Number
Description
 
 
Asset Purchase Agreement between Red Lion Hotels Corporation, TicketsWest.com, Inc. and Paciolan, LLC dated August 11, 2017 (incorporated by reference to Exhibit 10.1 in the Quarterly Report on Form 10-Q (Commission File No. 001‑13957) filed on November 6, 2017)
 
 
Amended and Restated Purchase Agreement dated May 1, 2018 by and among Red Lion Hotels Franchising, Inc. and Knights Franchise Systems, Inc., Wyndham Hotel Group, LLC, Wyndham Hotel Group Canada, ULC and Wyndham Hotel Group Europe Limited (incorporated by reference to Exhibit 2.1 in the current report on Form 8-K (Commission File No. 001-13957) filed on May 7, 2018)
 
 
Credit Agreement, dated as of May 14, 2018, by and among Red Lion Hotels Corporation, certain of Red Lion Hotels Corporation's direct and indirect wholly-owned subsidiaries, Deutsche Bank AG New York Branch, Capital One, National Association and Raymond James Bank, N.A. (incorporated by reference to Exhibit 10.1 in the current report on Form 8-K (Commission File No. 001-13957) filed on May 16, 2018)
 
 
First Amendment to Credit Agreement, dated as of August 31, 2018, by and among Red Lion Hotels Corporation, certain of Red Lion Hotels Corporation's direct and indirect wholly-owned subsidiaries, Deutsche Bank AG New York Branch, Capital One, National Association and Raymond James Bank, N.A. (incorporated by reference to Exhibit 10.1 in the current report on Form 8-K (Commission File No. 001-13957) filed on September 7, 2018)
 
 
Loan Purchase and Sale Agreement dated September 4, 2018 between RLH Baltimore Loan Acquisition, LLC, as Buyer, and PFP IV SUB III, LLC, as Seller (incorporated by reference to Exhibit 10.2 in the current report on Form 8-K (Commission File No. 001-13957) filed on September 7, 2018)
 
 
21 *
List of Subsidiaries of Red Lion Hotels Corporation
 
 
23 *
Consent of BDO USA, LLP
 
 
24
Powers of Attorney (included on signature page)
 
 
31.1 *
Certification of principal executive officer pursuant to Exchange Act Rule 13a-14(a)
 
 
31.2 *
Certification of principal financial officer pursuant to Exchange Act Rule 13a-14(a)
 
 
32.1 *
Certification of principal executive officer pursuant to Exchange Act Rule 13a-14(b)
 
 
32.2 *
Certification of principal financial officer pursuant to Exchange Act Rule 13a-14(b)
 
 
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
* Exhibits filed with this report
 
** Exhibit refiled with this report to reflect the expiration of confidential treatment for certain terms in this exhibit
 
Item 16.
Form 10-K Summary

None.


100


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

RED LION HOTELS CORPORATION
Registrant


Signature
 
Title
 
Date
 
 
 
 
 
 
 
By:
 
/s/ GREGORY T. MOUNT
 
President and Chief Executive Officer
(Principal Executive Officer)
 
March 8, 2019
 
 
Gregory T. Mount
 
 
 
 
 
 
 
 
 
 
By:
 
/s/ JULIE SHIFLETT
 
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
March 8, 2019
 
 
Julie Shiflett
 
 
 


POWERS OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints Gregory T. Mount and Julie Shiflett and each of them severally, such person's true and lawful attorneys-in-fact and agents, with full power to act without the other and with full power of substitution and resubstitution, to execute in the name and on behalf of such person, individually and in each capacity stated below, any and all amendments to this report, and any and all other instruments necessary or incidental in connection herewith, and to file the same with the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

101


Signature
 
Title
 
Date
 
 
 
 
 
 
 
 
 
/s/ GREGORY T. MOUNT
 
President and Chief Executive Officer
(Principal Executive Officer), Director
 
March 8, 2019
 
 
Gregory T. Mount
 
 
 
 
 
 
 
 
 
 
 
 
/s/ JULIE SHIFLETT
 
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
March 8, 2019
 
 
Julie Shiflett
 
 
 
 
 
 
 
 
 
 
 
 
/s/ NATHAN M. TROUP
 
Senior Vice President, Chief Accounting Officer
(Principal Accounting Officer)
 
March 8, 2019
 
 
Nathan M. Troup
 
 
 
 
 
 
 
 
 
 
 
 
/s/ ROBERT G. WOLFE
 
Chairman of the Board of Directors
 
March 8, 2019
 
 
Robert G. Wolfe
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ TED DARNALL
 
Director
 
March 8, 2019
 
 
Ted Darnall
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ JAMES P. EVANS
 
Director
 
March 8, 2019
 
 
James P. Evans
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ AMY HUMPHREYS
 
Director
 
March 8, 2019
 
 
Amy Humphreys
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ JOSEPH B. MEGIBOW
 
Director
 
March 8, 2019
 
 
Joseph B. Megibow
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ BONNY W. SIMI
 
Director
 
March 8, 2019
 
 
Bonny W. Simi
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ MICHAEL VERNON
 
Director
 
March 8, 2019
 
 
Michael Vernon
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ ALEXANDER WASHBURN
 
Director
 
March 8, 2019
 
 
Alexander Washburn
 
 
 
 


102


RLHCORPLOGOCOLORRGBA03.JPG

December 5, 2018


William J. Linehan

RE: Red Lion Hotels Corporation Executive Vice President, Chief Marketing Officer Offer Letter


Dear Bill:

This letter supersedes and replaces in its entirety your original offer letter dated February 10, 2014, as amended on February 27, 2015, effective as of the date set forth above (“Amended Offer Letter”).

You have served as the Chief Marketing Officer since joining Red Lion Hotels Corporation (“Company”) in 2014. The Company appreciates your work and contribution to the success of the Company’s expansive growth and brand development. The parties now mutually desire to separate employment effective May 31, 2019 (“Separation Date”). This Amended Offer Letter governs the terms and conditions of your employment through the Separation Date, provided that you indicate your acceptance to the terms by signing the Amended Offer Letter as indicated below and signing the Company’s standard release agreement. This Amended Offer Letter will be considered null and void if you fail to return the signed Amended Offer Letter and standard release agreement within twenty-one days of the date of this letter or revoke the same.

POSITION: Your job title will remain Executive Vice President, Chief Marketing Officer through the Separation Date. Your responsibilities will be only those specific duties assigned to you from time to time by the President & CEO, which shall include but not be limited to preparing for and planning for the annual brand conference in December 2018

COMPENSATION: Your position is classified as a salaried exempt position, which means it is exempt from state and federal overtime laws. You will be paid a bi-weekly base salary of $13,156.15, which is equivalent to $342,060.00 per year, subject to normal withholdings and payroll taxes. You will not be entitled to any additional compensation in the event you are appointed to serve as a director of the Company or as an officer or director of any of the Company’s direct or indirect subsidiaries or affiliates.

TERM: Your employment will be separated on May 31, 2019, unless you resign or are terminated for Cause prior to this date (“Separation Date”).



If you voluntarily resign or are terminated with Cause (defined below) prior to May 31, 2019, you will be entitled to your annual base pay through the effective date of your termination. No further compensation or remuneration will be paid. If you are terminated without Cause prior to May 31, 2019, you will be paid severance in the form of your annual base pay for the then current fiscal year through May 31, 2019.

As used herein, the term “Cause” means: (i) your willful and intentional failure or refusal to perform or observe any of your material duties, responsibilities or obligations, if such breach is not cured within 30 days after notice thereof to you by the Company, which notice shall state that such conduct shall, without cure, constitute Cause; (ii) any willful and intentional act by you involving fraud, theft, embezzlement or dishonesty affecting the Company; or (iii) your conviction of (or a plea of nolo contendere to) an offense which is a felony in the jurisdiction involved.

BONUS: In addition to your base salary, you are eligible to earn and be paid a 2018 bonus on May 31, 2019 if you are actively employed through May 31, 2019, if you sign the Company’s standard release agreement effective May 31, 2019, and if you meet the other requirements outlined in the Variable Pay Plan (“VPP”), as may be amended from time to time. The 2018 bonus targets and goals for achievement of bonuses by executive officers are set by the Compensation Committee of the Board, and achievement is also determined by the Compensation Committee of the Board. Your annual bonus at target will be 40% of your base salary.

EQUITY: Vesting of any restricted stock units or performance stock units you have shall continue to be subject to the terms and conditions of any agreements under which such units were issued, including any time requirements, performance requirements and continued employment, including but not limited to any RSUs that are scheduled to vest in March 2019 and May 2019.

BENEFITS: You will be eligible to participate in all standard employee benefit programs on the same terms and conditions as any Company Vice President, as they may be modified from time to time. Medical, Dental, and Vision insurance will cease when employment terminates. You will be afforded your rights under COBRA, which allows you to pay for benefit continuation as allowed by law. Such notice of COBRA rights will be provided under separate document upon loss of medical coverage, to be sent directly to you by our COBRA administrator, AW Rehn and Associates.
CONDITION TO RECEIPT OF BONUS AND BENEFITS OF AMENDED OFFER LETTER: The receipt of the benefits of this Amended Offer Letter and any bonus severance or other benefits will be subject to you signing and not revoking a separation agreement and release of claims in the form and substance acceptable to the Company in its discretion (1) within twenty-one days of receiving this Amended Offer Letter and (2) as a condition of receiving any Bonus approved by the Board.
LOYALTY, NONDISCLOSURE OF CONFIDENTIAL INFORMATION: By accepting this offer, you agree that you will act at all times in the best interest of the Company. You also agree that, except as required for performance of your work, you will not use, disclose or publish any


Confidential Information of the Company either during or after your employment, or remove any such information from the Company’s premises. Confidential Information includes, but is not limited to, lists of actual and prospective customers and clients, financial and personnel-related information, projections, operating procedures, budgets, reports, business or marketing plans, compilations of data created by the Company or by third parties for the benefit of the Company.

NONCOMPETITION AND NONSOLICITATION: You agree that during your employment with the Company you will not, directly or indirectly, engage or participate or make any financial investments in (other than ownership of up to 5% of the aggregate of any class of securities of any corporation if such securities are listed on a national stock exchange or under section 12(g) of the Securities Exchange Act of 1934) or become employed by, or act as an agent or principal of, or render advisory or other management services to or for, any Competing Business. As used herein the term “Competing Business” means any business which includes hotel ownership, hotel management, hotel services or hotel franchising that competes directly or indirectly with the Company. You also agree that during your employment at the Company you will not solicit, raid, entice or induce any person that then is or at any time during the twelve-month period prior to the end of your employment was an employee of the Company (other than a person whose employment with the Company has been terminated by the Company), to become employed by any person, firm or corporation. Notwithstanding the foregoing, the Company shall in good faith consider any written request you make to provide paid consulting services to a Competing Business prior to May 31, 2019, and shall not unreasonably withhold its consent unless the Company determines in its sole discretion that such services will have a direct or indirect negative impact on the Company.

NONDISPARAGEMENT: You expressly agree that you will not make any disparaging, derogatory, malicious, and/or false comments, whether oral or written, about the Company, its Directors, Officers, employees or agents, in any way, in any discussion with third parties, in a press release, or in any other similar forum or manner, during the term of your employment or at any time thereafter. You understand that any proven breach of this paragraph is a material breach of this Agreement. The Company expressly agrees that none of its President, Executive Vice Presidents or Board members will make any disparaging, derogatory, malicious, and/or false comments, whether oral or written, about you, in any way, in any discussion with third parties, in a press release, or in any other similar forum or manner, during the term of your employment or at any time thereafter.

COMPLAINT RESOLUTION: By accepting this Amended Offer Letter with the Company, you also agree to continue to familiarize yourself with its policies, including its policies on equal opportunity and anti-harassment, and to promptly report to the appropriate the Company supervisors or officers any matters which require their attention.

KEY EMPLOYEE STATUS: You are regarded as a key employee under certain federal regulations governing family and medical leave. This status will require that you work closely with us in planning if you develop a need for family or medical leave.

NATURE OF EMPLOYMENT: The Company is an at-will employer. This means that your employment is not for a set amount of time; either you or the Company may terminate employment at any time, with or without cause. Nothing in this agreement modifies your at-will status.



ENTIRE AGREEMENT: This letter contains all of the terms of your employment with the Company, and supersedes any prior understandings or agreements, whether oral or in writing.
The Company reserves the right, subject to limitations and provisions of applicable law and regulations, to change, interpret, withdraw, or add to any of its policies, benefits, or terms and conditions of employment at its sole discretion, and without prior notice or consideration to any associate. The Company’s policies, benefits or terms and conditions of employment do not create a contract or make any promises of specific treatment.

GOVERNING LAW. This Agreement and any disputes or claims arising hereunder will be construed in accordance with, governed by and enforced under the laws of the State of Washington without regard for any rules of conflicts of law. You expressly consent to the personal jurisdiction of the state and federal courts located in Spokane County, Washington for any lawsuit filed there against you by the Company arising from or relating to this Agreement.


Sincerely,



/s/ Gregory T. Mount            
Gregory T. Mount
President & Chief Executive Officer
Red Lion Hotels Corporation



Accepted as of the date first set forth above



/s/ William J. Linehan            
William J. Linehan




RLHCORPLOGOCOLORRGBA03.JPG

January 14, 2019


Ms. Julie Shiflett
julie.shiflett@rlhco.com

RE: Red Lion Hotels Corporation Employment Offer Letter

Dear Julie:

On behalf of Red Lion Hotels Corporation (the “Company”), we are delighted to offer you the position of Executive Vice President, Chief Financial Officer. In your new position, you will report to the President and CEO of the Company.

As an executive officer of the Company, the details of your hire, your compensation and any of your acquisitions and dispositions of stock of the Company may in the future be subject to Securities Exchange Commission reporting rules.

The following outlines the employment package for your position.

START DATE: January 14, 2019.

POSITION: Executive Vice President, Chief Financial Officer. Your responsibilities will be those outlined in your job description, as may be modified, and as may be assigned to you from time to time by the President and CEO. You will also be required, as appropriate and consistent with other senior executives, to attend and participate in (i) necessary senior executive meetings, committees and councils and (ii) meetings of the Board of Directors of the Company.

COMPENSATION: Your position is classified as a salaried exempt position, which means it is exempt from state and federal overtime laws. You will be paid a bi-weekly base salary of $14,423.08, which is equivalent to $375,000 per year, subject to normal withholdings and payroll taxes. You will not be entitled to any additional compensation in the event you are appointed to serve as an officer or director of any of the Company’s direct or indirect subsidiaries or affiliates.



BONUS: In addition to your base salary, you are eligible to earn a bonus if you are actively employed throughout the applicable bonus period, and if you meet the other requirements outlined in any bonus plan as may be approved by the Company from time to time for Executive Vice Presidents of the Company. Bonus targets and goals for achievement of bonuses by executive officers are set by the Compensation Committee of the Board. Your bonus target for this position is set at a target of 70% of base salary. In recognition of your work on behalf of the Company as a consultant in 2018, you shall also be entitled to a bonus for 2018 at a target of 35% of base salary, and achievement determined by the achievement of the President & CEO of the goals set for him by the Company for 2018.

ANNUAL EQUITY GRANT: At the sole discretion of the Compensation Committee of the Company’s Board, you will receive an annual grant of equity under the Company’s 2015 Stock Incentive Plan (or such successor plan as may be then in effect).  Subject to such discretion, such grant shall be in a value equal to 80% of your base salary, a portion of which is anticipated to be issued in the form of restricted stock units (“RSUs”) vesting 25% on each of the first four anniversaries of issuance, and the balance of which is anticipated to be issued in the form of performance stock units (“PSUs”) vesting in accordance with performance metrics to be determined by the Compensation Committee in its sole discretion and consistent with the terms and conditions of PSUs issued to the Company’s other executive officers.  The annual equity grant is typically issued at the end of March.

INITIAL EQUITY GRANT: You will also receive effective on your Start Date a one-time grant of 88,000 Restricted Stock Units in the Company vesting one-fourth on each of the first four anniversaries of issuance. In the event the Company terminates your employment without cause, any Restricted Stock Units that would otherwise have vested within 12 months after such termination shall accelerate and vest upon such termination. Any RSUs you are issued that subsequently vest shall be settled exclusively in the common stock of the Company.

RELOCATION: You shall not be required to relocate from your present residence as a condition of your employment now or at any time during your employment. You may, however, be expected as part of your duties to travel frequently to such places as may be directed from time to time by the Company. The Company will reimburse your reasonable travel expenses in accordance with its travel reimbursement policies as such policies may change from time to time.

BENEFITS: You will be eligible to participate in all employee benefit programs on the same terms and conditions as any Company Executive Vice President, as they may be modified from time to time, including:



•
Medical and Dental insurance eligible the first of the month following your Start Date
•
Employee Assistance Program (EAP)
•
Long Term Disability insurance coverage starting the first of the month following your Start Date
•
Flexible Spending Account - Section 125 Medical Reimbursement and Dependent Care accounts eligible within 30 days of your Start Date for the following 1st of the month effective date
•
AFLAC - Voluntary Cancer Protection, Short Term Disability, Personal Recovery and Accident / Injury Protection Plans available following Start Date and also during open enrollment periods
•
Vacation, Holiday, Sick Pay and Disability Programs
•
Participation in the Company 401(k) Retirement Savings Plan with a discretionary match made after the end of each calendar year.
•
Direct Deposit
•
Option to purchase shares of Company stock at a 15% discount through payroll deduction under Red Lion’s Employee Stock Purchase Plan
•
Voluntary Term Life and AD&D Insurance coverage eligible the first of the month following your Start Date
•
Continuing education reimbursement
•
Discounted hotel accommodations for you and your family at Company hotels


SEVERANCE BENEFITS:

UPON TERMINATION WITHOUT CAUSE: If the Company terminates your employment without Cause (defined below), the Company will pay you a lump sum payment equal to one-half (1/2) your base annual salary for the then current fiscal year, provided that as a previous condition to such payment, you shall execute and not revoke during any legally applicable revocation period, a mutually acceptable separation agreement and general release.

UPON CHANGE OF CONTROL AND CONSTRUCTIVE TERMINATION: If, during the term of your employment with the Company, there is a Change of Control (defined below) and there is a Constructive Termination (defined below) of your employment without Cause within twelve (12) months after such Change of Control, you will, in lieu of severance under the preceding paragraph, be entitled to a lump sum payment equal to the sum of (a) your base annual salary for the then current fiscal year, plus (b) an amount equal to (i) your target annual bonus under the then applicable bonus plan for the then current fiscal year, multiplied by (ii) a fraction, the numerator of which is 365 plus the number of days elapsed in the then current fiscal year at the time of the termination and the denominator of which is 365. In addition, (A) the Company shall accelerate vesting on any portion of any equity grant previously made to you under the Company’s 2015 Stock Incentive Plan, or any successor plan, that would otherwise have vested after the date of the termination of your employment; and (B) all Company imposed restrictions under any restricted stock, restricted stock unit or other similar equity-based awards granted to you by the Company shall be terminated upon the termination of your employment, and the Company shall issue all common stock that underlies such awards but has not yet been issued; provided that (i) if the terms of any such award require you to pay monetary consideration for such stock, the stock underlying such award shall be issued only if you pay such


consideration, and (ii) if any restrictions under any such award are performance-based, such restrictions shall terminate and the stock underlying such award shall be issued only if and to the extent expressly provided in the agreement evidencing the award.

As used herein, the term “Cause” means: (i) your willful and intentional failure or refusal to perform or observe any of your material duties, responsibilities or obligations, if such breach is not cured within 30 days after notice thereof to you by the Company, which notice shall state that such conduct shall, without cure, constitute Cause; (ii) any willful and intentional act by you involving fraud, theft, embezzlement or dishonesty affecting the Company; or (iii) your conviction of (or a plea of nolo contendere to) an offense which is a felony in the jurisdiction involved.

“Constructive Termination” shall be deemed to occur if the Company terminates your employment without Cause, or if you voluntarily elect to terminate your employment within thirty (30) days after any of the following events occurring without your consent: (i) there is a significant reduction in your overall scope of duties, authorities and responsibilities (it being understood that a new position within a larger combined company is not a constructive termination if it is in the same area of operations and involves similar scope of management responsibility notwithstanding that you may not retain as senior a position overall within the larger combined company as your prior position within the Company); or (ii) there is a reduction of more than 20% of your base salary or target bonus (other than any such reduction consistent with a general reduction of pay across the Company’s or its successor’s executive staff as a group, as an economic or strategic measure due to poor financial performance by the Company); or (iii) you are required to relocate from your present residence as a condition of your continuing employment.

As used herein, the term “Change of Control” means the occurrence of any one of the following events: any merger or consolidation involving the acquisition of 50% or more of the combined voting power of the outstanding securities of the Company by a “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), adoption of a plan for liquidation of the Company or for sale of all or substantially all of the assets of the Company or other similar transaction or series of transactions involving the Company, or the acquisition of 50% or more of the combined voting power of the outstanding securities of the Company by a “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934).

The severance amounts hereunder shall, subject to COMPLIANCE WITH SECTION 409A below, be paid to you as soon as practicable following the occurrence of the event that entitles you to such payments.

COMPLIANCE WITH SECTION 409A: Notwithstanding any other provision of this letter to the contrary, the provision, time and manner of payment or distribution of all compensation and benefits provided by this letter (“Section 409A Deferred Compensation”) that constitute nonqualified deferred compensation subject to and not exempted from the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), shall be subject to, limited by and construed in accordance with the requirements of such section and all regulations and other guidance promulgated by the Secretary of the Treasury pursuant


to such section (such section, regulations and other guidance being referred to herein as “Section 409A”), including the following:

(a)    Separation from Service. Payments and benefits constituting Section 409A Deferred Compensation otherwise payable or provided pursuant to this letter upon your Constructive Termination shall be paid or provided only at the time of a termination of your employment that constitutes a Separation from Service. For the purposes of this letter, a “Separation from Service” is a separation from service within the meaning of Treasury Regulation Section 1.409A-1(h).

(b)    Six-Month Delay Applicable to Specified Employees. If, at the time of your Separation from Service, you are a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, then any payments and benefits constituting Section 409A Deferred Compensation to be paid or provided pursuant to this letter upon your Separation from Service shall be paid or provided commencing on the later of (i) the first business day after the date that is six months after the date of such Separation from Service or, if earlier, the date of your death (in either case, the “Delayed Payment Date”), or (ii) the date or dates on which such Section 409A Deferred Compensation would otherwise be paid or provided in accordance with this letter without regard to this paragraph. All such payments and benefits that would, but for this paragraph, become payable prior to the Delayed Payment Date shall be accumulated and paid on the Delayed Payment Date.


(c)    Installments. Your right to receive any amounts payable hereunder in two or more installments shall be treated as a right to receive a series of separate payments and, accordingly, each such installment payment shall at all times be considered a separate and distinct payment for purposes of Section 409A.


(d)    Notice Upon Constructive Termination. If you voluntarily elect to terminate your employment under circumstances that would otherwise constitute a Constructive Termination under this letter, a Constructive Termination shall not be deemed to have occurred unless (i) you have given the Company written notice that a specified event has occurred giving you the right to voluntarily terminate your employment and have that be treated as a Constructive Termination, (ii) the Company fails to cure such event within a period of thirty (30) days after the receipt of such notice, and (iii) you voluntarily terminate your employment within thirty (30) days following the end of that period.

LOYALTY, NONDISCLOSURE OF CONFIDENTIAL INFORMATION: By accepting this offer, you agree that you will continue to act at all times in the best interest of the Company. You also agree that, except as required for performance of your work, you will not use, disclose or publish any Confidential Information of the Company either during or after your employment, or remove any such information from the Company’s premises. Confidential Information includes, but is not limited to, lists of actual and prospective customers and clients, financial and personnel-related information, projections, operating procedures, budgets, reports, business or marketing plans, compilations of data created by the Company or by third parties for the benefit of the Company.



NONCOMPETITION AND NONSOLICITATION: (a) You agree that during a period after termination of your employment commensurate with the months of base salary you are paid as a benefit in connection with a related severance event, you will not, directly or indirectly, engage or participate or make any financial investments in (other than ownership of up to 5% of the aggregate of any class of securities of any corporation if such securities are listed on a national stock exchange or under section 12(g) of the Securities Exchange Act of 1934) or become employed by, or act as an agent or principal of, or render advisory or other management services to or for, any Competing Business. As used herein the term “Competing Business” means any business which includes hotel ownership, hotel management, hotel services or hotel franchising that competes directly or indirectly with the Company.

(b)     You also agree that during your employment at the Company and during a period after termination of your employment commensurate with the months of base salary you are paid as a benefit in connection with a related severance event, you will not solicit, raid, entice or induce any person that then is or at any time during the twelve-month period prior to the end of your employment was an employee of the Company (other than a person whose employment with the Company has been terminated by the Company), to become employed by any person, firm or corporation.

COMPLAINT RESOLUTION: By accepting this offer with the Company, you also agree to continue to familiarize yourself with its policies, including its policies on equal opportunity and anti-harassment, and to promptly report to the appropriate the Company supervisors or officers any matters which require their attention.

KEY EMPLOYEE STATUS: You are regarded as a key employee under certain federal regulations governing family and medical leave. This status will require that you work closely with us in planning if you develop a need for family or medical leave.

NATURE OF EMPLOYMENT: As you know, the Company is an at-will employer. This means that your employment is not for a set amount of time; either you or the Company may terminate your employment at any time, with or without cause.

ENTIRE AGREEMENT: This letter contains all of the terms of your employment with the Company, and supersedes any prior understandings or agreements, whether oral or in writing.

The Company reserves the right, subject to limitations and provisions of applicable law and regulations, to change, interpret, withdraw, or add to any of its policies, benefits, or terms and conditions of employment at its sole discretion, and without prior notice or consideration to any associate. The Company’s policies, benefits or terms and conditions of employment do not create a contract or make any promises of specific treatment.



We are pleased and proud to be adding your talents to a leadership team that is dedicated to making a difference in the communities we serve, creating fulfilling jobs and environments conducive to success, and providing the foundation for the ongoing success of the Company.

Sincerely,


/s/ Gregory T. Mount            
Gregory T. Mount
President and CEO
Red Lion Hotels Corporation

Accepted as of the date first set forth above:
/s/ Julie Shiflett            
Julie Shiflett




LOAN AGREEMENT
by and among
RL VENTURE HOLDING LLC; RL BEND, LLC; RL BOISE, LLC;
RL COOS BAY, LLC; RL EUREKA, LLC; RL OLYMPIA, LLC; RL PASCO, LLC;
RL PORT ANGELES, LLC; RL POST FALLS, LLC; RL REDDING, LLC;
RL RICHLAND, LLC; RL SALT LAKE, LLC; and RL SPOKANE, LLC,
each a Delaware limited liability company
individually a Borrower and collectively, the Borrowers,
PACIFIC WESTERN BANK
a California state-chartered bank,
as Agent
and
the Lenders party hereto from time to time

1

 
TABLE OF CONTENTS
 
 
 
Page
Article 1 CERTAIN DEFINITIONS.
6
Article 2 THE LOAN; INTEREST RATE; PAYMENTS.
31
Section 2.1
Evidence of Loan.
31
Section 2.2
Initial Advance of the Loan; Loan Origination Fee
31
Section 2.3
Interest Rate
32
Section 2.4
Past Due Charge and Default Interest Rate
32
Section 2.5
Payments of Principal and Interest; Fees.
32
Section 2.6
Maturity Date.
34
Section 2.7
Prepayment and Repayment Fees.
34
Section 2.8
Indebtedness Absolute; No Offset; Waiver
35
Section 2.9
Lawful Limits
36
Section 2.10
Increased Costs; Capital Adequacy.
36
Section 2.11
Interest Rate Protection
38
Section 2.12
Extension of Maturity Date
39
Section 2.13
Release of a Property
40
Article 3 ACCOUNTS AND RESERVES.
42
Section 3.1
Security Grant.
42
Section 3.2
Reserves
42
Section 3.3
Operating Account and Lender Account.
50
Section 3.4
Application of Operating Revenues.
51
Article 4 REPRESENTATIONS AND WARRANTIES.
52
Section 4.1
Representations and Warranties
52
Section 4.2
Continuation of Representations and Warranties
59
Article 5 BORROWER COVENANTS.
59
Section 5.1
Performance of Obligations
59
Section 5.2
Existence; Compliance with Legal Requirements
60
Section 5.3
Single Purpose Entity
60
Section 5.4
Compliance with Non-Consolidation Opinion Assumptions
60
Section 5.5
ERISA
60
Section 5.6
Defense and Notice of Actions and Certain Other Events
61
Section 5.7
Right of Inspection; Due Diligence
61
Section 5.8
Liens
61
Section 5.9
Further Assurances; Supplemental Affidavits
62
Section 5.10
Financial Reporting.
62
Section 5.11
Taxes.
65
Section 5.12
Insurance.
65




2

Section 5.13
Disposition of Insurance and Condemnation Proceeds and Damages.
67
Section 5.14
Maintenance and Preservation of the Property.
69
Section 5.15
Membership Interest Sale Price
71
Section 5.16
Proceedings to Enjoin
71
Section 5.17
Distributions
71
Section 5.18
Transfer or Encumbrance of the Property.
71
Section 5.19
Leases.
72
Section 5.20
Prohibition Against Additional Recordings
73
Section 5.21
Change in Name
73
Section 5.22
Debt Cancellation; Settlement of Claims
73
Section 5.23
Affiliate Transactions
73
Section 5.24
Limitation on Issuance of Equity Interests
73
Section 5.25
Compliance
74
Section 5.26
Debt Service Coverage Ratio
74
Section 5.27
Loan to Value Ratio
74
Section 5.28
Anti-Terrorism; OFAC; Patriot Act
74
Section 5.29
Material Contracts
75
Section 5.30
Limitation on Debt
75
Section 5.31
Interest Rate Protection Agreement
75
Section 5.32
Approved Operating Budget.
75
Section 5.33
Replacement Note
76
Section 5.34
Hotel Operation.
76
Section 5.35
Credit Card Processors
76
Section 5.36
Property Management Agreement.
77
Section 5.37
Restrictions on Payment of Affiliate Fees
78
Section 5.38
Contribution Provisions.
78
Section 5.39
Loan Assumption.
81
Section 5.40
Property Use.
82
Section 5.41
Ground Lease
83
Article 6 DEFAULTS.
83
Section 6.1
Event of Default
83
Section 6.2
Remedies Conferred upon Agent
86
Section 6.3
Right of Agent to Make Advances to Cure Event of Defaults; Obligatory Advances
87
Section 6.4
Payment of Costs, Expenses and Attorneys’ Fees
88
Section 6.5
Remedies Cumulative; No Waiver
88
Section 6.6
Severance
89
Section 6.7
Default Rate
89
Article 7 MISCELLANEOUS.
89
Section 7.1
Notices
89
Section 7.2
Reimbursement for Expenses
91
Section 7.3
Indemnity.
91
Section 7.4
Amendments and Waivers
92

3

Section 7.5
Invalid Provisions
92
Section 7.6
Loan Agreement Provisions Control over Other Instruments
93
Section 7.7
Approvals; Third Parties; Conditions
93
Section 7.8
Agent Not in Control; No Partnership
93
Section 7.9
Time of the Essence
94
Section 7.10
Successors and Assigns
94
Section 7.11
Renewal, Extension or Rearrangement
94
Section 7.12
Cumulative Rights
94
Section 7.13
Singular and Plural; Phases; Construction
94
Section 7.14
Exhibits; Schedules; and Recitals
95
Section 7.15
Titles of Articles, Sections and Subsections
95
Section 7.16
Survival
95
Section 7.17
Representation by Legal Counsel
95
Section 7.18
Waiver of Jury Trial
95
Section 7.19
Governing Law.
96
Section 7.20
Waivers
97
Section 7.21
Entire Agreement
97
Section 7.22
Injunctive Relief
97
Section 7.23
Counterparts
97
Section 7.24
Joint and Several.
97
Section 7.25
Assignments, Participations, and Syndications.
99
Section 7.26
Limitation on Liability of Agent’s and Lenders’ Members, Employees, etc
101
Section 7.27
Confidentiality and Publicity.
101
Section 7.28
Estoppel Certificates
102
Section 7.29
Retention of Servicer
102
Section 7.30
Taxes.
103
Section 7.31
Refinancing Right of First Offer
105
Article 8 ADMINISTRATIVE AGENT.
105
Section 8.1
Appointment and Authorization
105
Section 8.2
Agent to act as Agent
105
Section 8.3
Agent’s Reliance, Etc
106
Section 8.4
Indemnification of Agent
107
Section 8.5
Removal and Resignation
108
Section 8.6
Notice of Defaults
108
Section 8.7
Expenses
108





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EXHIBITS
 
Exhibit A
Legal Description of the Properties
Exhibit A-1
Legal Description of the Bend Property
Exhibit A-2
Legal Description of the Boise Property
Exhibit A-3
Legal Description of the Coos Bay Property
Exhibit A-4
Legal Description of the Eureka Property
Exhibit A-5
Legal Description of the Olympia Property
Exhibit A-6
Legal Description of the Pasco Property
Exhibit A-7
Legal Description of the Port Angeles Property
Exhibit A-8
Legal Description of the Post Falls Property
Exhibit A-9
Legal Description of the Redding Property
Exhibit A-10
Legal Description of the Richland Property
Exhibit A-11
Legal Description of the Salt Lake Property
Exhibit A-12
Legal Description of the Spokane Property
Exhibit B
Draw Procedures
Exhibit C
Definition of Single Purpose Entity
Exhibit D
Insurance Policies
Exhibit E
Allocated Loan Amount
Exhibit F
Property Improvement Plan and Budget
 
 
SCHEDULES
 
Schedule A
Operating Accounts (PropCo Borrowers)
Schedule B
Surveys
Schedule 1.1(d)
Environmental Reports
Schedule 3.2(d)
Deferred Maintenance Items
Schedule 4.1(b)
Organizational Chart
Schedule 4.1(q)
Permitted Debt (Trade Payables)
Schedule 4.1(bb)
Rent Roll
Schedule 4.1(dd)
Material Contracts
Schedule 5.32(b)
Operating Budget 2014


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LOAN AGREEMENT
THIS LOAN AGREEMENT (this “Agreement”) is entered into as of January 15, 2015, by RL VENTURE HOLDING LLC, a Delaware limited liability company (“Holding”), RL BEND, LLC, a Delaware limited liability company (“Bend PropCo”), RL BOISE, LLC, a Delaware limited liability company (“Boise PropCo”), RL COOS BAY, LLC, a Delaware limited liability company (“Coos Bay PropCo”), RL EUREKA, LLC, a Delaware limited liability company (“Eureka PropCo”), RL OLYMPIA, LLC, a Delaware limited liability company (“Olympia PropCo”), RL PASCO, LLC, a Delaware limited liability company (“Pasco PropCo”), RL PORT ANGELES, LLC, a Delaware limited liability company (“Port Angeles PropCo”), RL POST FALLS, LLC, a Delaware limited liability company (“Post Falls PropCo”), RL REDDING, LLC, a Delaware limited liability company (“Redding PropCo”), RL RICHLAND, LLC, a Delaware limited liability company (“Richland PropCo”), RL SALT LAKE, LLC, a Delaware limited liability company (“Salt Lake PropCo”), RL SPOKANE, LLC, a Delaware limited liability company (“Spokane PropCo”, and together with Holding, Bend PropCo, Boise PropCo, Coos Bay PropCo, Eureka PropCo, Olympia PropCo, Pasco PropCo, Port Angeles PropCo, Post Falls PropCo, Redding PropCo, Richland PropCo and Salt Lake PropCo and their permitted successors and assigns, jointly and severally, individually and collectively, “Borrower”, and collectively, “Borrowers”), the financial institution(s) listed on the signature pages hereof and their respective permitted successors and assigns (each individually a “Lender” and referred to herein collectively as the “Lenders”) and PACIFIC WESTERN BANK, a California state-chartered bank, its successors and assigns, for itself as a Lender and as administrative agent for the Lenders (in such capacity, “Agent”).
R E C I T A L S
WHEREAS, Borrower has requested that Lender make a loan in the maximum principal amount of Eighty Million and 00/100 Dollars ($80,000,000.00) (the “Loan”) to be secured by, among other things, a first lien deed of trust and/or mortgage on each of those certain real properties legally described on Exhibit A attached hereto; and
WHEREAS, Lenders have agreed to make the Loan upon completion of Lenders’ standard legal and business due diligence, satisfaction by Borrower of all the conditions precedent and receipt of final loan documents acceptable to Agent, Lenders and Borrower.
NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, Agent, Lenders and Borrower hereby agree as follows.
Article 1
CERTAIN DEFINITIONS.
As used herein, the following terms have the meanings indicated:
“Acceptable Counterparty” has the meaning given to such term in Section 2.11(a).

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“Affiliate” means, with respect to any Borrower Party: (i) any other Borrower Party, or (ii) any Person that directly or indirectly (a) owns (excluding ownership of any Equity Interests that are publicly-traded) more than ten percent (10%) of, or (b) is Controlling, Controlled by, or under direct or indirect common Control with, Borrower or any Borrower Party (except for Control by ownership of Equity Interests that are publicly-traded), or (iii) any director, officer or manager of any Person described in subsection (i) or (ii) above (other than a Person the Equity Interests in which are publicly-traded). The term “Affiliate” when used with reference to Agent means any entity that Controls, is Controlled by, or is under direct or indirect common Control with, Agent. The term “Affiliate” when used with reference to any Lender means any entity that Controls, is Controlled by, or is under direct or indirect common Control with, such Lender.
“Agent” has the meaning given to such term in the introductory paragraph of this Agreement.
“Agent’s Construction Consultant” means any Person retained by Agent, in its Permitted Discretion, as a construction consultant in relation to any Property.
“Agreement” has the meaning given to such term in the introductory paragraph of this Agreement.
“Aggregate Yield Amount” means, on any date of determination, the aggregate amount of all interest payments made at any time at or prior to such date of determination under this Agreement and received by Agent.
“Allocated Loan Amount” means the portion of the Loan allocated to each Property as set forth on Exhibit E, attached hereto and made a part hereof (it being understood that the Allocated Loan Amount for a Property shall not take into account the amount of funds remaining in the PIP Reserve relating to such Property).
“Alteration” has the meaning given to such term in Section 5.14(b).
“Appraisal” means a written statement independently and impartially prepared by a qualified appraiser, setting forth an opinion as to the “as-is” market value of the applicable Property that is (i) dated not more than sixty (60) days prior to the applicable date of calculation required pursuant to the terms of this Agreement, (ii) addressed to Agent, its successors and assigns, and Lenders and their successors and assigns, and (iii) made in compliance with the requirements of Title XI of the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 and the Uniform Standards of Professional Appraisal Practice which are maintained by the Appraisal Standards Board of the Appraisal Foundation. As used herein, an Appraisal shall also mean any written supplement or update of a prior Appraisal, that otherwise satisfies the conditions set forth in this definition.
“Approved Expenses” means any reasonable out of pocket expenses (other than Protective Advances) incurred by Agent with respect to the administration, enforcement, modification, amendment, restructure or collection of the Loan (including, without limitation, any such actions taken with respect to the Collateral securing the Loan).

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“Approved Leases” means, collectively, (i) Leases described on the Rent Roll as of the Closing Date, (ii) each Approved Leasing Parameters Lease, and (iii) any other Leases approved in writing by Agent.
“Approved Leasing Parameters Lease” means a Lease which (i) provides for automatic self-operative subordination to the Security Instrument and attornment to Agent, (ii) does not contain any option to purchase, any right of first refusal to purchase, any right to terminate (except in the event of the destruction or condemnation of substantially all of any Property), any requirement for a non-disturbance or recognition agreement, or any other provision which might adversely affect the rights of Agent under the Loan Documents in any material respect, (iii) is not a Major Lease and (iv) contains a prohibition on the production, distribution or sale of marijuana, cannabis or their byproducts.
“Approved Operating Budget” means an operating expense budget submitted to Agent pursuant to Section 5.32(a), which may be subject to Agent’s written approval pursuant to Section 5.32(c), showing, for the forthcoming calendar year, in reasonable detail, each line item of each Borrower’s anticipated Operating Expenses, including amounts required to establish, maintain and/or increase any monthly payments required hereunder.
“Approved Operating Expenses” means the Operating Expenses for the Portfolio that are included in the current Approved Operating Budget or that have otherwise been approved by Agent in writing in its Permitted Discretion.
“Assignment of Agreements” means that certain Assignment of Agreements made by Borrowers to Agent for the benefit of the Lenders of even date herewith as the same may be amended, restated, supplemented or otherwise modified from time to time.
“Assignment of Interest Rate Agreement” means that certain Assignment of Interest Rate Protection Agreement made by Holding to Agent for the benefit of the Lenders of even date herewith, and consented to by an Acceptable Counterparty, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“Assignment of Management Agreement” means, collectively, each Collateral Assignment and Subordination of Property Management Agreement dated on or about the date hereof made by PropCo Borrowers and Property Manager to Agent for the benefit of the Lenders of even date herewith, as the same may be modified, amended or restated from time to time.
“Assignment of Rents” means, collectively, (i) that certain Assignment of Rents executed by Bend PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (ii) that certain Assignment of Rents executed by Boise PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (iii) that certain Assignment of Rents executed by Coos Bay PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (iv) that certain Assignment of Rents executed by Eureka PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (v) that certain Assignment of Rents executed by Olympia PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (vi) that certain Assignment of Rents executed by Pasco PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (vii) that

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certain Assignment of Rents executed by Port Angeles PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (viii) that certain Assignment of Rents executed by Post Falls PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (ix) that certain Assignment of Rents executed by Redding PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (x) that certain Assignment of Rents executed by Richland PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (xi) that certain Assignment of Rents executed by Salt Lake PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (xii) that certain Assignment of Rents executed by Spokane PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, each as recorded in the jurisdiction where the Property encumbered thereby is located and as may be amended, restated, extended or supplemented from time to time.
“Bank Products Agreement” means any agreement to provide cash management services, including treasury, depository, overdraft, credit or debit card, electronic funds transfer and other cash management or depositary arrangements entered into between any Borrower and a Lender or an Affiliate of a Lender, in its separate capacity as a provider of such cash management services provided for in such Bank Products Agreement.
“Bankruptcy Proceeding” has the meaning given to such term in Section 6.1(f)(i).
“Bend Building” means the 75-key “Red Lion Hotel” flagged hotel located on the Bend Land.
“Bend Land” means that certain parcel or parcels of real estate located in Bend, Oregon, legally described in Exhibit A-1 to this Agreement, together with all easements and other rights appurtenant thereto.
“Bend PropCo” has the meaning given to such term in the introductory paragraph of this Agreement.
“Bend Property” means the Bend Land, Bend Building and all Improvements, Personal Property, Fixtures and related facilities and amenities, now or hereafter located on, or relating to the Bend Land and the operation thereof, but excluding any removable personal property owned by any occupant thereof other than Bend PropCo on the date in question.
“Boise Building” means the 182-key “Red Lion Hotel” flagged hotel located on the Boise Land.
“Boise Land” means that certain parcel or parcels of real estate located in Boise, Idaho, legally described in Exhibit A-2 to this Agreement, together with all easements and other rights appurtenant thereto.
“Boise PropCo” has the meaning given to such term in the introductory paragraph of this Agreement.

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“Boise Property” means the Boise Land, Boise Building and all Improvements, Personal Property, Fixtures and related facilities and amenities, now or hereafter located on, or relating to the Boise Land and the operation thereof, but excluding any removable personal property owned by any occupant thereof other than Boise PropCo on the date in question.
“Borrower” and “Borrowers” have the meanings given to such terms in the introductory paragraph.
“Borrower Party” means, individually and collectively, Borrowers, Parent and Guarantor.
“Business Day” means (i) any day that is not a Saturday, Sunday or other day on which commercial banks in California and New York City are authorized or required by law to remain closed and (ii) with respect to all notices, determinations, fundings and payments in connection with the LIBOR Rate, any day which is a business day described in clause (i) and which is also a day open for trading by and between banks in dollar deposits in the London interbank market.
“Calculation Date” means the date on which Agent determines, based on the monthly reporting required pursuant to Section 5.10(d), the Debt Service Coverage Ratio for the immediately preceding Quarter(s).
“Cash Management Bank” means Wells Fargo Bank, or such other bank as Borrower may request and approved by Agent in its sole discretion.
“Change in Law” means (a) the adoption of any law, rule or regulation after the Closing Date, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the Closing Date or (c) compliance by any Lender (or, for purposes of Section 2.10 by any lending office of such Lender or by its holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the Closing Date.
“Claims” means any and all liabilities, obligations, losses, damages, penalties, claims, actions, litigation, proceedings, investigations, judgments, suits, fees, costs, expenses, charges, advances and disbursements of any kind (including, without limitation, reasonable fees, costs, expenses and charges of counsel) resulting from the assertion of a claim.
“Closing” means the consummation of the Loan on the Closing Date upon satisfaction of the conditions thereto as determined by Agent in its sole discretion.
“Closing Escrow Agreement” means those certain letters from Arent Fox LLP, Davis Wright Tremaine LLP and Duane Morris LLP to First American Title Insurance Company, dated as of the Closing Date, regarding the Contribution (as defined therein), this Loan and the Membership Interest Sale.
“Closing Date” means the date of this Agreement.
“Code” shall mean the Internal Revenue Code of 1986, as amended (or any corresponding provision or provisions of any succeeding law).

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“Collateral” means all collateral now or hereafter securing or intended to secure the Obligations, including each Property and all other assets of Borrowers and all other property in which a lien has been granted to Agent pursuant to any of the Loan Documents.
“Completion Date” means the date which is two (2) years after the Closing Date, subject to an extension for a period equal to the duration of any Force Majeure Event with respect to the affected Property only.
“Completion Guaranty” means that certain Completion Guaranty of even date herewith executed by RLH in favor of Agent for the benefit of Lenders, together with, upon closing on the Membership Interest Sale, that certain Joinder to Completion Guaranty, executed by each Joinder Guarantor, as the same may be modified, amended or restated from time to time.
“Confidential Information” has the meaning given to such term in Section 7.27(b).
“Contract Rate” means a rate per annum equal to the LIBOR Margin plus the LIBOR Rate.
“Control” and any derivative of such term, including “Controlling” and “Controlled”, means, when used with respect to any Person, (i) the direct or indirect beneficial ownership of fifty-one percent (51%) or more of the outstanding voting securities or voting equity of such Person or (ii) the power to direct or cause the direction of the management and policies of such Person whether by contract or otherwise.
“Construction Contract” means any general contracts, subcontracts, architects agreements, vendor and other contracts entered into by any Borrower or Property Manager with respect to any Property and the Property Improvements.
“Coos Bay Building” means the 144-key “Red Lion Hotel” flagged hotel located on the Coos Bay Land.
“Coos Bay Land” means that certain parcel or parcels of real estate located in Coos Bay, Oregon, legally described in Exhibit A-3 to this Agreement, together with all easements and other rights appurtenant thereto.
“Coos Bay PropCo” has the meaning given to such term in the introductory paragraph of this Agreement.
“Coos Bay Property” means the Boise Land, Boise Building and all Improvements, Personal Property, Fixtures and related facilities and amenities, now or hereafter located on, or relating to the Coos Bay Land and the operation thereof, but excluding any removable personal property owned by any occupant thereof other than Coos Bay PropCo on the date in question.
“Covered Taxes” has the meaning given to such term in Section 7.30(a). “Credit Card Processor” means Elavon, Inc.
“Credit Card Processor” means Elavon, Inc.

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“Debt” means, for any Person, without duplication: (a) all indebtedness of such Person for borrowed money, for amounts drawn under a letter of credit, or for the deferred purchase price of property or services for which such Person or its assets is liable, (b) all unfunded amounts under a loan agreement, letter of credit, or other credit facility for which such Person would be liable, if such amounts were advanced under such loan agreement or credit facility or if such letter of credit was issued, (c) all amounts required by such Person as a guaranteed payment to partners or a preferred or special dividend, including any mandatory redemption of shares or interests, (d) all indebtedness guaranteed by such Person, directly or indirectly, (e) all obligations under leases (including capital leases) for which such Person is liable, and (f) all obligations of such Person under interest rate swaps, caps, floors, collars and other interest hedge agreements, in each case whether such Person is liable contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations such Person otherwise assures a creditor against loss.
“Debt Service” means, for any period of time, the sum of all scheduled principal (if any) and interest payments on the Loan that are due and payable during such period of time.
“Debt Service Coverage Ratio” means, as of any date of determination, the ratio calculated by Agent of:
(i)    (A) the Operating Revenues for the most recently-completed twelve (12) calendar months; less
(B) (1) the Operating Expenses for the most recently-completed twelve (12) calendar months; to
(ii)    the DSCR Debt Service payable for the twelve (12) month period beginning with the most recently-completed calendar month.
Debt Service Coverage Ratio shall be determined by Agent based on the financial information provided to Agent by Borrowers and reviewed (and if Agent so elects, verified) by Agent. Agent’s determination shall be binding upon Borrowers absent manifest error.
“Debt Yield” means, as of any date of determination, the ratio calculated by Agent of:
(i)    (A) the Operating Revenues for the most recently-completed twelve (12) calendar months; less
(B) (1) the Operating Expenses for the most recently-completed twelve (12) calendar months; to
(ii)    the outstanding principal amount of the Loan, plus all accrued and unpaid interest thereon at the Contract Rate.
Debt Yield shall be determined by Agent based on the financial information provided to Agent by Borrowers and reviewed (and if Agent so elects, verified) by Agent. Agent’s determination shall be binding upon Borrowers absent manifest error.

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“Default” means the occurrence of any event, circumstance or condition which constitutes a breach of or a default under any Loan Document and which, after the giving of any required notice and/or the passage of any applicable cure period, would constitute an Event of Default under this Agreement or any other Loan Document.
“Default Rate” means a rate per annum equal to the lesser of (i) five percent (5%) over the Contract Rate, or (ii) the maximum rate of interest permitted to be charged by applicable laws or regulation governing this Agreement until paid, such additional interest to be compounded monthly.
“Deferred Maintenance Items” has the meaning given to such term in Section 3.2(c).
“Deferred Maintenance Reserve” has the meaning given to such term in Section 3.2(c).
“Disbursement Request” has the meaning give to such term on Exhibit B.
“Distribution” means any distribution of cash by any Borrower or Parent to any Person having any direct or indirect legal or beneficial interest in any Borrower or Parent, pursuant to such Person’s interest in any Borrower or Parent. The transfers made to RLH pursuant to the terms of that certain Contribution Agreement between RLH and Holding of substantially even date shall not be deemed to be Distributions.
“DSCR Cash Management Period” means the period commencing as of any Calculation Date that the Debt Service Coverage Ratio for the Quarter immediately preceding such Calculation Date is less than 1.50:1.0, and ending upon the earlier to occur of (i) the Calculation Date that Agent determines that the Debt Service Coverage Ratio was equal to or exceeded 1.50:1.0 for the two consecutive Quarters immediately preceding such Calculation Date or (ii) the date upon which Borrowers make a partial prepayment of principal pursuant to Section 3.4(d) within ten (10) Business Days after Agent notifies Borrowers that such DSCR Cash Management Period has commenced, resulting in the Debt Service Coverage Ratio being increased to not less than 1.50:1.0.
“DSCR Debt Service” means, for any period of time, the greater of (a) the sum of (i) all scheduled principal payments on the Loan that are due and payable during such period of time, plus (ii) all interest payments on the Loan that would be due and payable during such period of time based on the Contract Rate in effect on such date of determination; and (b) the principal and interest payments that would be due and payable during such period of time based upon a loan constant of seven and two one-hundredths of one percent (7.02%) multiplied by the outstanding principal balance of the Loan on the date such DSCR Debt Service is calculated.
“Encroachment Permits” has the meaning given to such term in Section 5.40(c).
“Environmental Assessment” means, as of the Closing Date, the Environmental Reports, and after the Closing Date, (i) a “Phase I” environmental site assessment, completed in accordance with ASTM Practice Standard E1527-05, with respect to a Property covering substantially the same matters covered in the Environmental Reports and such other matters which at the time of a subsequent Environmental Assessment are customarily included in “Phase I” environmental site assessments prepared for institutional lenders, and (ii) if required under the Loan Documents, a

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“Phase II” or “Phase III” environmental audit covering such matters as Agent may require, and in the case of both (i) and (ii) above, otherwise in scope acceptable to Agent in its Permitted Discretion. Subsequent Environmental Assessments shall be addressed to Agent and/or Agent’s designee and shall be in form and substance satisfactory to Agent in Agent’s Permitted Discretion.
“Environmental Indemnity” means the Environmental Indemnity Agreement dated as of even date herewith executed by Borrowers and RLH in favor of Agent for the benefit of the Lenders, together with, upon closing on the Membership Interest Sale, that certain Joinder to Environmental Indemnity Agreement, executed by each Joinder Guarantor, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“Environmental Proceedings” has the meaning given to such term in Section 4.1(o)(iii).
“Environmental Reports” means collectively the reports identified on Schedule 1.1(d) attached hereto.
“Environmental Reserve” has the meaning given to such term in Section 3.2(f).
“Equity Interests” means, with respect to any Person, its equity ownership interests, its membership interests, its common stock and any other capital stock or other equity ownership units of such Person authorized from time to time, and any other shares, options, interests, participations or other equivalents (however designated) of or in such Person, whether voting or nonvoting, including, without limitation, common stock, options, warrants, preferred stock, phantom stock, membership units (common or preferred), stock appreciation rights, membership unit appreciation rights, convertible notes or debentures, stock purchase rights, membership unit purchase rights and all securities convertible, exercisable or exchangeable, in whole or in part, into any one or more of the foregoing.
“ERISA” has the meaning given to such term in Section 4.1(m).
“Eureka Building” means the 175-key “Red Lion Hotel” flagged hotel located on the Eureka Land.
“Eureka Land” means that certain parcel or parcels of real estate located in Eureka, California, legally described in Exhibit A-4 to this Agreement, together with all easements and other rights appurtenant thereto.
“Eureka PropCo” has the meaning given to such term in the introductory paragraph of this Agreement.
“Eureka Property” means the Eureka Land, Eureka Building and all Improvements, Personal Property, Fixtures and related facilities and amenities, now or hereafter located on, or relating to the Eureka Land and the operation thereof, but excluding any removable personal property owned by any occupant thereof other than Eureka PropCo on the date in question.
“Event of Default” has the meaning given to such term in Section 6.1.

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“Exit Fee” means an amount equal to Four Hundred Thousand and No/100 Dollars ($400,000.00).
“Falcon Investors” means Falcon Investors, LLC, a New York limited liability company.
“FF&E” means furniture, fixtures and equipment to be installed and/or used in connection with the Properties in accordance with this Agreement.
“FF&E Deposit Amount” means, with respect to any Monthly Payment Date, an amount for each Property equal to the greater of (i) four percent (4%) of Gross Revenues for such Property; or (ii) such amounts, if any, as may be required as of such date for FF&E pursuant the Franchise Agreement, if any, governing the Property. The FF&E Deposit Amount for any Monthly Payment Date shall be determined using the Gross Revenues for the calendar month second preceding the current Monthly Payment Date (for example, and without limitation, the Gross Revenues calculated with respect to the FF&E Deposit Amount on the Monthly Payment Date in November of any year shall use the Gross Revenues of the Properties for the month of September of such year, as reported to Agent pursuant to Section 5.10(d)).
“FF&E Reserve” shall have the meaning given to such term in Section 3.2(d).
“Final Bucket PIP Backup” shall have the meaning given to such term in Section 3.2(a)(ii)(D).
“Final PIP Bucket” shall have the meaning given to such term in Section 3.2(a)(ii)(D).
“First PIP Bucket” shall have the meaning given to such term in Section 3.2(a)(ii)(A).
“Fixtures” has the meaning given to such term in the Security Instrument.
“Force Majeure” means with respect to the Property, a delay directly affecting the Property, caused by unusually adverse weather conditions which have not been taken into account in the construction schedule, fire, earthquake or other acts of God, shortages or unavailability of labor or materials, strikes, lockouts, war, acts of terrorism, acts of public enemy, riots or insurrections or any other unforeseen circumstances or events beyond the reasonable control of Borrower, and as to which Borrower notifies Agent in writing within fifteen (15) days after such occurrence. Notwithstanding the foregoing, Force Majeure does not include financial circumstances or events or matters which may be resolved solely by Borrower by the payment of money. In no event shall Force Majeure delays with respect to the Property exceed a total of ninety (90) days in the aggregate without Agent’s approval in its Permitted Discretion.
“Franchise Agreement” means any franchise agreement entered into between Franchisor and a Borrower upon the termination of a Property Management Agreement, if any.
“Franchisor” means Red Lion Hotels Franchising, Inc., a Washington corporation, or such other Person as Agent may approve in its sole discretion.

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“GAAP” means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession in the United States, that are applicable to the circumstances as of the date of determination, consistently applied.
“Governmental Authority” means any federal, state, foreign, county, city, or municipal government, or political subdivision thereof, any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality or public body, or any court or administrative tribunal, whether now or hereafter in existence, and that has jurisdiction over any Borrower Party or any Property.
“Gross Revenues” means, with respect to the Portfolio for any period, all Operating Revenues and other income, rents, additional rents, revenues, cash receipts, parking revenues, issues, profits, proceeds of the sale of a portion of the Portfolio, and other items of revenue derived by the applicable Borrower from the Portfolio from any source, including, without limitation, all revenues collected from vending machines and any concessions.
“Ground Lease” means that certain Lease and Option between Ground Lessor and Boise PropCo covering such portion of the Boise Property as identified therein.
“Ground Lease Rent” means the monthly rent described in the Ground Lease.
“Ground Lessor” means Rosemary Hill or her assigns.
“Guarantor” means (i) RLH, (ii) upon closing on the Membership Interest Sale, each Joinder Guarantor, and (iii) any other Person who now or hereafter guarantees any or all of the Obligations. Wherever the term Guarantor is used said term shall mean, as applicable, each one or more of the Persons who comprise Guarantor.
“Guaranty” means, individually and collectively, (i) the Indemnity Guaranty, (ii) the Completion Guaranty and (iii) any other guaranty agreement executed by a Guarantor in connection with the Loan, as each may be modified, amended or restated from time to time.
“Hazardous Materials” means any chemical, substance, object, condition, material or waste that is or may be hazardous to human health or safety or to the environment, due to its radioactivity, ignitability, corrosivity, flammability, toxicity, infectiousness or other harmful properties or effects, including all chemicals, substances, materials and wastes that are now or hereafter may be regulated in any manner, classified as dangerous, hazardous or toxic, or as pollutants or contaminants, or to which exposure is prohibited or restricted by any federal, state or local government or public agency, board, body or authority or by any Hazardous Materials Law. Hazardous Materials include flammable explosives, radioactive materials, polychlorinated biphenyls, asbestos, mold, radon, toxic substances (including, without limitation, Toxic Mold) or other related materials whether in the form of a chemical, element, compound, solution, mixture or otherwise, including those materials defined as “hazardous substances”, “hazardous materials”,

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“toxic substances”, “air pollutants”, “toxic pollutants”, “hazardous wastes”, “extremely hazardous waste” or “restricted hazardous waste” by any Hazardous Materials Law.
“Hazardous Materials Law” means any federal, state, or local law, ordinance or regulation or any rule adopted or guideline promulgated pursuant thereto, or any order, ruling or directive of any federal, state, local, executive, judicial, legislative, administrative or other governmental or public agency, board, body or authority relating to health (including Toxic Mold), industrial hygiene, the environment, or, to the extent relating to Hazardous Materials or environmental matters, the occupational or environmental conditions on, under or about the subject Property (including ambient air, soil, soil vapor, groundwater, surface water or land use), whether now or hereafter in force, including those relating to the release, emission or discharge of Hazardous Materials, those in connection with the construction, fuel supply, power generation and transmission, waste disposal or any other operations or processes relating to the subject Property. Hazardous Materials Law shall include, but not be limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Emergency Planning and Community Right-to-Know Act, the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act, the Solid Waste Disposal Act, the Clean Water Act and the Clean Air Act, as the same are now or hereafter amended.
“Holding” has the meaning given to such term in the introductory paragraph of this Agreement.
“Holding Operating Account” means account numbers 4806078440, 4040744310 and 4040744328 held at Cash Management Bank in the name of Holding.
“Hotel Transactions” means, collectively (i) occupancy arrangements for customary hotel transactions in the ordinary course of Borrowers’ business conducted at the hotel located at each Property, including nightly rentals (or licensing) of individual hotel rooms or suites, banquet room use and food and beverage services and (ii) informational or guest services which are terminable on one month’s notice or less without cause and without penalty or premium including co-marketing, promotional services and outsourced services.
“Improvements” means any building, structures, fixtures and other improvements now or hereafter located on the Land and which are owned by Borrowers.
“In Balance” has the meaning given to such term in Section 3.2(a)(vi).
“In Balance Shortfall” has the meaning given to such term in Section 3.2(a)(vi).
“Indebtedness” means, for any Person, without duplication, all present and future indebtedness, whether direct or contingent, funded or unfunded, evidenced by or arising under this Agreement with respect to the Loan, or under any other Loan Document, together with interest thereon and all other sums due to any Lender in respect of the Loan under any Loan Document (including sums added to the principal balance of the Loan in accordance with the terms of any Loan Document, all Protective Advances, Prepayment Premiums, Past Due Charges, Loan

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Administration Fees, Loan Expenses and all other charges, fees, costs and expenses payable pursuant to any Loan Document).
“Indemnifiable Amounts” has the meaning given to such term in Section 8.4.
“Indemnified Liabilities” has the meaning given to such term in Section 7.3.
“Indemnified Persons” means Agent, each Lender, any Servicer, any Transferee and their respective Affiliates, officers, directors, shareholders, employees, agents, accountants and attorneys.
“Indemnity Guaranty” means that certain Indemnity Guaranty of even date herewith executed by RLH in favor of Agent for the benefit of Lenders, together with, upon closing on the Membership Interest Sale, that certain Joinder to Indemnity Guaranty, executed by each Joinder Guarantor, as the same may be modified, amended or restated from time to time.
“Initial Advance” has the meaning given to such term in Section 2.2.
“Insurance Premiums” has the meaning given to such term in Section 3.2(c)(ii) of this Agreement.
“Insurance Reserve” has the meaning given to such term in Section 3.2(b)(ii) of this Agreement.
“Interest Rate Protection Agreement” has the meaning given to such term in Section 2.11.
“Joinder Guarantor” means, individually and collectively, Steven Fishman, an individual, Payday Partners, LLC, a Delaware limited liability company, Falcon Investors and Shelbourne Capital.
“Land” means, individually and collectively, Bend Land, Boise Land, Coos Bay Land, Eureka Land, Olympia Land, Pasco Land, Port Angeles Land, Post Falls Land, Redding Land, Richland Land, Salt Lake Land and Spokane Land, together with all easements and other rights appurtenant thereto.
“Lease” means any lease, license or agreement (excluding any which is terminable upon notice by Borrower of not more than thirty (30) days) for use of any part of a subject Property; provided, however, as used herein, the term “Lease” shall not include Hotel Transactions.
“Legal Requirements” means all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities affecting any Borrower, any Guarantor or a Property or any part thereof or the construction, use, alteration or operation thereof, or any part thereof, whether now or hereafter enacted and in force, including, without limitation, the Americans with Disabilities Act of 1990, and all permits, licenses and authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to any Borrower or any Guarantor at any time in force affecting any Borrower, any Guarantor or a Property or any part thereof, including, without limitation, any which may (i) require repairs,

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modifications or alterations in or to such Property or any part thereof, or (ii) in any way limit the use and enjoyment thereof.
“Lender” or “Lenders” have the meanings given to such terms in the introductory paragraph of this Agreement.
“Lender Account” means any one or more deposit accounts established in the name of Lender from time to time at a deposit bank of Lender’s election.
“LIBOR Margin” means four and three-quarters of one percent (4.75%) per annum.
“LIBOR Rate” means a rate per annum equal to the rate of interest which is identified and normally published by Bloomberg Professional Service page USD-LIBOR-ICE as the offered rate for loans in United States dollars for a one (1) month period, rounded upwards, if necessary, to the nearest 1/100 of 1%. Such rate shall be the rate set by the ICE Benchmark Administration as of 11:00 a.m. (London time) on the day which is two (2) Business Days prior to each Monthly Payment Date and effective on each such Monthly Payment Date. If Bloomberg Professional Service (or another nationally-recognized rate reporting source acceptable to Agent) no longer reports the LIBOR Rate or Agent determines in good faith that the rate so reported no longer accurately reflects the rate available to Agent in the London Interbank Market or if such index no longer exists or if page USD-LIBOR-ICE no longer exists or accurately reflects the rate available to Agent in the London Interbank Market, Agent may select a replacement index or replacement page, as the case may be. Notwithstanding the foregoing, in no event shall the LIBOR Rate be an amount less than one-quarter of one percent (0.25%).
“Lien” means any mortgage, deed of trust, lien (statutory or otherwise), pledge, hypothecation, preference, assignment, security interest or any other encumbrance, charge or transfer of, or any agreement to enter into or create any of the foregoing, on or affecting all or any part of a Property or any interest therein, or any direct interest in any Borrower, including any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, the filing of any financing statement, and mechanic’s, materialmen’s and other similar liens and encumbrances; provided, however, that “Lien” shall not include any Permitted Exceptions.
“Loan” has the meaning given to such term in the Recitals.
“Loan Administration Fee” has the meaning given to such term in Section 2.5(c).
“Loan Documents” means: this Agreement; the Note or Notes; each Guaranty; the Environmental Indemnity; each Security Instrument; each Assignment of Rents; the Operating Account Agreement; the Assignment of Agreements; the Pledge Agreement; the Assignment of Management Agreement; the Assignment of Interest Rate Agreement; the Post-Closing Agreement; the Closing Escrow Agreement; the Uniform Commercial Code financing statements; such estoppel certificates and subordination, nondisturbance and attornment agreements to which any Borrower is a party regarding any existing Leases as may be required or otherwise requested by Agent; all other documents evidencing, securing, governing or otherwise pertaining to the Loan and the other

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Obligations, including but not limited to any Note executed by Borrowers, any post-closing agreement by and between Borrowers and Agent (but excluding any agreement exclusively among Agent and Lenders) and all amendments, restatements, modifications, renewals, substitutions and replacements of any of the foregoing.
“Loan Expenses” means all amounts described in Section 7.2 of this Agreement and any other costs or expenses identified as Loan Expenses in this Agreement or any other Loan Document.
“Loan Origination Fee” has the meaning given to such term in Section 2.2.
“Loan Proceeds” means all amounts advanced as part of the Loan, whether advanced directly to Borrowers or otherwise.
“Loan to Value Ratio” means, as of any date of determination, the ratio computed as follows: (i) the numerator of the ratio shall be equal to the outstanding principal balance of the Loan and (ii) the denominator of the ratio shall be the aggregate “as is” value of the Portfolio based upon Appraisals.
“Mandated Plan” has the meaning given to such term in Section 5.40(f).
“Major FF&E” means any FF&E and other capital expenditures requiring material installation or construction work to be performed, including, without limitation, work to mechanical systems and boilers, building systems, elevators, roofing and structures.
“Major Lease” means any Lease which covers or would demise 1,500 rentable square feet or more of space at a Property.
“Marina Lease” has the meaning given to such term in Section 5.40(c).
“Material Adverse Change” means any development, event, condition, obligation, liability or circumstance or set of events, conditions, obligations, liabilities or circumstances or any change(s) which, as determined by Agent in the exercise of Permitted Discretion:
(a)    has prevented or materially impeded or limited, or reasonably could be expected to prevent or materially impede or limit, the enforceability or validity of any Loan Document, the perfection or priority of any Lien created under any Loan Document or the remedies of Agent under any Loan Document;
(b)    has been, or reasonably could be expected to be, material and adverse to the ownership, use enjoyment or value of any material portion of the Collateral taken as a whole, or to the business, operations, prospects, properties, assets, liabilities or condition (financial or otherwise) of any Borrower or any Guarantor taken as a whole; or
(c)    has materially impaired, or reasonably could be expected to materially impair, the ability of any Borrower or any Guarantor, taken as a whole, to pay or perform any of its respective Obligations under the Loan Documents.

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“Material Contract” means each Property Management Agreement, any Franchise Agreement and, other than Construction Contracts, each contract and agreement relating to the ownership, management, development, use, operation, leasing, maintenance, repair or improvement of any Property or any other contract and/or agreement for a Property, in each case that provides for payments to or by any Borrower or the Property Manager in excess of $200,000 per annum.
“Material Subcontract” means each subcontract for Property Improvements that provides for payments to or by any Borrower in excess of $200,000.
“Maturity Date” means the Monthly Payment Date in January 2019 (as such Maturity Date may be extended pursuant to Section 2.12 hereof) or such earlier date on which the final payment of principal of the Loan becomes due and payable as herein provided, whether by declaration of acceleration, or otherwise.
“Maximum Loan Amount” means $80,000,000.
“Membership Interest Sale” means the sale and transfer of forty-five percent (45%) of the Equity Interests of Parent by RLH to Shelbourne Investors.
“Membership Interest Sale Price” means a cash purchase price (including transaction expenses) for the Membership Interest Sale of not less than $18,500,000.
“Minimum Interest” means Six Million and No/100 Dollars ($6,000,000.00).
“Monthly Payment Date” means the 20th day of each calendar month (or, if such 20th day is not a Business Day, then the first Business Day thereafter).
“New Lending Office” has the meaning given to such term in Section 7.30(f).
“Note” or “Notes” means any promissory note or notes, in form and substance satisfactory to Agent in its sole discretion, executed and delivered by Borrowers and payable to the order of Agent, for the benefit of Lenders, in an aggregate principal amount equal to the stated principal amount of the Loan.
“Obligations” means the Indebtedness and all other obligations (other than payment of the Indebtedness) of any Borrower Party under any of the Loan Documents or under any Bank Products Agreement.
“Obligors” has the meaning given to such term in Section 2.8.
“OFAC” means the U.S. Department of Treasury’s Office of Foreign Asset Control.
“Olympia Building” means the 192-key “Red Lion Hotel” flagged hotel located on the Olympia Land.

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“Olympia Land” means that certain parcel or parcels of real estate located in Olympia, Washington, legally described in Exhibit A-5 to this Agreement, together with all easements and other rights appurtenant thereto.
“Olympia PropCo” has the meaning given to such term in the introductory paragraph of this Agreement.
“Olympia Property” means the Olympia Land, Olympia Building and all Improvements, Personal Property, Fixtures and related facilities and amenities, now or hereafter located on, or relating to the Olympia Land and the operation thereof, but excluding any removable personal property owned by any occupant thereof other than Olympia PropCo on the date in question.
“Operating Account” means those accounts with account numbers set forth on Schedule A and held at Cash Management Bank in the name of the applicable Borrower, set forth on Schedule A.
“Operating Account Agreement” means that certain Blocked Account Control Agreement (Shifting Control) dated on or about the date hereof among Borrowers, Agent and Cash Management Bank, as the same may be amended, restated, supplemented, replaced or otherwise modified from time to time.
“Operating Cash Flow” means, during any applicable period of time, all Operating Revenues from the Portfolio less Operating Expenses for the Portfolio.
“Operating Expenses” means, with respect to the period being measured, all reasonable and necessary expenses of operating the Portfolio in the ordinary course of business which are paid by or on behalf of Borrowers (which, for the avoidance of doubt shall not include any asset management fees or any similar fees due and owing to any Affiliate of any Borrower except as approved in the Loan Documents or otherwise approved by Agent in the exercise of Permitted Discretion) and which are directly associated with and fairly allocable to the Portfolio for the applicable period, including ad valorem real estate taxes and assessments, insurance premiums, utilities, maintenance costs, accounting, legal, property management fees payable pursuant to the Property Management Agreement (including non-customary management fees such as construction management fees provided for in the applicable Approved Operating Budget or as otherwise approved by Agent), franchise fees payable pursuant to any Franchise Agreements, and other professional fees and marketing expenses, amounts required to be deposited in the FF&E Reserve, and expenses incurred by Agent and reimbursed by Borrowers under this Agreement and the other Loan Documents; but excluding capital expenses, Debt Service, any of the foregoing expenses which are paid from deposits to cash reserves (if any) paid to Agent and previously included as Operating Expenses, any payment or expense for which Borrowers were or are to be reimbursed from proceeds of the Loan (including any disbursements from a Reserve funded from Loan proceeds) or insurance or by any third party, any non-cash charges such as depreciation and amortization, and any cost or expense reasonably rejected or reasonably not permitted by Agent under this Agreement or the Loan Documents or in any subsequent writing by Agent. Operating Expenses shall also not include federal, state or local income taxes or legal and other professional fees unrelated to the operation of the Properties.

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“Operating Revenues” means, with respect to the period being measured, all cash receipts of Borrower from Hotel Transactions and Leases in place for the Portfolio, and other items of revenue derived by Borrower from the Portfolio from any source, including, without limitation, all revenues collected from vending machines and any concessions, but excluding (i) security deposits and earnest money deposits until they are forfeited by the depositor, (ii) advance rentals until they are earned, (iii) rents due and payable under any Lease which are more than thirty (30) days delinquent, (iv) proceeds from a sale or financing, (v) extraordinary items of income, such as those resulting from casualty or condemnation or lease termination payments of tenants, (vi) any cash receipts or revenues of Borrower resulting from any Leases for which the underlying tenant is the subject of a Bankruptcy Proceeding, and (vii) any cash receipts or revenues of Borrower resulting from any Leases for which the underlying tenant is not currently occupying and conducting its normal business within the applicable leased space.
“Other Taxes” has the meaning given to such term in Section 7.30(b).
“PacWest” means Pacific Western Bank, a California state-chartered bank.
“Parent” means RL Venture LLC, a Delaware limited liability company.
“Parent Operating Agreement” means (i) the Limited Liability Company Agreement of Parent, and (ii) upon closing of the Membership Interest Sale, the Amended and Restated Limited Liability Company Agreement of Parent, as may be amended, restated or modified from time to time in accordance with this Agreement.
“Parking Lease” has the meaning given to such term in Section 5.40(d).
“Participant” has the meaning given to such term in Section 7.25(b).
“Pasco Building” means the 279-key “Red Lion Hotel” flagged hotel located on the Pasco Land.
“Pasco Land” means that certain parcel or parcels of real estate located in Pasco, Washington, legally described in Exhibit A-6 to this Agreement, together with all easements and other rights appurtenant thereto.
“Pasco PropCo” has the meaning given to such term in the introductory paragraph of this Agreement.
“Pasco Property” means the Pasco Land, Pasco Building and all Improvements, Personal Property, Fixtures and related facilities and amenities, now or hereafter located on, or relating to the Pasco Land and the operation thereof, but excluding any removable personal property owned by any occupant thereof other than Pasco PropCo on the date in question.
“Pasco VCP” has the meaning given to such term in Section 5.40(e).
“Past Due Charge” has the meaning given to such term in Section 2.4.

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“Patriot Act” shall mean the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Title III of Pub. L. 107-56 (signed into law October 26, 2001), as amended.
“Permitted Debt” has the meaning given to such term in Section 4.1(q).
“Permitted Discretion” means a determination or judgment made in good faith in the exercise of reasonable (from the perspective of a secured lender) credit or business judgment.
“Permitted Exceptions” means and includes (a) applicable zoning and building ordinances and land use regulations; (b) the lien of taxes and assessments for the year 2014 and subsequent years not yet due and payable; (c) any documents or matters listed on Schedule B of the Title Policy with respect to any Property, as approved by Agent, (d) matters as shown on the Survey; (e) any Liens in favor of Agent, and (f) Liens otherwise permitted under Section 5.8 or approved by Agent under Section 5.20.
“Permitted Transfer” has the meaning given to such term in Section 5.18(b).
“Person” means any individual, corporation, partnership, joint venture, association, joint stock company, trust, trustee, estate, limited liability company, unincorporated organization, real estate investment trust, government or any agency or political subdivision thereof, or any other form of entity.
“Personal Property” means, collectively, the tangible personal property described in each Security Instrument.
“PIP Backup” has the meaning given to such term in Section 3.2(a)(ii).
“PIP Bucket” means each of the First PIP Bucket, the Second PIP Bucket, the Third PIP Bucket and the Final PIP Bucket.
“PIP Reserve” has the meaning given to such term in Section 3.2(a)(i).
“Pledge Agreement” means that certain Pledge Agreement, dated as of the date hereof, executed by Parent in favor of Agent for the benefit of Lenders, as the same may be modified, amended or restated from time to time.
“Policy” or “Policies” has the meaning given to such term in Exhibit D, attached hereto and made a part hereof.
“Port Angeles Building” means the 186-key “Red Lion Hotel” flagged hotel located on the Port Angeles Land.
“Port Angeles Land” means that certain parcel or parcels of real estate located in Port Angeles, Washington, legally described in Exhibit A-7 to this Agreement, together with all easements and other rights appurtenant thereto.

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“Port Angeles PropCo” has the meaning given to such term in the introductory paragraph of this Agreement.
“Port Angeles Property” means the Port Angeles Land, Port Angeles Building and all Improvements, Personal Property, Fixtures and related facilities and amenities, now or hereafter located on, or relating to the Port Angeles Land and the operation thereof, but excluding any removable personal property owned by any occupant thereof other than Port Angeles PropCo on the date in question.
“Port Angeles VCP” has the meaning given to such term in Section 5.40(f).
“Portfolio” means all of the Properties taken as a whole, but excluding from and after the date of release any Property against which Agent previously released its Lien in accordance with Section 2.13 of this Agreement.
“Post-Closing Agreement” means that certain Post-Closing Agreement among Borrowers and Agent of even date herewith, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“Post Falls Building” means the 163-key “Red Lion Hotel” flagged hotel located on the Post Falls Land.
“Post Falls Land” means that certain parcel or parcels of real estate located in Post Falls, Idaho, legally described in Exhibit A-8 to this Agreement, together with all easements and other rights appurtenant thereto.
“Post Falls PropCo” has the meaning given to such term in the introductory paragraph of this Agreement.
“Post Falls Property” means the Post Falls Land, Post Falls Building and all Improvements, Personal Property, Fixtures and related facilities and amenities, now or hereafter located on, or relating to the Post Falls Land and the operation thereof, but excluding any removable personal property owned by any occupant thereof other than Post Falls PropCo on the date in question.
“Prepayment Premium” has the meaning given to such term in Section 2.7(a).
“Pro Rata Share” means, with respect to any Lender at any time, the proportionate interest of such Lender in the Loan as the same may be adjusted from time to time among the Lenders.
“Proceeding” has the meaning given to such term in Section 7.3(c).
“PropCo Borrower” or “PropCo Borrowers” means, individually and collectively, respectively, Bend PropCo, Boise PropCo, Coos Bay PropCo, Eureka PropCo, Olympia PropCo, Pasco PropCo, Port Angeles PropCo, Post Falls PropCo, Redding PropCo, Richland PropCo, Salt Lake PropCo and Spokane PropCo, and their permitted successors and assigns.

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“Property” or “Properties” means, individually and collectively, respectively, Bend Property, Boise Property, Coos Bay Property, Eureka Property, Olympia Property, Pasco Property, Port Angeles Property, Post Falls Property, Redding Property, Richland Property, Salt Lake Property and Spokane Property.
“Property Claim Proceeds” has the meaning given to such term in Section 5.13(a)(i).
“Property Improvement Plan and Budget” means, individually and collectively, each improvements expenditure budget and plan for the Property Improvements for each Property attached hereto as Exhibit F, as the same may be modified from time to time in accordance with this Agreement.
“Property Improvements” means the improvements to each Property identified and described on the Property Improvement Plan and Budget.
“Property Management Agreement” means individually and collectively, (i) that certain Operating Agreement, between Property Manager and Bend PropCo dated as of the date hereof, (ii) that certain Operating Agreement, between Property Manager and Boise PropCo dated as of the date hereof, (iii) that certain Operating Agreement, between Property Manager and Coos Bay PropCo dated as of the date hereof, (iv) that certain Operating Agreement, between Property Manager and Eureka PropCo dated as of the date hereof, (v) that certain Operating Agreement, between Property Manager and Olympia PropCo dated as of the date hereof, (vi) that certain Operating Agreement, between Property Manager and Pasco PropCo dated as of the date hereof, (vii) that certain Operating Agreement, between Property Manager and Port Angeles PropCo dated as of the date hereof, (viii) that certain Operating Agreement, between Property Manager and Post Falls PropCo dated as of the date hereof, (ix) that certain Operating Agreement, between Property Manager and Redding PropCo dated as of the date hereof, (x) that certain Operating Agreement, between Property Manager and Richland PropCo dated as of the date hereof, (xi) that certain Operating Agreement, between Property Manager and Salt Lake PropCo dated as of the date hereof, and (xii) that certain Operating Agreement, between Property Manager and Spokane PropCo dated as of the date hereof, as the same may be modified, amended, restated or replaced from time to time as permitted herein.
“Property Manager” means Red Lion Hotels Management, Inc., a Washington corporation, or such other Person as Agent may approve in its Permitted Discretion providing property management services in connection with a Property.
“Protective Advance” means any advance deemed necessary or appropriate in Agent’s sole and exclusive discretion to protect or preserve the value of the Collateral, Agent’s lien priority with respect to the Collateral and to ensure the Collateral’s compliance with Legal Requirements. A Protective Advance shall include any advances, as determined in Agent’s sole and exclusive discretion, to (a) avoid an imminent threat to any lien created under the Loan Documents or to the priority of any such lien, (b) avoid any imminent and significant threat to the value of a Property or the interests of the Lenders in the Loan, or (c) to protect against an imminent risk to the health or safety of individuals at a Property.

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“Public Control Affiliate” means any Person owning more than fifty percent (50%) of the direct Equity Interests in RLH.
“Quarter” means any calendar quarter ending on March 31, June 30, September 30 or December 31.
“Redding Building” means the 192-key hotel located on the Redding Land.
“Redding Land” means that certain parcel or parcels of real estate located in Redding, California, legally described in Exhibit A-9 to this Agreement, together with all easements and other rights appurtenant thereto.
“Redding PropCo” has the meaning given to such term in the introductory paragraph of this Agreement.
“Redding Property” means the Redding Land, Redding Building and all Improvements, Personal Property, Fixtures and related facilities and amenities, now or hereafter located on, or relating to the Redding Land and the operation thereof, but excluding any removable personal property owned by any occupant thereof other than Redding PropCo on the date in question.
“Register” has the meaning given to such term in Section 7.25(c). “Reimbursement Party” has the meaning given to such term in Section 7.2.
“Release Date” has the meaning given to such term in Section 2.13.
“Release Exit Fee” means, with respect to any Property, a sum equal to the product determined by multiplying (a) one half percent (0.5%) by (b) the Allocated Loan Amount for such Property.
“Release Notice” has the meaning given to such term in Section 2.13.
“Release Price” means, as it relates to each Property, an amount equal to the greater of (a) one hundred twenty percent (120%) of the Allocated Loan Amount for such Property, or (b) ninety percent (90%) of net sales proceeds for such Property as determined by Lender; provided, however, that if the Loan to Value Ratio is less than 50% at the time of the release of such Property, then the Release Price for such Property shall be the greater of (i) one hundred twenty percent (120%) of the Allocated Loan Amount for such Property, or (ii) seventy-five percent (75%) of net sales proceeds for such Property as determined by Lender.
“Rent Roll” has the meaning given to such term in Section 4.1(bb).
“Reserves” means the funded and unfunded reserves established under Section 3.2 or elsewhere in this Agreement, including the PIP Reserve, the Tax and Insurance Reserve, the Deferred Maintenance Reserve, the FF&E Reserve, the Seasonality Reserve and the Environmental Reserve.
“Restoration Threshold” has the meaning given to such term in Section 5.12(d).

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“Richland Building” means the 149-key “Red Lion Hotel” flagged hotel located on the Richland Land.
“Richland Land” means that certain parcel or parcels of real estate located in Richland, Washington, legally described in Exhibit A-10 to this Agreement, together with all easements and other rights appurtenant thereto.
“Richland PropCo” has the meaning given to such term in the introductory paragraph of this Agreement.
“Richland Property” means the Richland Land, Richland Building and all Improvements, Personal Property, Fixtures and related facilities and amenities, now or hereafter located on, or relating to the Richland Land and the operation thereof, but excluding any removable personal property owned by any occupant thereof other than Richland PropCo on the date in question.
“RLH” means Red Lion Hotels Corporation, a Washington corporation.
“Salt Lake Building” means the 393-key “Red Lion Hotel” flagged hotel located on the Salt Lake Land.
“Salt Lake Land” means that certain parcel or parcels of real estate located in Salt Lake City, Utah, legally described in Exhibit A-11 to this Agreement, together with all easements and other rights appurtenant thereto.
“Salt Lake PropCo” has the meaning given to such term in the introductory paragraph of this Agreement.
“Salt Lake Property” means the Salt Lake Land, Salt Lake Building and all Improvements, Personal Property, Fixtures and related facilities and amenities, now or hereafter located on, or relating to the Salt Lake Land and the operation thereof, but excluding any removable personal property owned by any occupant thereof other than Salt Lake PropCo on the date in question.
“Seasonality Reserve” has the meaning given to such term in Section 3.2(e).
“Seasonality Reserve Required Balance” means, for any calendar year, an amount equal to the sum of (i) one-hundred ten percent (110%) of the projected monthly shortfall in Operating Cash Flow, if any, for the calendar months of June through December, as determined by the Approved Operating Budget for such calendar year and (ii) one-hundred ten percent (110%) of the actual shortfall in Operating Cash Flow, if any, for the calendar months of January through May of such calendar year; provided, however, the Seasonality Reserve Required Balance for calendar year 2015 shall be $1,200,000.
“Seasonality Shortfall Amount” means, as determined on September 30th of each calendar year, the amount, if any, by which the balance of the Seasonality Reserve is less than the Seasonality Reserve Required Balance for such calendar year; provided, however, the Seasonality Shortfall Amount for any calendar year, shall be capped at an amount equal to the amount of the positive Operating Cash Flow for the Portfolio for the twelve (12) calendar months then ending.

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“Second Bucket PIP Backup” shall have the meaning given to such term in Section 3.2(a)(ii)(B).
“Second PIP Bucket” shall have the meaning given to such term in Section 3.2(a)(ii)(B).
“Security Instruments” means, collectively, (i) that certain Deed of Trust executed by Bend PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (ii) that certain Deed of Trust executed by Boise PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (iii) that certain Deed of Trust executed by Coos Bay PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (iv) that certain Deed of Trust executed by Eureka PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (v) that certain Deed of Trust executed by Olympia PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (vi) that certain Deed of Trust executed by Pasco PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (vii) that certain Deed of Trust executed by Port Angeles PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (viii) that certain Deed of Trust executed by Post Falls PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (ix) that certain Deed of Trust executed by Redding PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (x) that certain Deed of Trust executed by Richland PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (xi) that certain Deed of Trust executed by Salt Lake PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, (xii) that certain Deed of Trust executed by Spokane PropCo in favor of Agent for the benefit of Lenders, dated as of the date hereof, each as recorded in the jurisdiction where the applicable Property encumbered thereby is located and as may be amended, restated, extended or supplemented from time to time.
“Servicer” has the meaning given to such term in Section 7.29.
“Shelbourne Capital” means Shelbourne Capital LLC, a Delaware limited liability company.
“Shelbourne Investors” means Shelbourne Falcon RLHC Hotel Investors, LLC, a Delaware limited liability company.
“Single Purpose Entity” has the meaning given to such term in Exhibit C.
“Spokane Building” means the 400-key “Red Lion Hotel” flagged hotel located on the Spokane Land.
“Spokane Land” means that certain parcel or parcels of real estate located in Spokane, Washington, legally described in Exhibit A-12 to this Agreement, together with all easements and other rights appurtenant thereto.
“Spokane PropCo” has the meaning given to such term in the introductory paragraph of this Agreement.

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“Spokane Property” means the Spokane Land, Spokane Building and all Improvements, Personal Property, Fixtures and related facilities and amenities, now or hereafter located on, or relating to the Spokane Land and the operation thereof, but excluding any removable personal property owned by any occupant thereof other than Spokane PropCo on the date in question.
“Stored Materials” shall have the meaning given to such term in Section 3.2(a)(vii).
“Strike Price” has the meaning given to such term in Section 2.11(a).
“Survey” means, collectively, those surveys described on Schedule B hereto.
“Tax and Insurance Reserve” has the meaning given to such term in Section 3.2(b)(ii) of this Agreement.
“Tax Reserve” has the meaning given to such term in Section 3.2(b)(i) of this Agreement.
“Taxes” means all taxes, assessments, levies and charges imposed by any public or quasi-public authority having jurisdiction over a Property which are or may affect, or become a Lien upon, a Property or the rents, royalties, profits and income of a Property, or interest therein, or imposed by any Governmental Authority upon Borrower or Agent by reason of their respective interests in a Property or by reason of any payment, or portion thereof, made to Agent hereunder or pursuant to any Obligation or any of the other Loan Documents, other than taxes which are measured by and imposed upon Agent’s general net income.
“Tenant” or “Tenants” means, collectively or individually (as the context provides), any tenant or licensee from time to time party to any Lease of any Property.
“Term” means the entire term of this Agreement, which shall expire upon indefeasible repayment in full of the Indebtedness and full performance of each and every obligation to be performed by Borrower pursuant to the Loan Documents (other than those indemnification obligations and other inchoate obligations expressly stated to survive the repayment of the Indebtedness).
“Third Bucket PIP Backup” shall have the meaning given to such term in Section 3.2(a)(ii)(C).
“Third PIP Bucket” shall have the meaning given to such term in Section 3.2(a)(ii)(C).
“Title Policy” means those certain 2006 ALTA Mortgage Policies of Title Insurance issued by First American Title Insurance Company in the forms of the pro formas attached to the Closing Escrow Letter.
“Toxic Mold” means mold or fungus of a type that may pose a risk to human health or the environment or would negatively and materially impact the value of the Property.

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“Tranche A Property” means the Bend Property, Boise Property, Coos Bay Property, Eureka Property, Pasco Property, Port Angeles Property, Post Fall Property, Redding Property and Richland Property.
“Tranche B Property” means the Olympia Property, Salt Lake Property and Spokane Property.
“Transaction Persons” has the meaning given to such term in Section 4.1(d).
“Transfer” means the sale, transfer, hypothecation, encumbrance, mortgage, conveyance, Lease, alienation, assignment, disposition, divestment, or leasing with option to purchase, or assignment of a subject Property, or any portion thereof or interest therein (whether direct or indirect, legal or equitable, including the issuance, sale, assignment, alienation, conveyance, divestment, transfer, disposition, hypothecation, mortgage or encumbrance of any direct or indirect Equity Interest in any Borrower or in any entity having an Equity Interest in any Borrower, whether direct or indirect); or entering into any agreement or contract to do any of the foregoing which is not conditioned on compliance with the terms of the Loan Documents with respect to Transfers, or undertaking, suffering or causing any of the foregoing to occur voluntarily, involuntarily or by operation of law. Notwithstanding the foregoing, the following shall not constitute a “Transfer”; (i) Hotel Transactions, (ii) changes in the ownership of stock in a publicly-traded entity and (iii) the Membership Interest Sale.
“Transferee” has the meaning given to such term in Section 7.25(a).
“UCC” means the Uniform Commercial Code as in effect in the State of New York; provided that, if perfection or the effect of perfection or nonperfection or the priority of any security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, “UCC” means the Uniform Commercial Code as in effect from time to time in such other jurisdiction for purposes of the provisions hereof relating to such perfection, effect of perfection or non-perfection or priority.
“WDOE” has the meaning given to such term in Section 5.40(e).
ARTICLE 2    
THE LOAN; INTEREST RATE; PAYMENTS.
Subject to the terms and provisions of this Agreement and the other Loan Documents, each Lender hereby agrees to make, and Borrower hereby promises to repay to each Lender, such Lender’s Pro Rata Share of the Loan. All proceeds of the Loan shall be funded pursuant to, and repaid in accordance with, the terms of this Agreement and the other Loan Documents.
Section 2.1    Evidence of Loan.
(a)    Agent shall maintain, in accordance with its usual practice, true, correct and complete electronic or written records evidencing the outstanding Indebtedness owed by Borrower to the Lenders hereunder and under each of the other Loan Documents, including without limitation

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the amount of principal and interest payable and paid to each Lender from time to time under this Agreement.
(b)    The entries made in the electronic or written records maintained pursuant to this Section 2.1 shall be prima facie evidence of the existence and amounts of the Indebtedness therein recorded; provided, however, that the failure of the Agent to maintain such records or any error therein shall not in any manner affect the obligation of Borrower to repay the correct amount owed pursuant to the Loan, including all disbursements made hereunder and all other Obligations of Borrower hereunder or under any other Loan Document, in accordance with the terms of this Agreement and the other Loan Documents.
(c)    Agent will account to Borrower monthly with a written statement of the amount outstanding under the Loan, the balance of the Reserves and any charges and payments made pursuant to this Agreement or any other Loan Document; provided, however, that the failure of Agent to provide such written statement shall not constitute a default or breach by Agent of this Agreement or any other Loan Documents or excuse the timely payment of all Indebtedness due and payable. In the absence of manifest error, such accounting rendered by Agent shall be deemed final, binding and conclusive, unless Agent is notified by Borrower in writing to the contrary within thirty (30) calendar days of receipt of each accounting, which notice shall be deemed an objection only to items specifically objected to therein.
Section 2.2    Initial Advance of the Loan; Loan Origination Fee. Upon the Closing of the Loan, Lenders shall disburse the initial advance in an amount equal to Fifty-Three Million Eight Hundred Seven Thousand Twenty-Three and 00/100 Dollars ($53,807,023.00) (the “Initial Advance”). Such advance of the Loan shall include payment to Agent for the benefit of the Lenders of a loan origination fee in the amount of Eight Hundred Thousand and 00/100 Dollars ($800,000.00) (the “Loan Origination Fee”). Borrower hereby authorizes and directs Agent to pay itself the Loan Origination Fee out of the proceeds of the Initial Advance. The Loan is not a revolving credit facility and therefore, may not be drawn, repaid and redrawn. Any payments of principal on the Loan shall be applied to permanently reduce the Loan in accordance with this Agreement and, once repaid, no portion of the Loan may be re-borrowed.
Section 2.3    Interest Rate. The outstanding principal balance under the Loan shall bear interest at the Contract Rate. Whenever, subsequent to the date hereof, the LIBOR Rate is increased or decreased, the Contract Rate, as set forth herein, shall be similarly changed without notice or demand of any kind by an amount equal to the amount of such change in the LIBOR Rate on the day of such change. The monthly interest due on the principal balance of the Loan outstanding shall be computed for the actual number of days elapsed during the month in question on the basis of a year consisting of three hundred sixty (360) days and shall be calculated by determining the average daily principal balance outstanding for each day of the month in question. The daily rate shall be equal to 1/360th times the Contract Rate. If any statement furnished by Agent for the amount of a monthly payment due exceeded the actual amount that should have been paid because the LIBOR Rate decreased and such decrease was not reflected in the monthly statement, Borrower shall make the payment specified in the monthly statement from Agent and Borrower shall receive a credit for the overpayment, which credit shall be applied towards the next subsequent monthly

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payment due hereunder. If any statement furnished by Agent for the amount of a monthly payment due was less than the actual amount that should have been paid because the LIBOR Rate increased and such increase was not reflected in the monthly statement, Borrower shall make the payment specified in the monthly statement from Agent and Borrower shall be required to pay any resulting underpayment with the next subsequent monthly payment due hereunder.
Section 2.4    Past Due Charge and Default Interest Rate. Borrower recognizes and acknowledges that any default on any payment, or portion thereof, due hereunder or to be made under any of the other Loan Documents, will result in losses and additional expenses to Agent in servicing the Indebtedness, and in losses due to Lenders’ loss of the use of funds not timely received. If for any reason Borrower fails to pay any interest or principal or any other sum required to be paid under this Agreement when due, excluding any payment due at maturity or upon acceleration, or fails to pay any amounts due under any of the other Loan Documents when due, then (in lieu of damages for any detriment proximately caused thereby which would be extremely difficult and impracticable to ascertain or compute) Borrower shall pay to Agent on behalf of the Lenders, in addition to any such delinquent payment, an amount equal to five percent (5%) of such delinquent payment or the maximum amount permitted by applicable law (“Past Due Charge”). In addition, upon the Maturity Date and upon the occurrence and during the existence of an Event of Default (or upon any acceleration), interest shall automatically accrue hereunder, without notice to Borrower, at the Default Rate. The Default Rate shall be calculated and due from the date that the Default occurred which led to the Event of Default without regard to any grace or cure period as may be applicable, and shall be payable upon demand.
Section 2.5    Payments of Principal and Interest; Fees.
(a)    Initial Payment of Interest. On the Closing Date, Borrower shall pay to Agent for the benefit of the Lenders interest in advance at the Contract Rate for the period of time from and including such date through (but excluding) the Monthly Payment Date in January 2015 based upon the Initial Advance.
(b)    Monthly Payments of Principal and Interest. Commencing on the Monthly Payment Date in February 2015 and continuing on each Monthly Payment Date through and including the month in which the Maturity Date occurs, Borrower hereby promises to pay monthly installments of interest as calculated in accordance with Section 2.4 above, and such interest shall be payable in arrears. In addition to the monthly payments of interest as set forth in the preceding sentence, commencing on the Monthly Payment Date in January 2017, and continuing on each Monthly Payment Date thereafter, Borrower shall pay to Agent for the benefit of the Lenders monthly payments of principal equal to the amount necessary to repay the outstanding principal balance of the Loan over a twenty-five (25) year amortization period based on the Contract Rate as of the date of each required monthly principal payment. Any partial prepayment of the Loan shall reduce the amount of any monthly principal amortization payment required pursuant to the preceding sentence (but this shall not be construed as permitting any partial prepayment other than as may be expressly permitted elsewhere in this Agreement), such that from and after such partial prepayment, the monthly principal amortization payment shall be recalculated by amortizing the outstanding

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principal balance of the Loan following such partial prepayment over the then-remaining amortization period.
(c)    Loan Administration Fee. In addition to the payments of principal and interest set forth above, Borrower shall pay to Agent, for its own benefit, a monthly administrative fee (the “Loan Administration Fee”) of $3,333.33 on each Monthly Payment Date.
(d)    Exit Fee. Upon the earlier to occur of (i) the Maturity Date, or (ii) the prepayment in full of the Loan, Borrower shall pay to Agent, for the benefit of Lenders, the Exit Fee, which shall be deemed to be fully-earned by Lenders on the Closing Date; provided, however, the Exit Fee shall be reduced by an amount equal to the aggregate of all Release Exit Fees, if any, actually paid by Borrower to Agent prior to the date on which the Exit Fee is due pursuant to this Section.
(e)    Business Days. Whenever in this Agreement or any other Loan Document any payment is required to be made on a date that is not a Business Day, such payment shall be made on the first Business Day after such date (and any such extension of time shall be included in the computation of payment of interest (including interest at the Default Rate)).
(f)    Additional Interest. All fees payable by Borrower hereunder, including but not limited to the Loan Origination Fee, the Loan Administration Fee and any Prepayment Premium, shall be deemed additional interest payable hereunder; provided however, in no event shall such fees be included as interest for purposes of calculating Debt Service, DSCR Debt Service or Debt Yield. Notwithstanding the foregoing, any payments made by Borrower to reimburse Agent and Lenders for any costs or expenses incurred by such parties and payable by Borrower pursuant to the terms of this Agreement shall not be deemed additional interest hereunder.
(g)    U.S. Funds. The Loan is denominated and payable solely in United States Dollars.
(h)    Wire Transfer Instructions. Absent written instruction to the contrary from Agent, Borrower shall make all payments to Agent for the benefit of Lenders by wire transfer pursuant to the following instructions:
Bank: Bank of America, NY
ABA#: 026009593
Account #: 003938703751
Account Name: CapitalSource Funding SFG
Reference: Red Lion
Section 2.6    Maturity Date.
The entire balance of principal and accrued interest and other amounts then outstanding under the Loan are due and payable on the Maturity Date. Borrowers acknowledge that such amount will equal the outstanding principal balance of the Loan, accrued and unpaid interest and all other amounts due and owing under this Agreement and the other Loan Documents.

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Section 2.7    Prepayment and Repayment Fees.
(a)    Permitted Prepayments. Borrowers shall not prepay the Loan in full or in part at any time except as permitted by and in accordance with this Section 2.7(a).
(i)    Any prepayment of the Loan in full shall only be permitted after not less than sixty (60) days’ advance written notice, nor more than one-hundred twenty (120) days’ advance written notice to Agent, which notice in each instance shall specify Borrowers’ election to make such prepayment. Any such prepayment in full of the Loan shall include payment of a prepayment premium to be calculated as follows (the “Prepayment Premium”):
(B)    If such prepayment is made on or before January 15, 2017, an amount equal to the greater of (A) one percent (1.0%) of the Maximum Loan Amount or (B) the Minimum Interest the less the Aggregate Yield Amount as of the date of such prepayment.
(C)    If such prepayment is made after January 15, 2017 but prior to July 15, 2017, an amount equal to the greater of (A) one-half of one percent (0.5%) of the Maximum Loan Amount, or (B) the Minimum Interest less the Aggregate Yield Amount as of the date of such prepayment; or
(D)    If such prepayment is made after July 15, 2017 but prior to Maturity Date, an amount equal to the Minimum Interest less the Aggregate Yield Amount as of the date of such prepayment.
(ii)    Borrower shall not make any partial prepayment of the Loan except as expressly permitted by this Agreement (including, without limitation, prepayments in connection with a release of a Property pursuant to Section 2.13 or as permitted by Section 3.4(d), Section 5.26 and Section 5.27).
(b)    Acceleration. If the Loan is accelerated following the occurrence of an Event of Default, Borrower shall pay to Agent for the benefit of the Lenders, in addition to all other amounts outstanding under the Loan Documents a Prepayment Premium equal to the Prepayment Premium that would be payable upon a voluntary prepayment of the Loan as of the date of acceleration.
(c)    Acknowledgment of Borrower. Borrower, Agent and Lenders acknowledge that the Prepayment Premium required by this Section is compensation to Agent and Lenders for the cost of reinvesting the Loan Proceeds and for the loss of the contracted rate of return on the Loan. Furthermore, Borrower, Agent and Lenders acknowledge that the loss that may be sustained by Agent and Lenders as a result of such a prepayment by Borrower or acceleration of the Loan is not susceptible of precise calculation and the Prepayment Premium represents the good faith effort of Borrower, Agent and Lenders to compensate Agent and Lenders for such loss.
(d)    Casualty. No Prepayment Premium shall be due in connection with any prepayment of the Loan as a result of casualty or condemnation.

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Section 2.8    Indebtedness Absolute; No Offset; Waiver. The payment obligations of Borrower hereunder are absolute and unconditional, without any right of rescission, setoff, counterclaim or defense for any reason against Agent and Lenders. As of the Closing Date, the Loan has not been compromised, adjusted, extended, satisfied, rescinded, set-off or modified, and the Loan Documents are not subject to any litigation, dispute, refund, claims of rescission, setoff, netting, counterclaim or defense whatsoever, including but not limited to, claims by or against Borrower, Guarantor or any other party. Payment of the Indebtedness by Borrower, when due and payable pursuant to the terms of this Agreement and the other Loan Documents, is not subject to compromise, adjustment, extension, satisfaction, rescission, set-off, counterclaim, defense, abatement, suspension, deferment, deductible, reduction, termination or modification, whether arising out of transactions concerning the Loan, or otherwise. Without limitation to the forgoing, to the fullest extent permitted under applicable law and notwithstanding any other term or provision contained in this Agreement or any other Loan Document, Borrower hereby waives (and shall cause each Borrower Party to waive) (a) presentment, protest and demand, notice of default (except as expressly required in the Loan Documents), notice of intent to accelerate, notice of acceleration, notice of protest, notice of demand (except as expressly required in the Loan Documents) and of dishonor and non-payment of the Indebtedness, (b) any requirement of diligence or promptness on Agent’s part in the enforcement of its rights under the provisions of this Agreement and any other Loan Document, (c) any rights, legal or equitable, to require any marshalling of assets or to require foreclosure sales in a particular order, (d) all notices of every kind and description which may be required to be given by any statute or rule of law, (e) the benefit of all laws now existing or that may hereafter be enacted providing for any appraisement before sale or any portion of the Collateral, (f) all rights of homestead, exemption, redemption, valuation, appraisement, stay of execution, notice of election to mature or declare due the whole of the Obligations in the event of foreclosure of the Liens created by the Loan Documents, (g) the pleading of any statute of limitations as a defense to any demand under any Loan Document and (h) any defense to the obligation to make any payments required under the Loan Documents, including the obligation to pay Taxes based on any damage to, defects in or destruction of the Collateral or any other event, including obsolescence of any of the Collateral, it being agreed and acknowledged that such payment obligations are unconditional and irrevocable. Borrower further acknowledges and agrees (i) to any substitution, subordination, exchange or release of any security or the release of any party primarily or secondarily liable for the payment of the Loan; (ii) that Agent shall not be required to first institute suit or exhaust its remedies hereon against others liable for repayment of all or any part of the Loan, whether primarily or secondarily (collectively, the “Obligors”), or to perfect or enforce its rights against any Obligor or any security for the Loan; and (iii) that its liability for payment of the Loan shall not be affected or impaired by any determination that any security interest or lien taken by Agent for the benefit of the Lenders to secure the Loan is invalid or unperfected. Borrower acknowledges, warrants and represents in connection with each waiver of any right or remedy of Borrower contained in any Loan Document, that it has been fully informed with respect to, and represented by counsel of its choice in connection with, such rights and remedies, and all such waivers, and after such advice and consultation, has presently and actually intended, with full knowledge of its rights and remedies otherwise available at law or in equity, to waive or relinquish such rights and remedies to the full extent specified in each such waiver.

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Section 2.9    Lawful Limits. In no contingency or event whatsoever, whether by reason of acceleration or otherwise, shall the interest and other charges paid or agreed to be paid to Agent or the Lenders for the use, forbearance or detention of money hereunder exceed the maximum rate permissible under applicable law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. If, due to any circumstance whatsoever, fulfillment of any provision hereof, at the time performance of such provision shall be due, shall exceed any such limit, then, the obligation to be so fulfilled shall be reduced to such lawful limit, and, if Agent or any Lender shall have received interest or any other charges of any kind which might be deemed to be interest under applicable law in excess of the maximum lawful rate, then such excess shall be applied first to any unpaid fees and charges hereunder (to the extent not constituting interest under applicable law), then to unpaid principal balance owed by Borrower hereunder, and if the then remaining excess interest is greater than the previously unpaid principal balance, Agent shall promptly refund such excess amount to Borrower and the provisions hereof shall be deemed amended to provide for such permissible rate. The terms and provisions of this Section 2.9 shall control to the extent any other provision of any Loan Document is inconsistent herewith.
Section 2.10    Increased Costs; Capital Adequacy.
(a)    If any Change in Law shall:
(i)    impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Contract Rate);
(ii)    impose on any Lender or the London interbank market any other condition affecting this Loan Agreement or the Loan; or
(iii)    make it unlawful for Lender to make or maintain the indebtedness evidenced by the Loan in eurodollars;
and such Change in Law increases the cost to any Lender of making or maintaining the Loan (or of maintaining its obligation to make the Loan) or reduces the amount of any sum received or receivable by any Lender under this Loan Agreement (whether of principal, interest or otherwise), then Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered.
(b)    If at the time of or prior to any determination of the Contract Rate, Lender determines (which determination shall be conclusive in the absence of manifest error) that by reason of circumstances affecting the London interbank market generally, (i) deposits in United States Dollars in the relevant amounts and of the relevant maturity are unavailable to Lender in the London interbank market, (ii) the Contract Rate does not adequately or fairly reflect the cost to Lender of making or maintaining the Loan due to changes in administrative costs, fees, tariffs or taxes or other matters outside of Lender’s reasonable control or (iii) adequate and fair means do not or will not exist for determining the Contract Rate, then Lender shall promptly notify Borrower, and the Loan shall bear interest, and continue to bear interest until Lender determines in its Permitted Discretion that the applicable circumstance described in the foregoing clauses (i), (ii) or (iii) no longer pertains,

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at a fluctuating rate per annum based on a substitute index selected by Lender plus a suitable margin to approximate, in Lender’s good faith judgment, the return that Lender would have received if the circumstance had not occurred.
(c)    If any Lender determines in its Permitted Discretion that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Loan Agreement or the Loan made by such Lender to a level below that which such Lender or its holding company, as applicable, could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company, as applicable, with respect to capital adequacy), then from time to time Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender’s holding company, as applicable, for any such reduction suffered.
(d)    A certificate from any Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, under Sections 2.10(a) or 2.10(b), shall be delivered to Borrower and shall be conclusive absent manifest error. Borrower shall pay such Lender the amount shown as due on any such certificate within ten (10) days after receipt (the date of such payment being the “Increased Cost Payment Date”).
(e)    Failure or delay on the part of any Lender to demand compensation pursuant to this Section 2.10 shall not waive such Lender’s right to demand such compensation; provided that Borrower shall not be required to compensate such Lender under this Section 2.10 for any increased costs or reductions incurred more than ninety (90) days prior to the date any Lender notifies Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s intention to claim compensation for such increased costs or reduction; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then such 90-day period will be extended to include the period of such retroactive effect.
(f)    Notwithstanding anything to the contrary in this Loan Agreement, the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith shall be deemed to be a Change in Law and/or a change in capital adequacy requirements, as applicable, regardless of the date enacted, adopted or issued, provided, Borrower shall be treated in the same manner, with respect to this Subsection (f), as other similarly situated borrowers of such Lender.
(g)    Notwithstanding anything to the contrary in this Loan Agreement, if any Change in Law affects any Lender and results in Borrower having to pay additional amounts to such Lender to compensate such Lender for such additional costs incurred or reduction suffered, Borrower shall have the right to prepay the Loan in full, following payment to any Lender of amounts due under this Section 2.10 together with any Exit Fee, without the obligation to pay a Prepayment Premium. The election to prepay the Loan in full pursuant to this Section 2.10 shall be made in writing by Borrower not more than sixty (60) days after the Increased Cost Payment Date and such prepayment in full shall have been made within one hundred twenty (120) days of the Increased Cost Payment Date.

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Section 2.11    Interest Rate Protection. By no later than one (1) Business Day after the Closing Date, Holding shall have entered into, made all payments required under, and satisfied all conditions precedent to the effectiveness of, an interest rate protection agreement that satisfies all of the following conditions (such interest rate protection agreement, together with any replacements thereof, the “Interest Rate Protection Agreement”):
(a)    Such agreement (i) is with a financial institution having a long term, unsecured and unsubordinated debt rating of at least “A+” by S&P and “A1” by Moody’s (an “Acceptable Counterparty”); (ii) has a term ending no earlier than the third anniversary of the Closing Date; (iii) is an interest rate cap in respect of a notional amount not less $80,000,000 that shall have the effect of capping the LIBOR Rate at 4.0% per annum (the “Strike Price”); and (iv) provides that the only obligation of Borrower thereunder is the making of a single payment upon the execution and delivery thereof. On or before the expiration of any existing Interest Rate Protection Agreement, Holding shall enter into, make all payments required under and satisfy all conditions precedent to the effectiveness of an extension or replacement of such Interest Rate Protection Agreement in form and substance acceptable to Agent in its Permitted Discretion in incremental terms of at least one year such that the Interest Rate Protection Agreement, or an extension or replacement thereof, shall be in effect at all times during the Term.
(b)    Holding’s interest in such Interest Rate Protection Agreement has been assigned to Agent pursuant to the Assignment of Interest Rate Agreement, and the counterparty to such Interest Rate Protection Agreement has executed and delivered to Agent an acknowledgment of such assignment, which acknowledgment includes such counterparty’s agreement to pay directly to a Holding Operating Account all sums payable by such counterparty pursuant to the Interest Rate Protection Agreement and shall otherwise be satisfactory to Agent in form and substance in its Permitted Discretion. Holding shall assign any extended or replaced Interest Rate Protection Agreement to Agent pursuant to an assignment in form and substance similar to the Assignment of Interest Rate Protection Agreement.
(c)    In the event of any downgrade or withdrawal of the rating of the issuer or guarantor, as applicable, of the Interest Rate Protection Agreement below “A-” by S&P and “A3” by Moody’s, Holding shall either (i) cause such issuer or guarantor of the Interest Rate Protection Agreement to post collateral equivalent to the mark-to-market value of the cap or (ii) replace the Interest Rate Protection Agreement with a replacement Interest Rate Protection Agreement from an issuer rated (or guaranteed by a financial institution rate) at least “A-” by S&P and “A3” by Moody’s (with terms identical to the Interest Rate Protection Agreement being replaced, or otherwise approved by Agent in its Permitted Discretion), in either case not later than thirty (30) days following receipt of notice from Agent of such downgrade or withdrawal.
(d)    Holding shall promptly execute and deliver to the counterparty of the Interest Rate Protection Agreement such confirmations and agreements as may be requested by such counterparty in connection with such Interest Rate Protection Agreement.
(e)    Borrower agrees that Agent shall not have any obligation, duty or responsibility to Borrower or any other Person by reason of, or in connection with, any Interest Rate Protection Agreement (including any duty to provide or arrange any Interest Rate Protection

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Agreement, to consent to any mortgage or pledge of the Properties or any portion thereof as security for Borrower’s performance of its obligations under any Interest Rate Protection Agreement, or to provide any credit or financial support for the obligations of Borrower or any other Person thereunder or with respect thereto). No Interest Rate Protection Agreement shall alter, impair, restrict, limit or modify in any respect the obligation of Borrower to pay interest on the Loan as and when the same becomes due and payable in accordance with the provisions of the Loan Documents.
(f)    All payments due to Holding pursuant to any Interest Rate Protection Agreement, including upon any termination thereof, shall be made into the Holding Operating Account and applied pursuant to Section 3.4 hereof. If an Event of Default occurs and is continuing, Agent may, in its sole discretion, in addition to any other rights and remedies hereunder, apply the amounts so held by Agent to the Loan or other amounts due under the Loan Documents at Agent’s election. Until such time as the Obligations have been paid in full, Holding shall have no right to direct the payment by the counterparty of any funds payable on account of any Interest Rate Protection Agreement. Such funds shall constitute additional security for the Obligations. In the event Holding receives any sums pursuant to or in connection with any Interest Rate Protection Agreement, it shall promptly deposit such sums into the Holding Operating Account.
Borrower shall cause the issuer of such Interest Rate Protection Agreement to deliver, within the time period set forth on the Post-Closing Agreement, an opinion of counsel from the counsel (in-house or independent) for such issuer, upon which Agent and its successors and assigns may rely, which shall be in form and substance satisfactory to Agent in its Permitted Discretion.
Section 2.12    Extension of Maturity Date. Borrowers may request that Agent grant one extension of the Maturity Date for a period of twelve (12) months in accordance with the requirements below. Such extension request shall be granted to Borrower upon the satisfaction of the following conditions:
(a)    Borrowers shall have delivered to Agent a written request to extend the Maturity Date at least sixty (60) but not more than one-hundred-twenty (120) calendar days prior to the current Maturity Date;
(b)    Borrowers shall have delivered to Agent, concurrently with making the written extension request in clause (a) above, an extension fee equal to one-half of one percent (0.5%) of the Maximum Loan Amount;
(c)    on the date of the effectiveness of such extension of the Maturity Date, Agent shall have determined, in its Permitted Discretion, the outstanding principal balance of the Loan does not exceed the lower of (i) sixty percent (60%) of the aggregate “as-is” value of the Properties, and (ii) fifty-five percent (55%) of the stabilized value of the Properties (based upon an Appraisal ordered by Agent at Borrower’s cost, acceptable to Agent in its Permitted Discretion);
(d)    on the date of the effectiveness of such extension of the Maturity Date, Agent shall have determined in its sole discretion that (i) the Debt Service Coverage Ratio shall not be less than 2.00:1.00, and (ii) the Debt Yield shall not be less than fifteen percent (15%);

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(e)    no Default, Event of Default, or DSCR Cash Management Period shall have occurred and be continuing at the time of making the extension request or on the Maturity Date prior to the effectiveness of any such extension;
(f)    Borrowers shall have executed any agreements, documents or amendments to Loan Documents reasonably requested by Agent in connection with such extension of the Maturity Date;
(g)    During the extended term of the Loan, all terms and conditions of the Loan Documents (other than the original Maturity Date and this extension option) shall continue to apply;
(h)    Borrowers shall have entered into a replacement Interest Rate Protection Agreement in form and substance in compliance with Section 2.11;
(i)    Agent shall be determine that the funds remaining in the Reserves, together with the projected Operating Revenues from the Properties shall be sufficient to meet all reserve requirements during such extension period;
(j)    On the date of the effectiveness of such extension of the Maturity Date, no unresolved Material Adverse Change exists;
(k)    Borrower shall pay all actual out-of-pocket costs and expenses incurred by Agent in connection with such extension of the Maturity Date and Agent’s reasonable attorneys’ fees; and
(l)    Bend PropCo and Coos Bay PropCo shall have caused a mortgage modification to be recorded in the applicable real property records extending the maturity date set forth in Security Instruments for the Bend Property and Coos Bay Property, respectively.
Section 2.13    Release of a Property. So long as no Default, Event of Default, or DSCR Cash Management Period has occurred and is continuing or would result therefrom, Agent shall release Agent’s Lien on a Property identified in the Release Notice upon the satisfaction, and/or waiver, which must be in writing by Agent and shall be given or withheld in Agent’s sole discretion, of all of the following requirements:
(a)    Agent shall have received from Borrowers at least thirty (30) days prior to the requested date of the release (such release date is referred to herein as the “Release Date”), a written request for the release identifying the Property to be released (such notice is referred to herein as the “Release Notice”);
(b)    Agent receives payment of the Release Price for such Property;
(c)    The release documents for the Property identified in the Release Notice shall be prepared by the Borrowers at their expense and shall be in form and content satisfactory to Agent in its Permitted Discretion; provided, however, that such release shall be without recourse to Agent or any Lender and made without any representation or warranty. The executed release documents shall be held by Agent’s counsel in escrow for release in accordance with the terms of this Agreement,

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or if requested by such Borrower, the executed release documents may be delivered in escrow to a title closing agent, subject to Agent’s approval of the escrow agent and further provided that the release documents shall not be released until Agent has received the Release Price payment in accordance with Section 2.13(b) above;
(d)    If the Release Price is sufficient to repay the Loan in full, then in addition to the Release Price, Agent shall have received the Prepayment Premium, if any, in accordance with Section 2.7;
(e)    Following the release of the Property identified in the Release Notice, all of the covenants in the Loan Documents shall continue to be satisfied and all of the representations and warranties shall continue to be true and correct in all material respects;
(f)    Borrowers shall have paid (i) all of Agent’s out-of-pocket costs and expenses (including, without limitation, reasonable legal fees and disbursements of Agent) in connection with the release of such Property, and (ii) a $2,000 release fee with respect to the release of such Property;
(g)    Agent receives payment of the Release Exit Fee for such Property;
(h)    Agent shall have determined that the Loan to Value Ratio, after giving effect to the release and transfer of the Property identified in the Release Notice and the application of such Release Price to the outstanding Obligations, will not be greater than sixty percent (60%) (based on an Appraisal ordered by Agent at Borrower’s cost acceptable to Agent in its Permitted Discretion);
(i)    Agent shall have determined that the Debt Service Coverage Ratio, after giving effect to the release and transfer of the Property identified in the Release Notice and the application of such Release Price to the outstanding Obligations, will be greater than or equal to 1.50:1.00; and
(j)    Agent shall have determined that the Debt Yield, after giving effect to the release and transfer of the Property identified in the Release Notice and the application of such Release Price to the outstanding Obligations, will be greater than or equal to 14.5%.
Agent acknowledges that a sale of a Property may be structured as a sale by Holding of the Equity Interests in the applicable Borrower, and in such event, this Section 2.13 shall apply as if such sale were a sale of the Property. Upon payment of the Release Price for a Property and satisfaction of all other conditions to a release in this Section 2.13, with respect to such Property, the term “Properties” shall thereafter no longer include such Property. If all of the Property owned by a Borrower is released pursuant to this Section 2.13, then, except for such Borrower’s indemnification obligations under the Loan Documents which shall continue, such Borrower shall be released from its ongoing obligations under the Loan Documents that arise after the release of such Borrower’s Property. Notwithstanding the preceding sentence, all of such Borrower’s indemnification obligations under the Loan Documents shall survive the release of the Property owned by such Borrower.

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ARTICLE 3    
ACCOUNTS AND RESERVES.
Section 3.1    Security Grant.
(a)    Borrower has granted to Agent for the benefit of Lenders, within the security agreement provisions of the Security Instrument, and hereby grants to Agent for the benefit of Lenders, a first lien and security interest in the Operating Account and all Reserves (and the funds therein, any interest earned thereon and proceeds thereof), and Borrower hereby pledges the Reserves and the Operating Account (and the funds therein, any interest earned thereon and proceeds thereof) as collateral security for the payment of all Indebtedness and the performance of all Obligations. Borrower shall not, without obtaining the prior written consent of Agent, further pledge, assign or grant any security interest in the Operating Account, any Reserve or the monies deposited therein or permit any Lien to attach thereto, or any levy to be made thereon, or any UCC Financing Statements, except those naming Agent as the secured party, to be filed with respect thereto. Borrower, Agent and Cash Management Bank shall enter into the Operating Account Agreement on or prior to the Closing Date. Borrower shall not establish any deposit account other than the Operating Account without prior written consent of Agent and delivery to Agent of a deposit account control agreement in form and content satisfactory to Agent in its sole discretion.
(b)    This Agreement is, among other things, intended by the parties to be a security agreement for purposes of the UCC. As such, and in connection with the security grant contained in each Security Instrument, Agent is irrevocably authorized to file UCC Financing Statements naming the Borrower as debtor, to perfect the Agent’s security interest in the Collateral, in all jurisdictions in which Agent believes in its sole discretion that such filing is appropriate. If Agent believes that an “all-asset” collateral description, as contemplated by Section 9-504(2) of the UCC, is appropriate, Agent is irrevocably authorized to use such a collateral description, whether in one or more separate filings or as part of the collateral description in a filing that particularly describes the Collateral. Agent is irrevocably authorized to file such continuation statements and other similar documents as it determines, in its sole opinion, are appropriate to protect and perfect its rights.
Section 3.2    Reserves. The Reserves will be held by Agent, in Borrowers’ name, but shall not constitute trust funds and may be commingled with other monies held by Agent. Disbursements by Agent from a Reserve shall be subject to all conditions to making disbursements from each such Reserve as set forth in this Agreement. Agent’s rights with respect to Protective Advances or other advances permitted under any of the Loan Documents shall include the right to disburse funds from any Reserve for the purpose of making any payments for which such Reserve was created. Agent shall have no obligation whatsoever to make any advances or disbursements under this Section 3.2 or pursuant to any other applicable provision hereunder if a Default or an Event of Default shall have occurred and is continuing. Agent reserves the right to use the services of Agent’s Construction Consultant in connection with disbursements from the PIP Reserve, the FF&E Reserve, the Deferred Maintenance Reserve or any other advances of the Loan the proceeds of which shall be used to pay for construction or similar work on the Property, and Borrowers shall pay the reasonable fees of such Agent’s Construction Consultant.

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(a)    PIP Reserve.
(i)    A portion of the Loan equal to the sum of Twenty-Six Million One Hundred Ninety-Two Thousand Nine Hundred Seventy-Seven and No/100 Dollars ($26,192,977.00) (the “PIP Reserve”) shall not be funded on the Closing Date and the Borrowers may request one or more additional advances of principal up to, but not in excess of, in the aggregate, the maximum amount of the PIP Reserve as set forth in this Section 3.2(a) to pay the costs of the Property Improvements. For the period commencing on the Closing Date and expiring on the Completion Date, the PIP Reserve shall be utilized only for work on Property Improvements on the Portfolio in accordance with the Property Improvement Plan and Budget. So long as no Default or Event of Default shall have occurred and be continuing and the Debt Yield, after giving effect to the requested advance from the PIP Reserve, is not less than ten and one-half of one percent (10.5%), funds shall be advanced from the PIP Reserve within ten (10) Business Days after written request therefore, but not more frequently than monthly in accordance with and subject to the draw procedures set forth in Exhibit B hereto, as applicable. With respect to each advance from the PIP Reserve, Borrowers shall pay the actual reasonable fees and out-of-pocket expenses of Agent’s Construction Consultant.
(ii)    Other than advances from the First PIP Bucket, Agent shall make no advances from the PIP Reserve without, with respect to the Property Improvements to be completed in any PIP Bucket, copies of (x) all general contracts, architects agreements and Material Subcontracts required to complete the Property Improvements, which shall be subject to the review and approval of Agent in its Permitted Discretion and (y) all purchase orders and quotations for all FF&E required for the completion of the Property Improvements (such documentation collectively referred to as the “PIP Backup”). Advances from the PIP Reserve shall be subject to the following availability:
(B)    Prior to receipt of the Second Bucket PIP Backup, Agent shall permit Borrowers to request advances from the PIP Reserve, which shall be subject to this Section 3.2(a) and the draw procedures on Exhibit B in an amount not to exceed $2,500,000 (the “First PIP Bucket”).
(C)    Borrower shall provide PIP Backup for Property Improvements totaling not less than $10,500,000 (inclusive of the First PIP Bucket) (the “Second Bucket PIP Backup”), together with PIP Backup for the Property Improvements funded in the First PIP Bucket, to the extent not already received. Upon approval of the Second Bucket PIP Backup (which approval shall be given or withheld in Agent’s Permitted Discretion within 10 Business Days of receipt), Agent shall permit Borrowers to request advances from the PIP Reserve which shall be subject to this Section 3.2(a) and the draw procedures on Exhibit B for Property Improvements in the amounts reflected in the PIP Backup for the Property Improvements funded in the First PIP Bucket and approved pursuant to the Second Bucket PIP

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Backup, which shall not exceed $10,500,000 (inclusive of the First PIP Bucket) (the “Second PIP Bucket”).
(D)    Borrower shall provide PIP Backup for Property Improvements totaling not less than $18,500,000 (inclusive of the First PIP Bucket and the Second PIP Bucket) (such PIP Backup for Property Improvements not reflected in the PIP Backup for the First PIP Bucket or the Second Bucket PIP Backup being “Third Bucket PIP Backup”). Upon approval of the Third Bucket PIP Backup (which approval shall be given or withheld in Agent’s Permitted Discretion within 10 Business Days of receipt), Agent shall permit Borrowers to request advances from the PIP Reserve which shall be subject to this Section 3.2(a) and the draw procedures on Exhibit B for Property Improvements in the amounts approved pursuant to the Third Bucket PIP Backup, which shall not exceed $18,500,000 (inclusive of the First PIP Bucket and the Second PIP Bucket) (the “Third PIP Bucket”).
(E)    Borrower shall provide PIP Backup for all remaining Property Improvements set forth in the Property Improvement Plan and Budget (the “Final Bucket PIP Backup”). Upon approval of the Final Bucket PIP Backup (which approval shall be given or withheld in Agent’s Permitted Discretion within 10 Business Days of receipt), Agent shall permit Borrowers to request advances from the PIP Reserve which shall be subject to this Section 3.2(a) and the draw procedures on Exhibit B for Property Improvements in the amounts approved pursuant to the PIP Backup, which shall not exceed $26,192,977.00 (inclusive of the First PIP Bucket, the Second PIP Bucket and the Third PIP Bucket) (the “Final PIP Bucket”).
(iii)    Borrowers may increase or decrease any line item of any Property’s Property Improvement Plan and Budget, and may do so by increasing or decreasing, as applicable, any other line item from such Property’s or any other Property’s Property Improvement Plan and Budget, so long as such adjustments (A) when taken individually, do not change any line item by an amount greater than ten percent (10%) of the amount first approved by Agent for such line item in the Property Improvement Plan and Budget for such Property and (B) when taken in the aggregate, are (I) with respect to any Tranche A Property, no greater than the lesser of fifteen percent (15%) of the Property Improvement Plan and Budget for such Property and $250,000 and (II) with respect to any Tranche B Property, no greater than the lesser of fifteen percent (15%) of the Property Improvement Plan and Budget for such Property and $500,000. Any adjustments in excess of the limitations set forth in this Section 3.2(a)(iii) may only be made with Agent’s prior written approval, which may be given or withheld in its Permitted Discretion.
(iv)    Borrowers shall (A) commence and diligently pursue the completion of the Property Improvements required by the Property Improvement Plan and Budget in a timely manner in accordance with the requirements set forth herein and (B) cause the

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Property Improvements to be substantially completed, as determined by Agent’s Construction Consultant and Agent in its Permitted Discretion, by the Completion Date (without regard to the sufficiency or availability of funds in the PIP Reserve). The Property Improvements shall be completed in a good and workman-like manner and in accordance with the Property Improvement Plan and Budget and the Construction Contracts, which shall be provided to Agent prior to any disbursement from the PIP Reserve for work conducted thereunder. Following the disbursement of the entire PIP Reserve pursuant to Section 3.2(a), Borrower shall pay any remaining costs required for the completion of the Property Improvements set forth on the Property Improvement Plan and Budget.
(v)    Borrowers may make and agree to one or more change orders within any Property’s Property Improvement Plan and Budget without Agent’s prior written consent, so long as, (A) with respect to the Property Improvement Plan and Budget for (I) any Property, each individual change order does not exceed ten percent (10%) of such Property Improvement Plan and Budget, (II) any Tranche A Property, such change orders in the aggregate do not exceed the lesser of fifteen percent (15%) of the Property Improvement Plan and Budget for such Property and $250,000 and (III) any Tranche B Property, such change orders in the aggregate do not exceed the lesser of fifteen percent (15%) of the Property Improvement Plan and Budget for such Property and $500,000; (B) sufficient funds remain in the PIP Reserve which are allocated to each Property’s Property Improvement Plan and Budget to keep the PIP Reserve In Balance following such change order; and (C) written notice of such change order is delivered to Agent within five (5) Business Days after the end of the calendar month in which such change order is made. Any change orders with respect to a Property in excess of the individual and aggregate caps set forth in this Section 3.2(a)(v), shall be subject to Agent’s prior written approval in its Permitted Discretion, and then further subject to the availability of funds in the PIP Reserve.
(vi)    Disbursements made from the PIP Reserve shall be deemed to have been received by Borrowers on the date of disbursement. At no time shall Agent have any obligation to make any disbursements from the PIP Reserve (i) if any conditions to advances set forth in Exhibit B have not been satisfied, (ii) if the PIP Reserve is not In Balance or (iii) after the Completion Date. Borrower shall cause the PIP Reserve to remain In Balance upon each disbursement requested from the PIP Reserve, or on a monthly basis for months during which Borrower does not request a disbursement from the PIP Reserve. The PIP Reserve shall be deemed to be “In Balance” only if, in Agent’s Permitted Discretion, as of any date of determination, the amount equal to the undisbursed proceeds of the PIP Reserve shall equal or exceed the aggregate of: (I) the amount required, according to the Property Improvement Plan and Budget, including contingency, if any, to fund the completion of the Property Improvements in compliance with the Property Improvement Plan and Budget and this Agreement; and (II) the amount required, if any, to be paid for actual or projected cost overruns, in excess of any contingency set forth in the Property Improvement Plan and Budget, in connection with the completion of the Property Improvements, in compliance therewith. In the event that Agent, in accordance with this Section 3.2(a), shall determine that the PIP Reserve is not In Balance, Agent shall have no obligation to fund any disbursement from the PIP Reserve and shall provide Borrower written notice of such

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determination, including the dollar amount of such deficiency of funds remaining in the PIP Reserve (the “In Balance Shortfall”). Borrower agrees that if for any reason the PIP Reserve is not In Balance, Borrower shall pay to Agent, within ten (10) Business Days after written demand, an amount equal to the In Balance Shortfall. For the avoidance of doubt, Lender shall have no obligation to make any disbursement from the PIP Reserve until the PIP Reserve is In Balance.
(vii)    With respect to any building materials, FF&E or other items that are not yet affixed to or incorporated into the Improvements (“Stored Materials”), but for which Borrower has obtained physical possession, Borrowers shall, with respect to any Stored Materials subject to a Disbursement Request (i) cause such Stored Materials to be covered by the Policies required hereunder and protected against loss, theft and damage in a manner acceptable to Agent in its Permitted Discretion, (ii) cause such Stored Materials to be incorporated into the Improvements within sixty (60) days of the delivery of the Disbursement Request therefor, and (iii) with respect to Stored Materials not stored on the Property, provide to Agent (x) such security agreements, financing statements and other documents as Agent may require in its Permitted Discretion sufficient to create, perfect and protect a first priority lien on such Stored Materials, (y) a written statement from the storer of such Stored Materials to the effect that Agent and Agent’s Construction Consultant may freely inspect such Stored Materials at all reasonable times and shall be permitted to retrieve such Stored Materials in connection with an exercise of remedies hereunder and (z) a certification to the effect that such Stored Materials are (1) stored in a designated and secure area, conspicuously marked to show that they are the subject of a security interest in favor of Agent, and that such Stored Materials will not be moved except in connection with their delivery to the Premises and (2) effectively segregated from all other materials of whatever kind located at the off-site location in question.
(b)    Tax and Insurance Reserve.
(i)    On each Monthly Payment Date, Borrowers shall pay to Agent a sum equal to one-twelfth of an amount which would be sufficient to pay the Taxes payable, or reasonably estimated by Agent to be payable, during the ensuing twelve (12) months to be held as a tax reserve to fund payment of future Taxes (the “Tax Reserve”). If requested by Agent (not earlier than two months prior to the date on which the next installment of Taxes becomes due), Borrowers shall also deposit, within five (5) Business Days of such request, into the Tax Reserve an amount which, together with the aggregate of deposits to be made on each Monthly Payment Date pursuant to the first sentence of this subsection (i), shall be sufficient, as of one month prior to the date on which the next installment of Taxes becomes due, to pay in full such installment of Taxes, as reasonably estimated by Agent. Agent shall apply such funds to, or (at the sole option of Agent) release such funds to Borrowers for, payment of such Taxes, provided that Borrowers have promptly supplied Agent with timely notice of all Taxes due.
(ii)    On each Monthly Payment Date, Borrowers shall pay to Agent a sum equal to one-twelfth of the most recent annual insurance premiums to be held as an insurance

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reserve to pay for all liability and property insurance required to be to be held and maintained (the “Insurance Premiums”) by Borrowers pursuant to this Agreement (the “Insurance Reserve”, and together with the Tax Reserve, collectively referred to herein as the “Tax and Insurance Reserve”). If requested by Agent (not earlier than two months prior to the date on which the next installment of the next annual Insurance Premium becomes due), Borrowers shall also deposit, within five (5) Business Days of such request, into the Tax and Insurance Reserve an amount which, together with the aggregate of the monthly deposits to be made pursuant to the preceding sentence, shall be sufficient, as of one month prior to the date on which the next installment of the next annual Insurance Premium becomes due, to pay in full such insurance premium, as estimated by Agent. Agent shall apply such funds to, or (at the sole option of Agent) release such funds to Borrowers for, payment of such Insurance Premiums, provided that Borrowers have promptly supplied Agent with timely notices of all Insurance Premiums due.
(iii)    In making any payment relating to Taxes or Insurance Premiums, Agent may do so according to any bill, statement or estimate procured from the appropriate public office, with respect to Taxes, and insurer or agent, with respect to Insurance Premiums, without inquiry into the accuracy of such bill, statement or estimate, in any case, or into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim, as it relates to Taxes. If the total amount retained in the Tax and Insurance Reserve attributable to (i) the Tax Reserve exceeds the amount of payments actually applied by Agent as set forth in Section 3.2(c)(i) above, and (ii) the Insurance Reserve exceeds the amount of payments actually applied by Agent as set forth in Section 3.2(c)(ii) above, in each case, such excess may be credited by Agent on subsequent payments to be made by Borrowers under Sections 3.2(c)(i) and (ii), as applicable, or at the option of Agent, refunded to Borrowers; but if the funds in the Tax Reserve or the Insurance Reserve shall not be sufficient to pay the sums required by Section 3.2(c)(i) and (ii), respectively, at least thirty (30) days before the same are due and payable, Borrowers shall, within five (5) Business Days after receipt of written demand therefor from Agent, deposit with Agent the full amount of any such deficiency. Upon repayment in full of the Indebtedness and the satisfaction of all Obligations, any remaining funds held in the Tax and Insurance Reserve shall be released to Borrowers.
(c)    Deferred Maintenance Reserve. On the Closing Date, Agent shall withhold $228,545 from the Loan to fund a deferred maintenance reserve (the “Deferred Maintenance Reserve”). Such Deferred Maintenance Reserve shall, subject to the conditions set forth in this Agreement, be disbursed by Agent to Borrowers to pay the costs to complete the deferred maintenance items set forth on Schedule 3.2(d) (the “Deferred Maintenance Items”). Funds from the Deferred Maintenance Reserve shall be advanced by Agent to Borrowers not more than once during any month. Provided that no Default or Event of Default exists and is continuing, Agent shall disburse funds held in the Deferred Maintenance Reserve to Borrowers (or, at Borrower’s request, directly to the applicable contractors or vendors installing or performing work on the applicable Deferred Maintenance Items) to pay the cost of the applicable Deferred Maintenance Items, within ten (10) Business Days after the delivery by Borrower to Agent of a request therefor (but not more often than once per month), provided that (i) such disbursement is for Deferred Maintenance Items; (ii) Agent shall have (if it desires) verified (by an inspection conducted at

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Borrowers’ expense) the performance of the work on the Deferred Maintenance Items; and (iii) the request for disbursement is accompanied by (A) an Officer’s Certificate certifying (1) that such funds will be used to pay or reimburse Borrowers for Deferred Maintenance Items approved in writing by Agent and a description thereof, (2) that the same has not been the subject of a previous disbursement from the Deferred Maintenance Reserve or any other Reserve, (3) that all previous disbursements from the Deferred Maintenance Reserve have been used for the purpose for which they were requested, and (4) no Default or Event of Default or DSCR Cash Management Period exists; (B) lien waivers (which may be conditioned upon payment), (C) invoices and/or other evidence of costs or payment satisfactory to Lender; (D) at Agent’s option, a title search for any Property at which such Deferred Maintenance Items were installed or performed indicating that such Property is free from all Liens, claims and other encumbrances not previously approved by Lender; (E) such other evidence as Agent shall request that the Deferred Maintenance Items to be funded by the requested disbursement have been installed, completed and are paid for or will be paid upon such disbursement to Borrowers; and (F) the request for disbursement is in accordance with and subject to the draw procedures set forth in Exhibit B hereto. In no event shall Agent be obligated to reimburse Borrowers out of the Deferred Maintenance Reserve for costs of routine maintenance to any Property. Borrower shall cause each item identified on Schedule 3.2(d) to be substantially completed as determined by Agent’s Construction Consultant and Agent in its Permitted Discretion on or before the date for completion set forth thereon.
(d)    FF&E Reserve. On each Monthly Payment Date, Borrowers shall pay to Agent an amount equal to the FF&E Deposit Amount to be deposited into an FF&E reserve (the “FF&E Reserve”). Provided that no Default or Event of Default has occurred and is continuing, Agent shall disburse funds held in the FF&E Reserve to Borrowers within ten (10) Business Days after the delivery by Borrower to Agent of a request therefor (but not more often than once per month), in increments of at least $10,000, provided, that (i) such disbursement is for FF&E expenditures not covered by the Property Improvement Plan and Budget, (ii) such FF&E expenditure was made in accordance with the Approved Operating Budget or otherwise approved by Agent, which approval shall not be unreasonably withheld; and (iii) for all Major FF&E, Agent shall have (if it desires) verified (by an inspection conducted at Borrower’s expense) the installation or performance of the FF&E or work in question; (iv) such disbursement must be for work that has already been completed and for which Agent has received all Lien waivers as it may require in its sole discretion; and (v) the request for disbursement is in accordance with and subject to the draw procedures set forth in Exhibit B hereto. Upon repayment in full of the Indebtedness and the satisfaction of all Obligations, any remaining funds held in the FF&E Reserve shall be released to Borrowers or the Person(s) legally entitled thereto. Agent reserves the right to use the services of Agent’s Construction Consultant in connection with the approval and ongoing monitoring of any such disbursement and work related thereto.
(e)    Seasonality Reserve. For the purpose of providing funds for use by Borrowers to pay Debt Service and Approved Operating Expenses in the calendar months, if any, when Operating Cash Flow for the Portfolio is negative, Borrowers shall deposit with Agent, to be held in a reserve (the “Seasonality Reserve”), (i) $750,000 on the Closing Date (to be funded by Agent withholding $750,000 from the Loan) and (ii) on each Monthly Payment Date immediately following the receipt of the monthly reporting required by Section 5.10(d) for calendar months June

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through (and including) September of each calendar year, all positive Operating Cash Flow, if any. For the avoidance of doubt, and by way of example only, if the reporting required by Section 5.10(d) for the month of June is received on August 12th of the same year, Borrower shall deposit into the Seasonality Reserve an amount equal to the positive Operating Cash Flow, if any, as evidenced by such reporting, on the Monthly Payment Date in August. In no event shall Borrower be required to cause the balance of the Seasonality Reserve to exceed the Seasonality Reserve Required Balance; provided, however, if on September 30th of any calendar year the balance of the Seasonality Reserve is less than the Seasonality Reserve Required Balance, Borrowers shall deposit with Agent an amount in cash equal to the Seasonality Shortfall Amount on the Monthly Payment Date in October of such year to be held in the Seasonality Reserve. Provided no Default or Event of Default shall have occurred and is continuing, on any Monthly Payment Date when the Portfolio has negative Operating Cash Flow, Agent shall pay any shortfalls in Debt Service and Approved Operating Expenses for such month, only to the extent of the funds available in the Seasonality Reserve, in the order set forth for such items in Section 3.4(b). Funds deposited in the Seasonality Reserve shall be disbursed only pursuant to the preceding sentence or upon the indefeasible payment in full of the Indebtedness by Borrowers, at which point Agent shall disburse all funds deposited in the Seasonality Reserve to the Borrowers.
(f)    Environmental Reserve. On the Closing Date, Agent shall withhold $450,000 from the Loan to fund a reserve (the “Environmental Reserve”), which shall be designated for use by Borrowers to fund the costs of compliance with and completion of the Pasco VCP and the Port Angeles VCP (or the Mandated Plan). Agent shall hold $100,000 of the Environmental Reserve for the completion of the Pasco VCP and shall hold $350,000 of the Environmental Reserve for the completion of the Port Angeles VCP (or the Mandated Plan). Agent shall disburse funds held in the Environmental Reserve to Borrowers within ten (10) Business Days after the delivery by Borrower to Agent of a request therefor (but not more often than once per month), provided that (i) such disbursement is for costs incurred by Borrower (A) prior to the Closing Date in an amount not to exceed $75,000 and (B) after the Closing Date, in each case, to comply with its obligations under Section 5.40 (e) and (f); (ii) Agent shall have (if it desires) verified (by an inspection conducted at Borrowers’ expense) the performance of such work; and (iii) the request for disbursement is accompanied by (A) an Officer’s Certificate certifying (1) that such funds will be used to pay or reimburse Borrowers for costs incurred by Borrower to comply with its obligations under Section 5.40(e) and (f), (2) that the same has not been the subject of a previous disbursement from the Environmental Reserve or any other Reserve, (3) that all previous disbursements from the Environmental Reserve have been used for the purpose for which they were requested, and (4) no Default or Event of Default or DSCR Cash Management Period exists; and (B) invoices and/or other evidence of costs or payment satisfactory to Agent. Agent shall make $250,000 of the Environmental Reserve available to Borrowers for reimbursement for work conducted to satisfy the conditions in Section 5.40(e) and (f) and shall distribute the remaining $200,000 in the Environmental Reserve only upon the terms and conditions set forth below. Upon repayment in full of the Indebtedness and the satisfaction of all Obligations, the entire balance of the Environmental Reserve, if any, shall be disbursed to Borrower. Upon the confirmation from Agent’s environmental consultant, or other evidence satisfactory to Agent in its Permitted Discretion, that Borrower’s obligations under Section 5.40(e) or (f), as applicable, have been fully satisfied in Agent’s Permitted Discretion (which determination may be made based on the issuance by WDOE

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of a “no further action” letter with respect to the applicable Property or if WDOE otherwise terminates Borrowers’ obligations with respect to all cleanup of such Property), Agent shall disburse $100,000 from the funds remaining in the Environmental Reserve to Borrowers. Thereafter, the confirmation from Agent’s environmental consultant, or other evidence satisfactory to Agent in its Permitted Discretion, that Borrower’s obligations under Section 5.40(e) or (f), as applicable, have been fully satisfied in Agent’s Permitted Discretion (which determination may be made based on the issuance by WDOE of a “no further action” letter with respect to the applicable Property or if WDOE otherwise terminates Borrowers’ obligations with respect to all cleanup of such Property), Agent shall disburse the remaining balance of the Environmental Reserve to Borrowers. Agent shall have no obligation to make any disbursement of funds from the Environmental Reserve during the continuance of an Event of Default. Borrower shall pay all reasonable fees and actual out-of-pocket costs and expenses of Agent’s environmental consultant in connection with the foregoing.
Section 3.3    Operating Account and Lender Account.
(a)    All Gross Revenues of each Property shall be deposited by the remitter thereof into the Operating Account for such Property, and Borrowers shall direct, or shall cause Property Manager to direct, that all amounts (i) paid by all Tenants under any Leases and any other remitter of Gross Revenues and (ii) received by Credit Card Processor or any other processor of Gross Revenues, be deposited directly to the Operating Account. Borrower shall deliver such additional documents, including but not limited to payment direction letters directing that all payments to Borrower from any source shall be paid into the Operating Account. Notwithstanding the foregoing, all Gross Revenues received by Borrower, Property Manager or by their Affiliates, shall be deposited (and Borrower shall cause Property Manager or such Affiliates to deposit such amounts) in the Operating Account within two (2) Business Days after receipt thereof. The direction to Tenant, Credit Card Processor and each other remitter or processor of Gross Revenues to deposit such Gross Revenues into the Operating Account shall not be modified except by Agent. Borrower shall not establish any deposit account other than the Operating Account without (i) the prior written consent of Agent and (ii) delivery to Agent of a deposit account control agreement in form and substance satisfactory to Agent in its sole discretion.
(b)    At any time upon the occurrence and during the continuation of a Default, an Event of Default or a DSCR Cash Management Period, Agent may (i) directly notify any remitter of Gross Revenues, including any Tenant, to deposit all sums due and payable to Borrower to the Lender Account and (ii) deliver written notice (A) to the Cash Management Bank limiting Borrower’s access to the Operating Account in accordance with the terms of the Operating Account Agreement and directing Cash Management Bank to begin sweeping all cash in the Operating Account into the Lender Account and/or (B) to the Credit Card Processor directing it to begin sweeping all payments processed pursuant to the Credit Card Processing Agreement to the Lender Account. Upon (x) the termination of any DSCR Cash Management Period, (y) the cure of any Default in accordance with this Agreement and (z) the waiver by Agent, in its sole discretion, of all Events of Default, as applicable, Agent shall deliver written notice (i) to the Cash Management Bank reinstating Borrower’s access to the Operating Account in according with Section 3.4 hereof and (ii) to the Credit Card Processor reinstating the payment instruction which directs processed payments to the Operating Account.

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(c)    Agent may establish subaccounts of the Lender Account (which may be ledger or book entry accounts and not actual accounts). The Lender Account and any such subaccounts will be under the sole control and dominion of Agent, on behalf of Lenders, and Borrower shall have no right of withdrawal therefrom. Borrower shall pay for all expenses, when due, of opening and maintaining the Operating Account, the Lender Account, and all Reserves.
Section 3.4    Application of Operating Revenues.
(a)    Provided (i) no Default or Event of Default shall have occurred and is continuing, and (ii) no DSCR Cash Management Period is in effect, Borrower shall be entitled to withdraw, on a daily basis (or more or less frequently) any and all funds then on deposit in the Operating Account.
(b)    Provided no Event of Default shall have occurred and is continuing, on each Monthly Payment Date while a Default exists (and Agent has delivered any or all notices set forth in Section 3.3(b)) or during a DSCR Cash Management Period, Agent shall apply funds in the Lender Account in the following order of priority:
(i)    First, to transfer into the Tax and Insurance Reserve, the amount that Borrower is required to escrow therein for the Tax and Insurance Reserve for such month in accordance with the terms hereof;
(ii)    Second, to pay the Debt Service and any fees (including Loan Expenses) due and owing hereunder on such Monthly Payment Date;
(iii)    Third, to Borrower or Property Manager, an amount equal to the Approved Operating Expenses (which, subject to Agent’s approval pursuant to Section 5.32(c), shall include property management fees and other fees pursuant to the Property Management Agreement and franchise fees pursuant to any Franchise Agreement) for such month as set forth in the Approved Operating Budget, which funds shall be used by Borrower and/or Property Manager solely to pay for such Approved Operating Expenses;
(iv)    Fourth, to transfer into the FF&E Reserve and the Seasonality Reserve, the amount that Borrower is required to escrow therein for such month in accordance with the terms hereof;
(v)    Fifth, to pay or repay any Protective Advances and any other amounts due and owing hereunder or under any other Loan Documents on such Monthly Payment Date; and
(vi)    Sixth, all remaining amounts shall be held in the Lender Account as cash collateral until such time as no Default, Event of Default or DSCR Cash Management Period shall exist, in which case Agent shall wire the balance of the Lender Account to the Operating Account; provided, however, upon the occurrence of an Event of Default, Agent may apply such cash collateral in accordance with Section 3.4(c) below.

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(c)    In the event that the funds available in the Lender Account on any Monthly Payment Date are insufficient for payment of the amounts set forth in Section 3.4(b)(i) through (v) for such Monthly Payment Date, Borrower shall pay an amount equal to the extent of such insufficiency within two (2) Business Days of request by Agent, time being of the essence. Notwithstanding anything to the contrary contained in this Section 3.4, upon the occurrence and continuance of an Event of Default, Agent shall have the right to direct, and to apply all funds in any Reserve, the Operating Account, the Lender Account and other proceeds of repayment in such order and in such manner as Agent shall elect, including, the payment of principal and/or interest, in such order, priority and proportions as Agent in its sole discretion shall determine without seeking the appointment of a receiver and without adversely affecting the rights of Agent to foreclose the Lien of the Security Instrument, the Operating Account Agreement or exercise its other rights under the Loan Documents.
(d)    Notwithstanding the foregoing, Agent shall notify Borrower in writing if a DSCR Cash Management Period has commenced, and, so long as no Event of Default then exists, Borrower shall have ten (10) Business Days to make a partial prepayment of principal to Agent for the benefit of Lenders, in the amount necessary, as determined by Agent, to cause the Debt Service Coverage Ratio to be equal to or greater than 1.50:1.0; provided, however, such partial prepayment shall be in an amount equal to or greater than $500,000. Borrower shall not be required to pay any Prepayment Premium in connection with any partial prepayment of principal in relation thereto.
ARTICLE 4    
REPRESENTATIONS AND WARRANTIES.
Section 4.1    Representations and Warranties. To induce Agent and Lenders to execute and perform this Agreement, Borrowers hereby represent, warrant and, with respect to any statement of future conduct, covenants, to Agent and Lenders as follows:
(a)    Each PropCo Borrower has good, marketable and indefeasible fee simple title to the Property owned by such PropCo Borrower, subject to no Liens except for the Permitted Exceptions and Approved Leases. All transfer taxes, deed stamps, intangible taxes or other amounts in the nature of transfer taxes required to be paid by any Person under applicable Legal Requirements in connection with the transfer of the Properties to PropCo Borrowers have been paid.
(b)    Each Borrower is a limited liability company, duly formed, validly existing and in good standing under the laws of the State of Delaware. Each PropCo Borrower is qualified to conduct business in the state where the Property owned by such PropCo Borrower is located. No Borrower is a governmental entity. The address of each Borrower’s and Parent’s principal place of business is 201 W. North River Drive, Suite 100, Spokane, Washington 99201. No Borrower is a “foreign person” within the meaning of Sections 1445 or 7701 of the Code. Parent is the sole member of Holding and is a limited liability company, duly formed, validly existing and in good standing under the laws of the State of Delaware. Borrowers and Parent are duly qualified to do business and are in good standing in each jurisdiction where it is required to be so qualified in connection with its properties, business and operations. Borrowers, Parent and Guarantor have furnished to Agent true, correct and complete copies of their respective organizational documents,

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and such organizational documents are all in full force and effect. No default exists under any of the organizational documents and no event has occurred which, with the giving of notice or lapse of time or both, would result in any default thereunder. Attached hereto as Schedule 4.1(b) is a true and complete organization chart of Borrower, Parent and their direct and indirect owners as of the Closing Date.
(c)    Each of Borrower and Parent is a Single Purpose Entity. All of the factual assumptions made in the non-consolidation opinion delivered on the Closing Date are true, complete and correct in all material respects.
(d)    (e) No Borrower Party, nor any Person Controlling or Controlled by Borrower Party, nor any Person who at any times owns, directly or indirectly, more than twenty percent (20%) of the outstanding Equity Interests of any Borrower Party, nor any Person for whom any Borrower Party is acting as agent or nominee in connection with this transaction, but excluding in all events any Person owning, directly or indirectly, Equity Interests in any Guarantor in which Equity Interests in such Guarantor are publicly-traded “Transaction Persons”) (1) is a Person whose property or interest in property is blocked or subject to blocking pursuant to Section 1 of Executive Order 13224 of September 23, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)), (2) engages in any dealings or transactions prohibited by Section 2 of such executive order, or is otherwise associated with any such Person in any manner in violation of Section 2 of such executive order, or (3) is a Person on the list of Specially Designated Nationals and Blocked Persons or is in violation of the limitations or prohibitions under any other OFAC regulation or executive order.
(i)    No part of the proceeds of the Loan will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended.
(ii)    Borrower acknowledges by executing this Agreement that Agent has notified the Borrower and that Borrower has notified the Borrower Parties and the other Transaction Persons that, pursuant to the requirements of the Patriot Act, Agent is required to obtain, verify and record such information as may be necessary to identify such Persons (including, without limitation the name and address of such Person) in accordance with the Patriot Act.
(f)    Each Borrower has full power and authority to conduct its business as presently conducted, to own its Property, if any, to enter into this Agreement and to perform all of its duties and obligations under this Agreement and under the Loan Documents; and such execution and performance have been duly authorized by all necessary Legal Requirements. Neither any Borrower nor any Borrower Party has been convicted of a felony and there are no proceedings or investigations being conducted involving criminal activities of Borrower or any Borrower Party.
(g)    There are no actions, suits or other proceedings at law or in equity by or before any Governmental Authority now pending or, to any Borrower’s knowledge, threatened

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against or affecting Borrower Party or any Property, which, if adversely determined, would result in a Material Adverse Change.
(h)    This Agreement, the Security Instruments, the other Loan Documents and any other documents and instruments required to be executed and delivered by any Borrower Party in connection with this Loan, when executed and delivered, will constitute the duly authorized, valid and legally binding obligations of the Borrower Party thereto and may be enforced in accordance with their respective terms (except to the extent that enforceability may be affected or limited by applicable bankruptcy, insolvency and other similar debtor relief laws affecting the enforcement of creditors’ rights generally). No approval of, or consent from, any Governmental Authority or any other Person not holding a direct or indirect ownership interest in any Borrower Party is required in connection with the execution and delivery by any Borrower Party of this Agreement or any of the other Loan Documents to which each is a party. No basis exists as of the Closing Date for any claim against Agent under this Agreement, under the Loan Documents or with respect to the Loan. As of the Closing Date, enforcement of this Agreement and the Loan Documents is subject to no defenses of any kind. The Security Instruments when properly recorded and indexed in the appropriate records, together with any UCC Financing Statements required to be filed in connection therewith, when properly filed and indexed in the appropriate records, will create (i) a valid, perfected first priority Lien on the applicable PropCo Borrower’s interest in each Property and (ii) to the extent a security interest can be perfected by filing, valid and perfected first priority security interests in and to, and perfected collateral assignments of, all personalty, all in accordance with the terms thereof, in each case subject only to any applicable Permitted Exceptions. All mortgage, recording, stamp, intangible or other similar taxes required to be paid by any Person under applicable Legal Requirements in connection with the execution, delivery, recordation, filing, registration, perfection or enforcement of any of the Loan Documents have been paid.
(i)    The execution, delivery and performance of this Agreement, the Security Instrument, the other Loan Documents and any other documents or instruments to be executed and delivered by any Borrower Party pursuant to this Agreement or in connection with this Loan and the occupancy and use of the Property do not in any material respect: (i) violate any Legal Requirements, or (ii) conflict with, be inconsistent with, or result in any breach or default of any of the terms, covenants, conditions or provisions of any indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind to which any Borrower Party is a party or by which any of them may be bound. No Borrower Party is in default (without regard to grace or cure periods) under any contract or agreement to which it is a party, the effect of which default could adversely affect the performance by such Borrower Party of its obligations pursuant to and as contemplated by the terms and provisions of this Agreement and/or the other Loan Documents.
(j)    No condition, circumstance, event, agreement, document, instrument, restriction, litigation or proceeding (or threatened litigation or proceeding exists which would reasonably result in a Material Adverse Change.
(k)    All Collateral is located in the United States.
(l)    Except as set forth in the Post-Closing Agreement, each Property and the present use and occupancy of such Property does not, to the knowledge of Borrower, violate or

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conflict with any Legal Requirements, in any material respect, including, without limitation, zoning, building, land use, noise abatement, occupational health and safety laws, storm and sanitary disposal regulations, or any permit, easement, covenant, condition or restriction, whether recorded or not applicable to any storm and sanitary sewage disposal system, water system, drainage system, and all mechanical systems but excluding Hazardous Materials Laws. In addition, except as set forth in the Post-Closing Agreement, to the knowledge of Borrower after commercially reasonable due diligence and inquiry, any applicable Governmental Authority having jurisdiction over any Property have issued their permits for the construction, tap on and operation of those systems referred to in the prior sentence. No legal proceedings are pending or, to the knowledge of Borrower, threatened with respect to the zoning of any Property. Except as disclosed by the Title Policy or the Survey, neither the zoning nor any other right to construct, use or operate any Property is in any way dependent upon or related to any property other than such Property. There has not been committed by any Borrower Party or, to Borrower’s knowledge, any other Person in occupancy of or involved with the operation or use of any Property, any act or omission affording any Governmental Authority the right of forfeiture as against any Property or any part thereof or any monies paid in performance of any Borrower’s obligations under any of the Loan Documents. No portion of any Property has been purchased by Borrower with proceeds of any illegal activity. Except as set forth in the Post-Closing Agreement, if a third party is required under any covenants, conditions and restrictions of record or any other agreement to consent to the use and/or operation of such Property, such approval has been obtained from such party.
(m)    None of the proceeds of the Loan will be used by any Borrower for the purpose of purchasing or carrying “margin stock” within the meaning of Regulation T, U or X issued by the Board of Governors of the Federal Reserve System, as at any time amended, and Borrower agrees to execute all instruments which may be necessary from time to time, if any, to comply with all the requirements of Regulation U of the Federal Reserve System, as at any time amended.
(n)    No Borrower is an “employee benefit plan” as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) which is subject to Title I of ERISA. None of the assets of any Borrower constitute “plan assets” of one or more such plans within the meaning of 29 C.F.R. Sec. 2510.3-101. No Borrower is or will be a “governmental plan” within the meaning of Section 3(32) of ERISA. Transactions by or with Borrower are not subject to any state or other statute, regulation or other restriction regulating investments of, or fiduciary obligations with respect to, governmental plans within the meaning of Section 3(32) of ERISA which is similar to the provisions of Section 406 of ERISA or Section 4975 of the Code and which prohibit or otherwise restrict the transactions contemplated by this Agreement, including but not limited to the exercise by Agent of any of its rights under the Loan Documents.
(o)    No Borrower is (i) an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended; (ii) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money, or (iii) a “bank holding company” or a direct or indirect subsidiary of a “bank holding company” as defined in the Bank Holding Company Act of 1956, as amended, and Regulation Y thereunder of the Board of Governors of the Federal Reserve System.

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(p)    Except as may be set forth in the Environmental Reports or otherwise previously disclosed to Agent in writing:
(i)    Neither any Borrower nor, to the knowledge of Borrower, any Property is in violation of any Hazardous Materials Laws;
(ii)    Neither any Borrower nor any other Borrower Party has received, or has received a copy of, any notice of any violation or alleged violation of any Hazardous Materials Laws with respect to any Property;
(iii)    There are no pending civil (including actions by private parties), criminal or administrative actions, suits or proceedings affecting any Borrower Party or any Property relating to Hazardous Materials or Hazardous Materials Laws with respect to any Property (“Environmental Proceedings”) and neither Borrower nor any Borrower Party has any knowledge of any threatened Environmental Proceedings;
(iv)    Neither any Borrower nor, to the knowledge of Borrower, any other Person, has used, generated, manufactured, stored or disposed of on, under or about any Property or transported to or from any Property any Hazardous Materials (other than in compliance with Hazardous Materials Laws). To the knowledge of Borrower, no Property is subject to any private or governmental Lien or judicial or administrative notice or action or inquiry, investigation or claim relating to hazardous, toxic and/or dangerous substances, Toxic Mold or any other Hazardous Materials;
(v)    To the knowledge of Borrower, no Toxic Mold is on or about any Property which requires remediation under any applicable Hazardous Materials Laws or otherwise poses a danger to persons or property;
(vi)    There have been no environmental investigations, studies, audits, reviews or other analyses conducted by or on behalf of any Borrower which are in any Borrower’s possession or control and which have not been provided to Agent; and
(vii)    No Property has been used by Borrower, or to the knowledge of Borrower, any other Person, permanently or temporarily, as a disposal site or storage site for any Hazardous Materials in violation of any applicable Hazardous Materials Laws and to the knowledge of Borrower, each Property, and all parts thereof, are free of all Hazardous Materials other than Hazardous Materials that do not violate any applicable Hazardous Materials Laws.
(q)    All financial statements of any Borrower or any Borrower Party submitted to Agent by any Borrower, any Borrower Party or any Affiliate in connection with the Loan are true and correct in all material respects, have been prepared in accordance with GAAP consistently applied, and fairly present the respective financial conditions and results of operations of the Persons which are their subjects. Since the date of such financial statements, there has been no Material Adverse Change in the financial condition, operations or business of any Borrower, any Borrower Party, or any Property from that set forth in said financial statements.

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(r)    Following the discharge of existing Debt on the Closing Date, neither any Borrower nor Parent has any Debt other than (i) the Indebtedness and Obligations evidenced by this Agreement, (ii) trade payables (excluding payables for which Reserves have been established pursuant to this Agreement) incurred in the ordinary course of business of owning and operating each Property in an aggregate amount per Property no greater than the amount set forth on Schedule 4.1(q) for each Property, and (iii) payroll expenses which are no more than thirty (30) days past due (“Permitted Debt”).
(s)    This Agreement and all financial statements, budgets, schedules, opinions, certificates, confirmations, sworn statements, applications, rent rolls, affidavits, agreements and other materials submitted to Agent in connection with or in furtherance of this Agreement by or on behalf of any Borrower or any Borrower Party fully and fairly state the matters with which they purport to deal, and neither misstate any material fact nor, separately or in the aggregate, fail to state any material fact necessary to make the statements made not misleading.
(t)    All utility and municipal services required for the occupancy and operation of each Property for its intended use, including water supply, storm and sanitary sewage disposal systems, cable services, gas, electric and telephone facilities are available for use and tap-on at the boundaries of the Land. Each Property has rights of access to public ways (including curb cuts and street access) and parking, except as set forth in the Post-Closing Agreement, permits and easements required for the use of each Property for its current use have been granted and issued. All roads necessary for the use of each Property for its current use have been completed and dedicated to public use and accepted by all Governmental Authorities.
(u)    Except as disclosed on the Survey, none of the Improvements encroach upon any building line, set back line, side-yard line, or any recorded or visible easement which exists with respect to any Property.
(v)    Each Property is comprised of one (1) or more parcels which constitute separate tax lots and do not constitute a portion of any other tax lot not a part of such Property.
(w)    No condemnation or other similar proceeding has been commenced or, to any Borrower’s knowledge, is threatened or contemplated with respect to all or any portion of any Property or for the relocation of roadways providing access to any Property.
(x)    The Loan, including interest rate, fees and charges as contemplated hereby, is a business loan; the Loan is an exempted transaction under the Truth In Lending Act, 12 U.S.C. §1601 et seq.; and the Loan does not, and when disbursed will not, violate the provisions of the usury laws of the State of New York.
(y)    Following the discharge of existing Debt which will occur on the Closing Date, there are no outstanding financing statements (other than any such statements identifying Agent as the secured party) naming any Borrower or Parent, as a debtor, and there are no federal tax liens against or bankruptcy filings by or against any Borrower Party.

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(z)    To the extent required, each Borrower has filed (or has obtained effective extensions for filing) all federal, state and local tax returns required to be filed and have paid or made adequate provision for the payment of all federal, state and local taxes, charges and assessments payable by such Borrower.
(aa)    No Borrower Party is contemplating either the filing of a petition by it under any state or federal bankruptcy or insolvency law or the liquidation of all or a major portion of its property, and Borrower has no knowledge of any Person contemplating the filing of any such petition against any Borrower Party. In addition, no Borrower Party has been a debtor in any such bankruptcy proceeding, and no Borrower Party has ever made an assignment for the benefit of creditors or taken advantage of any insolvency act for the benefit of debtors.
(bb)    No Borrower has entered into the Loan or any Loan Document with the actual intent to hinder, delay, or defraud any creditor, and taking into account Section 5.38, each Borrower has received reasonably equivalent value in exchange for its obligations under the Loan Documents. As of the Closing Date, giving effect to the Loan and the transactions contemplated by the Loan Documents, and taking into account Section 5.38, the fair saleable value of Borrower’s assets exceeds and will, immediately following the making of the Loan, exceed the Borrower’s total probable liabilities, including subordinated, unliquidated, disputed and/or contingent liabilities, including the maximum amount of their contingent liabilities or their debts as such debts become absolute and matured. As of the Closing Date, and taking into account Section 5.38, Borrower’s assets do not and, immediately following the making of the Loan will not, constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Taking into account Section 5.38, Borrower does not intend to, and does not believe that it will, incur Debt and liabilities (including contingent liabilities and other commitments) beyond its ability to pay such Debt and liabilities as they mature (taking into account the timing and amounts of cash to be received by Borrower and the amounts to be payable on or in respect of obligations of Borrower).
(cc)    No Property or any portion thereof is subject to any other Lease other than the Leases described on Schedule 4.1(bb) hereto (the “Rent Roll”). Except as set forth on the Rent Roll: (i) each Lease is in full force and effect; (ii) each Tenant under its respective Lease has accepted possession of and are in occupancy of all of their respective demised premises, have commenced the payment of rent under its respective Lease, and to the knowledge of Borrower, there are no offsets, claims or defenses to the enforcement thereof; (iii) all rents due and payable under each Lease have been paid and no portion thereof has been paid for any period more than thirty (30) days in advance; (iv) the rent payable under each Lease is the amount of fixed rent set forth in the Rent Roll, and to the knowledge of Borrower, there is no claim or basis for a claim by the Tenant thereunder for an adjustment to the rent; (v) no Tenant has made any written claim against Borrower under its respective Lease which remains outstanding, to the knowledge of Borrower, there are no defaults on the part of Borrower under any Lease, and to the knowledge of Borrower, no event has occurred which, with the giving of notice or passage of time, or both, would constitute such a default; (vi) to the knowledge of Borrower, there is no present default (beyond the expiration of any notice and cure period) by any Tenant under any Lease, and no events or circumstances exist which, with the passage of time or the giving of notice, or both, would constitute a default by a Tenant under its respective Lease; (vii) all security deposits under the Leases are as set forth on the Rent Roll and

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are held in compliance with applicable Legal Requirements; (viii) the applicable Borrower is the sole owner of the entire lessor’s interest in each Lease; and (ix) each Lease is the valid, binding and enforceable obligation of the applicable Borrower and, to the knowledge of Borrower, the applicable Tenant thereunder. None of the Leases contains any option to purchase or right of first refusal to purchase the Property or any part thereof. Neither the Leases nor the rents thereunder have been assigned or pledged except to Agent for the benefit of the Lenders. Agent has been provided true and correct copies of all Leases.
(dd)    None of the Properties nor any part thereof are subject to any purchase options, rights of first refusal or other similar rights in favor of third parties.
(ee)    There are no Material Contracts other than the Property Management Agreements, the Franchise Agreements, if any, and the Material Contracts listed on Schedule 4.1(dd). Borrower has delivered to Agent true and complete copies of all Material Contracts and all amendments thereto. Each of the Material Contracts is in full force and effect. No party to any Material Contract has sent or received any notice of default thereunder that remains outstanding. No Borrower is in default and has no knowledge of any default under any Material Contract by any other party thereto. All amounts that are due and payable under each Material Contract by any party thereto have been paid in full. No party to any Material Contract has commenced any action or given or received any notice for the purpose of terminating such Material Contract.
(ff)    Shelbourne Investors has complied with its obligations pursuant to the Closing Escrow Agreement.
(gg)    As of the Closing Date, no Property is being used for the production, distribution or sale of marijuana, cannabis or their byproducts and to Borrower’s knowledge, no Tenant is using the Property for such purpose.
(hh)    The building located at the southeast side of the Pasco, Washington property and noted as a “Two-Story Brick Structure” on the ALTA Survey prepared by Duryea & Associates, P.S., job no. 14-1880D, dated October 13, 2014, last revised on November 10, 2014, complies with the Concomitant Zoning Agreement, recorded December 5, 1979 as document number 397315 in the official public records of Franklin County, Washington.
Section 4.2    Continuation of Representations and Warranties. Except for those representations and warranties made as of a certain date, Borrower hereby covenants, warrants and agrees that the representations and warranties made in Section 4.1 hereof shall be and shall remain true and correct at the time of the Closing Date and at all times thereafter so long as any part of the Indebtedness shall remain outstanding. Each disbursement request from any Reserve shall constitute a reaffirmation that the foregoing representations and warranties are true and correct in all material respects as of the date of such disbursement request or shall specify any representations and warranties that are not true and correct as of such date; provided however, specifying that such representations and warranties that are not true and correct as of such date shall not constitute a Default under this Agreement.
ARTICLE 5    

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BORROWER COVENANTS.
Each Borrower hereby covenants and agrees with Agent and Lenders that, at all times so long as any part of the Indebtedness shall remain outstanding:
Section 5.1    Performance of Obligations. Borrower shall promptly pay when due all Indebtedness and shall perform and comply with in a timely manner all other Obligations, and no Obligations shall be released, discharged or otherwise affected by reason of any act, claim or circumstance of any kind or nature, whether or not Borrower has notice or knowledge thereof.
Section 5.2    Existence; Compliance with Legal Requirements. Borrower and each Borrower Party which is not a natural person shall do or cause to be done all things necessary to preserve, renew and keep in full force and effect its existence, rights, permits and franchises and comply with all Legal Requirements applicable to it and the Properties. Neither Borrower nor any Borrower Party which is not a natural person shall engage in any dissolution, liquidation or consolidation or merger with or into any other Person except as permitted by the Loan Documents provided that the foregoing restriction shall not apply to RLH with respect to consolidations and mergers. Additionally, PropCo Borrowers shall not: (a) engage in any business activity not related to the ownership and leasing of the Properties, (b) transfer, lease or sell, in one transaction or any combination of transactions, all or substantially all of any Property or other assets of Borrower except to the extent expressly permitted by the Loan Documents, or (c) cause, permit or suffer Parent to dissolve, wind up or liquidate or take any action, or omit to take an action, as a result of which Parent would be dissolved, wound up or liquidated in whole or in part.
Section 5.3    Single Purpose Entity. Each Borrower shall at all times be a Single Purpose Entity. No Borrower shall make any change, amendment or modification to its organizational documents without Agent’s prior written consent in its Permitted Discretion. Additionally, no Borrower shall take any action which could result in it not being a Single Purpose Entity.
Section 5.4    Compliance with Non-Consolidation Opinion Assumptions. Each Borrower and Parent shall conduct their business so that the assumptions made in the non-consolidation opinion delivered on the Closing Date shall be true and correct in all material respects.
Section 5.5    ERISA. Each Borrower shall deliver to Agent such certifications or other evidence from time to time throughout the Term, as requested by Agent, stating that (A) such Borrower is not an “employee benefit plan” as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, or a “governmental plan” within the meaning of Section 3(32) of ERISA; (B) such Borrower is not subject to state statutes regulating investments and fiduciary obligations with respect to governmental plans; (C) the assets of such Borrower do not constitute “plan assets” within the meaning of 29 C.F.R. Section 2510.3-101; (D) neither such Borrower nor any Guarantor is a party in interest (as defined in Section 3(14) of ERISA) with respect to an employee benefit plan sponsored or contributed by any Lender; and (E) neither such Borrower nor any Guarantor is: (1) a fiduciary (including but not limited to any administrator, officer, trustee or custodian), counsel or employee of any Lender; (2) an employer any of whose employees are covered by an employee benefit plan sponsored or contributed by Agent; (3) an individual or entity providing services to an employee benefit plan sponsored or contributed by any Lender; (4) an employee organization any

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of whose members are covered by an employee benefit plan sponsored or contributed by any Lender; (5) an owner, direct or indirect, of fifty percent (50%) or more of any entity described in clauses (3) or (4) above; (6) a spouse, ancestor, lineal descendant or spouse of a lineal descendant of any individual described in clauses (1), (2), (3) or (4) above; (7) a corporation, partnership or trust or estate of which fifty percent (50%) or more is owned, directly or indirectly, or held by Persons described in clauses (1), (2), (3), (4) or (5) above; (8) an employee, officer, director or a ten percent or more shareholder, directly or indirectly, of a Person described in clauses (3), (4), (5) or (6) above or of any Lender; or (9) a ten percent (10%) or more partner or joint venture of a Person described in clauses (2), (3), (4), (5) or (6) above. No Borrower shall engage in any transaction which would cause any obligation, or action taken or to be taken, hereunder (or the exercise by any Lender of any of its rights under the Note, this Agreement or the other Loan Documents) to be a non-exempt (under a statutory or administrative class exemption) prohibited transaction under ERISA (collectively, the “ERISA Prohibited Actions”). Notwithstanding the foregoing, with respect to subsections (D) and (E) above, Agent may only require each Borrower and Guarantor to certify, in the affirmative or negative, as the case may be, with respect to any prospective Loan Transferee prior to such Person becoming a Lender, and thereafter no Borrower shall take any ERISA Prohibited Action with respect to any Lender.
Section 5.6    Defense and Notice of Actions and Certain Other Events. Each Borrower shall, without liability, cost or expense to Agent, protect, preserve and defend title to the Properties, the Liens granted to Agent for the benefit of the Lenders hereunder and under each of the other Loan Documents (including but not limited to the Security Instrument) and the rights or powers of Agent hereunder and under each of the other Loan Documents, against all adverse claimants to title, or any possessory or non-possessory interest in any Property. Each Borrower shall give Agent prompt written notice (and in no event later than ten (10) Business Days following such Borrower’s knowledge thereof) of any such event, action or proceeding, including fire or other casualty causing damage to any Property; the receipt by Borrower of a notice of condemnation or other taking of any Property; the receipt by Borrower of a notice from any governmental agency relating to any Property of any violation of law; a change in the nature of the occupancy or use of any Property; or the commencement or threatened commencement of any litigation or proceedings that seek to, or could have the effect of: (a) enjoining or otherwise preventing or declaring invalid or unlawful the occupancy, maintenance or operation of any Property or any portion thereof; (b) adversely affecting the validity or priority of the Liens granted Agent hereunder or under any other Loan Document; or (c) materially adversely affecting the financial condition of any Borrower Party, or the ability of any Borrower Party to perform its Obligations under the other Loan Documents. Borrower will cause any such litigation or proceedings to be vigorously contested in good faith, and in the event of an adverse ruling or decision, prosecute all allowable appeals therefrom. Without limiting the generality of the foregoing, each Borrower will resist the entry or seek the stay of any temporary or permanent injunction that may be entered, and use its best efforts to bring about a favorable and speedy disposition of all such litigation or proceedings.
Section 5.7    Right of Inspection; Due Diligence. Subject to the rights of Tenants under the Leases, Agent, Lenders and their respective agents or employees, may enter any Property at any time on reasonable advance notice (provided no advance notice shall be required after the occurrence of an Event of Default) for the purpose of (a) inspecting such Property or ascertaining Borrower’s

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compliance with the terms of any Loan Document, and (b) conducting periodic due diligence to assess the condition of the Collateral, Borrower and such Property.
Section 5.8    Liens. No Borrower shall cause, suffer or create any Liens upon all or any portion of any Property or any interest in any Property, or on any direct Equity Interests in any Borrower or Parent, other than the Permitted Exceptions, and any Borrower shall pay, or cause Tenants to pay, at or prior to the applicable due date, all obligations secured by or reducible to Liens which now or hereafter shall encumber any Property, whether senior or subordinate hereto, including all claims for work or labor performed, or materials or supplies furnished in connection with any work upon such Property. Notwithstanding the preceding sentence, Borrower may, within thirty (30) days after any Borrower first receives notice of an involuntary Lien, contest any such claim of involuntary Lien without cost or expense to Agent, but only upon posting, and concurrently supplying to Agent a certified copy of a statutory bond or other security sufficient under applicable law fully to protect any and all of such Property encumbered by such claim of involuntary Lien and otherwise sufficient in Agent’s Permitted Discretion to protect Agent against any judgment in favor of the Lien claimant. If Agent is made a party by any party other than a Borrower Party to any litigation concerning the Loan Documents, any Property or any part thereof or interest therein, or the occupancy thereof by any Person, then Borrower shall indemnify, defend and hold Agent harmless from all claims and liability by reason of such litigation, including reasonable attorneys’ fees and expenses incurred by Agent whether or not any such litigation is prosecuted to judgment. Subject to Borrower’s right to contest any claim of involuntary Lien in accordance with this Section 5.8, any involuntary Lien other than a Permitted Exception shall be paid or fully discharged by Borrower within the earlier of (i) ten (10) days after demand by Agent, and (ii) twenty (20) days after Borrower receives notice of the filing of such Lien.
Section 5.9    Further Assurances; Supplemental Affidavits. Each Borrower shall, at Borrower’s sole cost and expense: (a) execute and deliver to Agent such documents, instruments, certificates, assignments and other writings, and do such other acts necessary or desirable, to evidence, preserve and/or protect the security interest of Agent in the Collateral at any time securing or intended to secure the Obligations of Borrower under the Loan Documents, as Agent may reasonably require; and (b) do and execute all and such further lawful and reasonable acts, conveyances and assurances for the better and more effective carrying out of the intents and purposes of this Agreement and the other Loan Documents, as Agent shall reasonably require from time to time, including curing any defects in the execution and delivery of the Loan Documents and executing and delivering, or causing to be executed and delivered, all such other documents, agreements and instruments as Agent may reasonably request to further evidence and more fully describe the Collateral for the Loan, to correct any omissions in the Loan Documents, to perfect, protect or preserve any Liens created under any of the Loan Documents, or to make any recordings, file any notices, or obtain any consents, as may be necessary or appropriate in connection therewith.
Section 5.10    Financial Reporting.
(a)    Each Borrower shall keep and maintain or will cause to be kept and maintained proper and accurate books and records, in accordance with GAAP, or such other accounting method acceptable to Agent, reflecting the financial affairs of such Borrower. Agent

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shall have the right from time to time during normal business hours upon reasonable notice to any Borrower to examine such books and records at the office of any Borrower or such other Person maintaining such books and records and to make such copies or extracts thereof as Agent shall desire. Borrowers shall pay any costs incurred by Agent to examine such books, records and accounts, as Agent shall determine to be necessary or appropriate in its Permitted Discretion.
(b)    Each Borrower shall furnish, or cause Parent to furnish, to Agent:
(i)    Within ninety (90) days after the end of each of Borrower’s and Parent’s fiscal year, consolidated and consolidating annual financial statements of Parent and Borrower in accordance with Section (t) of Exhibit C to this Agreement, in accordance with GAAP, including the notes thereto, consisting of a balance sheet at the end of such completed fiscal year and the related statements of income, retained earnings, cash flows and owners’ equity for such completed fiscal year, which financial statements shall be prepared and certified without qualification by an independent certified public accounting firm that RLH has selected for its audits accompanied by related management letters, if available.
(ii)    All such financial statements, including, without limitation, those described in Section 5.10(a)(i) above, shall be accompanied by a certificate, executed on behalf of Parent, stating that such annual financial statement presents fairly the financial condition and the results of operations of Parent and its subsidiaries. Together with such financial statements, Borrower shall furnish to Agent a certificate, executed on behalf of Borrower, certifying as of the date thereof whether to Borrower’s knowledge there exists an Event of Default by Borrower under the Loan Documents and if such Event of Default exists, the nature thereof, the period of time it has existed and the action then being taken to remedy the same.
(c)    Borrower shall cause each Guarantor to furnish to Agent:
(i)    As it relates to any Guarantor that is not an individual, within ninety (90) days after the end of each of such Guarantor’s fiscal year, audited, annual financial statements of such Guarantor prepared consistent with GAAP, including the notes thereto, consisting of a balance sheet at the end of such completed fiscal year and the related statements of income, retained earnings, cash flows and owners’ equity for such completed fiscal year, which financial statements shall be certified without qualification by (i) with respect to RLH, the independent certified public accounting firm that RLH has selected for its audits and (ii) with respect to Shelbourne Capital, Payday Partners, LLC and Falcon Investors, the independent certified public accounting firm that RLH has selected for its audits or another independent certified public accounting firm selected by Shelbourne Capital, Payday Partners, LLC or Falcon Investors, as applicable, and satisfactory to Agent in its Permitted Discretion, provided, that, Shelbourne Capital, Payday Partners, LLC and Falcon Investors, may provide unaudited financial statements prepared in-house that otherwise comply with this Section 5.10(c)(i) until Agent may direct otherwise, in its sole discretion, at any time following the occurrence and continuance of an Event of Default..

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(ii)    As it relates to any individual Guarantor, (A) complete federal and state tax returns and (B) a personal financial statement prepared by an accountant, which financial statement shall include a statement showing the maximum amount of their contingent liabilities or their debts as such debts become absolute and matured.
(iii)    All such financial statements shall be accompanied by a certificate, executed on behalf of such Guarantor, stating that (A) such financial statement (1) is true, complete and accurate in all material respects, and (2) presents fairly the financial condition and the results of operations of such Guarantor, and (B) as of the date thereof, such Guarantor, together with the other Guarantors, are in compliance with the financial covenants applicable to such Guarantors in the applicable Guaranty.
(d)    Each Borrower will furnish Agent on or before the forty-five (45) days after the end of each calendar month, the following items, accompanied by a certificate from the chief financial officer of such Borrower, certifying that such items are true, correct, accurate, and complete and fairly present the financial condition and results of the operations of such Borrower and the Properties:
(i)    A fully executed copy of each Material Contract entered into during such calendar month;
(ii)    Operating statements and balance sheets of each Property conforming to Agent’s reporting requirements for comparable property and containing a comparison of actual results to budget estimates. Without limitation to the foregoing, such operating statements and balance sheets shall contain (A) the cash flow from operations of such Property for such calendar month and on a year-to-date and trailing twelve (12) calendar month basis, (B) a statement setting forth the Gross Revenues and Operating Expenses for such calendar month, and (C) the monthly bank statements with respect to any deposit accounts then used in connection with the operation of such Property from the bank or financial institution at which such accounts are held, which statements shall specify the balance of each such account as of the last day of such calendar month;
(iii)    A current rent roll for each Property of all Major Leases, if any (unless all rent roll information is set forth in the monthly operating statement);
(iv)    A copy of any notice received from a Tenant under a Major Lease threatening non-payment of rent or other default, alleging or acknowledging a default by landlord, requesting a termination of a lease or a material modification of any lease or notifying Borrower of the exercise or non-exercise of any option provided for in such Tenant’s lease, or any other similar material correspondence received by Borrower from any Tenant under a Major Lease during the subject month;
(v)    A statement of any litigation, legal action or proceeding identified in the second sentence of Section 5.6; and
(vi)    A certificate, executed on behalf of each Borrower, certifying as of the date thereof whether to such Borrower’s knowledge there exists an Event of Default by Borrower

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under the Loan Documents and if such Event of Default exists, the nature thereof, the period of time it has existed and the action then being taken to remedy the same.
(e)    Agent and Borrower shall hold a quarterly review meeting or teleconference if requested by Agent.
(f)    Borrower shall furnish to Agent, within ten (10) Business Days after request (or as soon thereafter as may be reasonably possible), such further detailed information with respect to the operation of any Property and the financial affairs of any Borrower as may be reasonably requested by Agent.
(g)    From and after the occurrence and during the continuance of an Event of Default, Agent may require, upon written demand and in its sole discretion, audited financial statements of any Borrower and any Guarantor (other than any individual guarantor).
Section 5.11    Taxes.
(a)    Borrower’s Obligation for Payment of Taxes. Except to the extent Agent makes payments of Taxes from the Tax Reserve (for the periods and payments so covered by such payments), Borrower shall pay or cause to be paid all Taxes when due and payable. Borrowers shall deliver to Agent receipts or other reasonable evidence of such payment within forty-five (45) days after the end of each calendar month. No Borrower shall suffer, permit, initiate, or otherwise cause for any purpose, the joint assessment of (i) any Property with any other real property constituting a tax lot separate from such Property, or (ii) any Land and any Personal Property, or any other procedure whereby the lien of real property taxes and assessments and the lien of personal property taxes shall be assessed, levied or charged against the Land as a single lien. While any Obligation remains outstanding, any Property shall be segregated on the applicable tax rolls from all other property, both real and personal. Borrower’s obligations under this Section 5.11 shall not be affected by any damage to, defects in or destruction of any Property or any other event, including obsolescence of all or any part of any Property.
(b)    Contest of Taxes. After prior written notice to Agent, Borrower, at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the amount or validity or application in whole or in part of any Taxes, provided that (i) no Default or Event of Default has occurred and is continuing; (ii) such proceeding shall suspend the collection of the applicable Taxes from Borrower and such Property or Borrower shall have paid all of the applicable Taxes under protest, (iii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Borrower is subject and shall not constitute a default thereunder, (iv) neither a Property nor any part thereof or interest therein may be sold, forfeited, terminated, cancelled or lost so long as the contest is being pursued, and (v) Borrower shall have deposited with Agent adequate reserves for the payment of the applicable Taxes, together with all interest and penalties thereon, unless Borrower has paid all of the applicable Taxes under protest or Borrower shall have furnished such other security as may be accepted by Agent in its sole discretion to insure the payment of any contested Taxes, together with all interest and penalties thereon.

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Section 5.12    Insurance.
(a)    Insurance Requirements. Each Borrower shall maintain such Policies in compliance with and subject to the terms and conditions of Exhibit D.
(b)    Delivery of Policies and Renewals. Prior to the Closing Date, Borrower shall deliver to Agent certificates evidencing the insurance required hereunder with all premiums through June 2015 paid as of the Closing Date. Original Policies or certified true copies of the original Policies shall be delivered to Agent not later than ninety (90) days after the Closing Date. Borrower shall procure and pay for renewals of such insurance (or shall cause the procurement and payment) from time to time before the expiration thereof, and Borrower shall deliver to Agent certificates with premiums prepaid at least ten (10) days before the expiration of any existing Policy. Original or certified copies of all renewal and replacement Policies shall be delivered to Agent not later than ninety (90) days after the expiration date of the applicable Policy or Policies required to be maintained hereunder, which copies shall bear notation evidencing payment of applicable premiums.
(c)    Borrower’s Failure to Maintain Insurance. If any Borrower fails to maintain and deliver to Agent certificates of insurance required by Agent as set forth herein and within the time periods required herein, upon ten (10) days prior written notice to Borrower, or such shorter period as may be required in order to insure all Policies required hereunder remain in place, Agent may procure such insurance at Borrower’s sole cost and expense, with interest thereon at the Default Rate.
(d)    Adjustment of Casualty Insurance Proceeds. Each Borrower shall cause any Policy in respect of loss or damage to any Property to provide that any loss equal to or greater than twenty-five percent (25%) of Allocated Loan Amount (the “Restoration Threshold”) shall be adjusted by Borrower and Agent together, and Borrower may not settle such loss or claim without the prior written consent of Agent. Any Policy in respect of loss or damage to a Property may provide that, provided no Default or Event of Default has occurred and is continuing, any loss that is less than the Restoration Threshold shall be adjusted solely by Borrower provided such adjustment is carried out in a competent and timely manner. During the continuance of a Default or an Event of Default, all losses shall be adjusted solely by Agent.
(e)    Release. Each Borrower, for itself, and on behalf of its insurers, hereby releases and waives any right to recover against Agent and each Lender on any liability for: damages for injury to or death of persons; any loss or damage to property, including the property of any occupant of any Property; any loss or damage to buildings or other improvements comprising any Property; any other direct or indirect loss or damage caused by fire or other risks, which loss or damage is or would be covered by the insurance required to be carried hereunder by Borrower, or is otherwise insured; or claims arising by reason of any of the foregoing, except to the extent caused by the gross negligence or willful misconduct of Agent or such Lender or their respective employees, agents or contractors, as the case may be.
(f)    Miscellaneous. Agent shall not, by reason of accepting, rejecting, obtaining or failing to obtain insurance, incur any liability for (i) the existence, nonexistence, form, amount or legal sufficiency thereof, (ii) the solvency or insolvency of any insurer, or (c) the payment of

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losses. All insurance required hereunder or carried by Borrower shall be procured at Borrower’s sole cost and expense. Borrower shall deliver to Agent receipts reasonably satisfactory to Agent evidencing full prepayment of the premiums therefor, except to the extent Agent makes payments from the Insurance Reserve (for the periods and payments so covered by such payments). In the event of foreclosure on, or other transfer of title in lieu of foreclosure of, a Property, all of Borrower’s interest in and to any and all Policies in force with respect to such Property shall pass to Agent, or the transferee or purchaser as the case may be, and Agent is hereby irrevocably authorized to assign in Borrower’s name to such purchaser or transferee all such Policies, which may be amended or rewritten to show the interest of such purchaser or transferee.

Section 5.13    Disposition of Insurance and Condemnation Proceeds and Damages.
(a)    Agent’s Rights in Proceeds and Damages; Settlement of Proceeds.
(i)    Each Borrower hereby assigns to Agent for the benefit of the Lenders as security for the Indebtedness and all other Obligations (A) any award for damages suffered or compensation paid by reason of a taking for public use, or an action in eminent domain, or the exercise of the police power, whether by a condemnation proceeding or otherwise (such as by inverse condemnation), or any transfer of all or any part of a Property in avoidance thereof, affecting such Property, (B) all proceeds of any Policies paid by reason of loss sustained to such Property, and (C) all claims, damages, causes of action, against or from any party or parties, with respect to such Property, or any funds received or receivable in connection with any damage to such Property, incurred as a result of any cause whatsoever (collectively, “Property Claim Proceeds”).
(ii)    Except with respect to proceeds that are less than the Restoration Threshold (which subject to Section 5.12(d) may be payable directly to Borrower), all Property Claim Proceeds shall be paid by the Person making payment directly to Agent; provided, however, that if for any reason such payment is made to Borrower, or to Borrower and Agent jointly, Borrower shall promptly endorse such payment to Agent. After first deducting all costs and expenses of Agent incurred in connection with the settlement or recovery of any Property Claim Proceeds, Agent may, at its option and without regard to the adequacy of the security hereunder (but subject to Section 5.13(b)), apply any such sum it retains hereunder to any Indebtedness whether due or not, and in such order or priority as Agent may determine. Application of all or any portion of such funds shall not cure or waive any Default or Event of Default, notice of a Default or an Event of Default or invalidate any acts done pursuant to such notice. Borrower shall execute such further assignments, documents or instruments as Agent may from time to time require in order to evidence the assignment hereunder.
(iii)    If, on any loss of or damage to the Property or on a partial taking or condemnation of the Property, Agent is not entitled under law to retain the entirety of any Property Claim Proceeds, then Agent shall be entitled to apply the Property Claim Proceeds to the repayment of the Obligations to the extent necessary in Agent’s judgment to reduce

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the Indebtedness by the ratio which the value of the Property remaining encumbered hereby bears to the value of the Property encumbered hereby immediately prior to such loss, damage or partial condemnation or taking, as determined by Agent’s appraiser retained for such purpose.
(iv)    In the event any Property Claim Proceeds are applied by Agent against the Indebtedness, no Prepayment Premium shall apply with respect to such application.
(v)    Any net proceeds or award remaining after full and final payment of the Obligations shall be returned to Borrower.
(b)    Use of Property Claim Proceeds to Repair Property.
(i)    In the event of damage to or destruction of a Property from any cause for which Borrower has a claim to Property Claim Proceeds, and so long as no Default or Event of Default shall have occurred and is continuing, Agent shall make available to Borrower the Property Claim Proceeds available as a result of such damage or destruction (in each case after deducting costs and expenses incurred by Agent in connection with the settlement or recovery of any proceeds as provided in Section 5.13(a)(ii)) for use by Borrower in the reconstruction and repair of the damaged Improvements to their prior condition on the terms and conditions set forth in Section 5.13(b)(ii) and (iii) below, in lieu of applying such net proceeds to the Indebtedness pursuant to Section 5.13(a).
(ii)    In the event the Property Claim Proceeds for any casualty are equal to or less than the Restoration Threshold, Agent agrees to make the Property Claim Proceeds available to Borrower, solely for the purpose of repairing and restoring the applicable damage, so long as (A) no Default or Event of Default has occurred and is continuing, (B) the full cost of repair and restoration is estimated not to exceed the Restoration Threshold for such Property, and (C) in Agent’s good faith judgment, the repair or restoration can be completed prior to the date which is six (6) months prior to the Maturity Date.
(iii)    In the event the Property Claim Proceeds exceed the Restoration Threshold, Agent agrees to make the Property Claim Proceeds available to Borrower only upon satisfaction of each of the following conditions: (a) Agent shall be satisfied in its Permitted Discretion, that by expenditure of the net proceeds hereunder such Property damaged or destroyed shall be fully restored within a reasonable period of time to the condition and value contemplated by this Agreement and Borrower shall obtain all required permits to rebuild such Property to at least the same number of units and parking spaces as before the casualty within a reasonable period of time after the casualty as determined by Agent in its Permitted Discretion, and all payments required under the Loan will continue to be paid; (b) in Agent’s good faith judgment, such work of repair and restoration can be completed in the ordinary course of business not later than the earlier of (i) six (6) months prior to the Maturity Date; (ii) the outside date, if any, under any Lease or any Legal Requirement; (c) no Lease may be terminated as a result of the casualty or other event resulting in the claim for payment of such insurance proceeds; (d) Agent shall have reviewed and approved Borrower’s plans and specifications for the work of repair and restoration,

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Borrower’s architect and any general contractors, subcontractors and material suppliers employed to perform such work; (e) if so required by Agent in its Permitted Discretion, all general contractors, all major subcontractors and material suppliers shall have supplied one-hundred percent (100%) performance and completion bonds; (f) if the net insurance proceeds available are insufficient for payment of the full cost of restoration or repair and the payments under the Loan during the completion period, as estimated by Agent, then Borrower shall have deposited with Agent sufficient additional funds to insure payment of all such costs, or made arrangements acceptable to Agent for such sufficient additional funds, such additional funds to be disbursed for costs incurred in the manner herein specified prior to the disbursement of any other funds held by Agent; (g) rent loss or business interruption insurance is available to cover the full amount (less any deductible) of any loss of income from such Property during its repair and restoration; (h) evidence of the implementation of builder’s risk coverage for such Property with coverage and in such amounts as Agent shall request and which otherwise complies with the insurance requirements set forth in Section 5.12 hereof; (i) the full cost of repair and restoration is estimated not to exceed thirty percent (30%) percent of the Allocated Loan Amount for such Property; (j) if the Property Claim Proceeds are derived from a partial condemnation of the Property, the condemnation, in the judgment of Agent, shall have no material adverse effect on the operation or value of such Property, and (k) Borrower shall have satisfied such other conditions as Agent may in the exercise of Permitted Discretion determine to be appropriate. The disbursement of all or any Property Claim Proceeds to Borrower pursuant to this Section 5.13(b) shall not cure or waive any Default or Event of Default or notice of a Default or an Event of Default or invalidate any acts done pursuant to such notice. In the event that any of the conditions to Borrower’s right to utilize Property Claim Proceeds are not satisfied or fulfilled at any time, such Property Claim Proceeds shall be applied as provided in Section 5.13(a).
(iv)    Property Claim Proceeds held by Agent hereunder for Borrower’s benefit shall bear interest; provided, however, that Agent shall have no duties or obligations with respect thereto, or with respect to the provisions of this Section 5.13(b), other than that of a lender; and the reasonable costs and expenses of Agent incurred in connection therewith shall be paid by Borrower (and Agent shall be entitled to pay such costs and expenses out of the insurance proceeds held by Agent) and shall be deemed Loan Expenses hereunder. Specifically, but without limiting the generality of the foregoing, no relationship of trust, or any other duty in the nature of fiduciary duties or otherwise, shall be imposed or implied by the status or actions of Agent hereunder; and under no circumstances shall Agent become obligated to take any action to repair or reconstruct any damaged or destroyed Property.
Section 5.14    Maintenance and Preservation of the Property.
(a)    Borrower’s Obligation for Maintenance of Property and Security. Borrower shall: (a) keep each Property in good condition and repair, and replace any items comprising any Property as they become obsolete or worn out with items of at least the same utility, quality and value, and in compliance with the standards in the applicable Property Management Agreement or Franchise Agreement, if any, governing such Property, free of any Liens other than the Permitted Exceptions; (ii) not remove, except as set forth in (i) above, or demolish any Property; (iii) restore

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promptly and in good and workmanlike manner any part of any Property which may be damaged or destroyed (subject to receipt of Property Claim Proceeds for such purpose); (iv) comply with and not suffer violations of any Legal Requirements and requirements of insurance companies and any bureau or agency which establishes standards of insurability; (v) not commit or permit waste of any Property; (vi) do all other acts which from the character or use of any Property may be reasonably necessary to maintain and preserve its value or to protect the security hereof; (vii) perform and comply with all obligations required to be performed or complied with in any leases, licenses, concessions, management agreements, or like material agreements affecting any Property or the operation or use thereof; (viii) pay any and all charges, assessments or fees imposed in connection with the delivery, installation or maintenance of any utility services or installations on, to or for any Property on or prior to the due date thereof; (ix) not change the use of any Property to anything other than the current use of such Property; (x) not drill for or extract, or enter into a lease or any other type of agreement for the drilling for or extraction of, oil, gas or other hydrocarbon substances, or any mineral of any kind, on, in or under any Property; (xi) make no assignment of rents of any Property except to Agent; and (xii) execute and, where appropriate, acknowledge and deliver, such further documents or instruments as Agent reasonably deems necessary or appropriate to preserve, continue and perfect the security provided for herein.
(b)    Agent’s Approval Rights for Work. Except to the extent contemplated by this Agreement or as otherwise funded from the PIP Reserve and the FF&E Reserve in accordance with Section 3.2 hereof, Borrower shall not undertake or suffer to be made any material alteration, addition, relocation, removal or demolition of, or structural or other material change in, any building, improvement, or, unless in the ordinary course of business and such item is replaced with an item of comparable quality, any fixture, machinery, or equipment comprising a Property, whether in connection with a new Lease or otherwise, (collectively, an “Alteration”), without the prior written approval of Agent, which approval may be withheld in Agent’s Permitted Discretion; provided however, that Borrower may undertake one or more Alterations, without Agent’s prior written consent, subject to the prior satisfaction of each of the following conditions (i) each such Alteration does not exceed $100,000 in total costs, (ii) such Alterations do not exceed $1,000,000 in the aggregate during the Term, (iii) such work does not affect the roof or the structure of the building and improvements comprising the Property, or adversely affect or diminish the value of a Property or arise as a result of any damage (other than ordinary wear and tear) or destruction to a Property and (iv) such work is designed (if applicable) by licensed professionals and is constructed by licensed contractors, all qualified for such purpose, and in accordance with all applicable laws, ordinances, regulations, permits and approvals.
Agent reserves the right to use the services of Agent’s Construction Consultant in connection with the approval and ongoing monitoring of any such Alteration.
(c)    Compliance with Legal Requirements. Borrower shall cause each Tenant to comply with the terms and provisions of its respective Lease with respect to all permits and all other Legal Requirements required for the operation of the Property; provided, that to the extent any Tenant fails to comply with the terms and provisions of its respective Lease relating to all permits and all other Legal Requirements required for the operation of its respective Property, then Borrower shall fully enforce its rights and remedies under the Lease with respect to such failure to comply.

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Borrower shall notify Agent in writing within five (5) Business Days after Borrower first receives notice of any such noncompliance. Without the prior written consent of Agent, Borrower shall not seek, make or consent to any change in the lot or parcel boundaries, zoning, conditions of use, or any other Laws which would constitute a violation of the warranties and representations herein contained, or would change the nature of the intended use or occupancy of a Property. Borrower shall, within the earlier of five (5) Business Days after receipt by Borrower or its agent or representative, deliver to Agent copies of any and all approvals, permits required pursuant to applicable Legal Requirements with respect to any Property or any other improvements thereon, or the occupancy, use and enjoyment thereof. Borrower shall not initiate or consent to any zoning reclassification of any portion of any Property or seek any variance under any existing zoning ordinance or use or permit the use of any portion of any Property in any manner that could result in such use becoming a nonconforming use under any zoning ordinance or any other applicable land use law, rule or regulation, without the prior consent of Agent.
(d)    Improvements. Borrower shall cause the Property Improvements to be substantially completed in their entirety (as certified by the Agent’s Construction Consultant) on or before the Completion Date in accordance with the Property Improvement Plan and Budget, applicable Legal Requirements and otherwise fee and clear of all Liens (other than Liens in favor of Agent and subject to Borrower’s right to contest Liens in accordance with Section 5.8). Agent reserves the right to use Agent’s Construction Consultant in connection with the approval and ongoing monitoring of the foregoing work. Borrower shall cause the PIP Reserve to remain In Balance upon each disbursement requested from the PIP Reserve, or on a monthly basis for months during which Borrower does not request a disbursement from the PIP Reserve.
Section 5.15    Membership Interest Sale Price. No Borrower Party shall use proceeds of the Loan to pay the Membership Interest Sale Price.
Section 5.16    Proceedings to Enjoin. If any proceedings are filed or are threatened to be filed seeking to (a) enjoin or otherwise prevent or declare invalid or unlawful the occupancy, maintenance or operation of any Property or any portion thereof; (b) adversely affect the validity or priority of the Liens and security interests granted to Agent for the benefit of the Lenders hereunder or under any other Loan Document; or (c) materially adversely affect the financial condition of any Borrower or any Guarantor, then Borrowers will notify Agent of such proceedings and within five (5) Business Days following any Borrower’s notice of such proceedings and Borrowers will cause such proceedings to be vigorously contested in good faith, and in the event of an adverse ruling or decision, prosecute all allowable appeals therefrom. Without limiting the generality of the foregoing, Borrowers will resist the entry or seek the stay of any temporary or permanent injunction that may be entered, and use its commercially reasonable efforts to bring about a favorable and speedy disposition of all such proceedings.
Section 5.17    Distributions. Except as set forth in the following sentence, no Borrower shall make any Distributions. So long as no Default, Event of Default, or DSCR Cash Management Period exists, Borrowers may make Distributions after paying all Approved Operating Expenses then due.
Section 5.18    Transfer or Encumbrance of the Property.

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(a)    Obligations of Borrower Regarding Transfers. Each Borrower acknowledges that the financial standing and managerial and operational ability of Borrowers are substantial and material considerations to the Lenders in their agreement to make the Loan and that any encumbrance or transfer of an interest in any Property will materially impair the Agent and Lenders’ reasonable security hereunder. In order to induce the Lenders to make the Loan, Borrowers agree (subject to the further terms and conditions of this Section 5.18): (i) not to change, directly or indirectly, the ownership of Borrower or Parent (provided that this shall not apply to the equity in any entity that is publicly traded), and (ii) not to effect a Transfer without in each instance first obtaining Agent’s prior written consent, which consent may be withheld for any reason, or given upon such terms and conditions as Agent shall require, all within Agent’s sole discretion, to the extent permitted by applicable law. Borrowers acknowledge and agree that, except for Permitted Transfers and releases of any Property in accordance with Section 2.13, any transaction or event of any kind effecting a Transfer or further encumbering the Property, or changing the identity of the parties primarily liable for performance of any Borrower’s covenants under this Agreement shall constitute an impairment of Agent’s and the Lenders’ reasonable security interests under this Agreement.
(b)    Permitted Transfers. Notwithstanding anything contained in Section 5.18(a), and provided no Default or Event of Default shall have occurred and is continuing, Borrowers shall have the right to consummate the following Transfers (all of the following collectively, “Permitted Transfers”), provided that Agent shall have received not less than thirty (30) days prior written notice of any Transfer resulting in any Person owning, directly or indirectly, more than twenty percent (20.0%) of the Equity Interests of any Borrower, Parent or any Guarantor (where any transferee in such Transfer did not already own more than twenty percent (20.0%) of the Equity Interests in any Borrower, Parent or any Guarantor), and Agent shall have successfully completed its standard searches of the United States Treasury Department’s OFAC Specially Designated Nationals (SDN) List in relation to such Person(s) prior to any such Transfer:
(i)    the execution of Approved Leases in accordance with this Agreement;
(ii)    a Transfer of direct Equity Interests in Parent among the holders of its Equity Interests immediately following the Membership Interest Sale so long as (x) Shelbourne Investors retains twenty-five percent (25%) of the direct Equity Interests of Parent and (y) any one of Shelbourne Capital, Steven Fishman or Falcon Investors remains, directly or indirectly, in Control of Shelbourne Investors; or
(iii)    Transfer of indirect Equity Interests in Parent to Persons not holding such Equity Interests immediately following the Membership Interest Sale, so long as (x) RLH and/or Shelbourne Investors remains in Control of Parent, (y) Shelbourne Investors retains twenty-five (25%) of the direct Equity Interests of Parent and (z) any one or more of Shelbourne Capital, Steven Fishman or Falcon Investors remains, directly or indirectly, in Control of Shelbourne Investors.
Section 5.19    Leases.
(a)    Lease Approval. Borrowers shall not enter into any new Lease other than an Approved Leasing Parameters Lease, without the prior written consent of Agent. Further, with

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respect to an existing Lease, Borrowers shall not modify, amend, supplement, cancel or consent to the assignment, sublease, or surrender thereof, without the prior written consent of Agent unless such existing Lease is an Approved Leasing Parameters Lease and following any such modification, amendment or supplementation such Lease remains an Approved Leasing Parameters Lease. All new Leases shall be subordinate to the Security Instrument unless Agent elects in writing, at its sole option, to subordinate the Security Instrument to a particular Lease or Leases. Additionally, all new Leases shall provide, in a manner approved by Agent, that the Tenant thereunder shall recognize as its lessor and attorn to any Person succeeding to the interest of Borrowers upon foreclosure of the Security Instrument (or deed in lieu thereof).
(b)    Lease Covenant. Borrowers shall, on demand, (a) execute such further assignments to Agent of any or all Major Leases as Agent may require and (b) deliver to Agent a fully executed copy of any or all Major Leases. Additionally, Borrowers shall: (a) observe and perform the obligations which the landlord is required to observe and perform under the Major Leases; (b) enforce the obligations to be performed by the Tenants of any and all Major Leases and any guarantors of any and all Major Leases, short of termination thereof; (c) promptly furnish to Agent any notice of default or termination sent or received by any Borrower under any Major Lease; (d) not collect any rents for more than thirty (30) days in advance of the time when the same shall become due, except for bona fide security deposits not in excess of an amount equal to thirty (30) days; (e) other than the Leases that are in place as of the Closing Date, not enter into any ground Lease or master Lease of any part of the Property without Agent’s prior written consent; (f) not further assign or encumber any Lease or any guaranty of any Lease; (g) not, except with Agent’s prior written consent or as otherwise permitted above, cancel or accept surrender or termination of any Major Lease or any guaranty of any Major Lease; and (h) not, except with Agent’s prior written consent, modify or amend any Major Lease or any guaranty of any Major Lease in a manner inconsistent with the terms hereof.
Section 5.20    Prohibition Against Additional Recordings. Borrowers will not record or permit to be recorded any document, instrument, agreement or other writing against any Property without the prior written consent of Agent, which may be granted or denied in Agent’s sole discretion. Borrowers will not enter into, modify, waive, grant any consent under, or release, surrender or terminate any easements, restrictive covenants or other instruments constituting Permitted Exceptions, or suffer, consent to or permit the foregoing, without Agent’s prior written consent, which consent may be granted or denied in Agent’s sole discretion.
Section 5.21    Change in Name. No Borrower shall change its name without first obtaining the prior written consent of Agent, which consent shall not be unreasonably withheld, conditioned or delayed. In the event Agent grants such consent, Borrowers shall, at Borrowers’ sole cost and expense, take all action required by Agent for the purpose of perfecting or protecting the lien and security interest of Agent. Borrowers shall promptly notify Agent in writing of any change in any Borrower’s organizational identification number.
Section 5.22    Debt Cancellation; Settlement of Claims. Borrowers shall not, in any calendar year, without the consent of Agent, (i) cancel or otherwise forgive or release any Debt owed to a Borrower by any Person, or (ii) settle any claim against a Borrower, other than a fully

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insured third party claim, in each case, where such forgiveness, release, or settlement is in an amount equal to or greater than one (1%) percent of Operating Revenues for the twelve (12) month period then ending for such Borrower.
Section 5.23    Affiliate Transactions. Borrower shall not enter into, or be a party to, any transaction with any Borrower Party or any Affiliate or Public Control Affiliate of any Borrower Party, directly or indirectly, without the prior written consent of Agent. Agent hereby approves the Property Management Agreements without the consent of Lender, the acquisition fee payable to Shelbourne Capital pursuant to the Parent Operating Agreement, the financing fee payable to Shelbourne Capital pursuant to the Parent Operating Agreement and the investor relations fee payable to Shelbourne Investors pursuant to the Parent Operating Agreement.
Section 5.24    Limitation on Issuance of Equity Interests. Without the prior written consent of Agent, Borrowers will not issue any Equity Interests in any Borrower other than those that have been issued as of the date hereof.
Section 5.25    Compliance. Borrowers shall not be in default or violation of any order, writ, injunction, decree or demand of any Governmental Authority, the violation of which might materially adversely affect the condition (financial or otherwise) or business of any Borrower. Borrowers shall not commit any act that may give any Governmental Authority the right to cause any Borrower to forfeit any Property or any part thereof or any monies paid in performance of any Borrower’s Obligations under any of the Loan Documents. Borrowers hereby covenant and agree not to commit, permit or suffer to exist any act or omission affording such right of forfeiture. Borrowers shall cooperate fully with Agent with respect to, and permit Agent, at its option to participate in, any proceedings before any Governmental Authority which may in any way affect the rights of Agent under any Loan Document.
Section 5.26    Debt Service Coverage Ratio. Borrowers shall not permit the Debt Service Coverage Ratio, as measured as of the last day of each Quarter, to be less than 1.40:1.00. Agent shall notify Borrower in writing if the Debt Service Coverage Ratio is less than 1.40:1.00, and, so long as no other Event of Default then exists, Borrowers shall have ten (10) Business Days to make a partial prepayment of principal to Agent for the benefit of Lenders, in the minimum amount necessary, as determined by Agent, to cause the Debt Service Coverage Ratio to be equal to or greater than 1.40:1.00; provided, however, such partial prepayment shall be in an amount equal to or greater than $500,000. Borrowers shall not be required to pay any Prepayment Premium in connection with any partial prepayment of principal in relation thereto.
Section 5.27    Loan to Value Ratio. Borrowers shall not permit the Loan to Value Ratio, at any time to be greater than eighty percent (80%), as determined by Appraisals in form and substance acceptable to Agent in its sole discretion. Agent shall have the right, from time to time, to order a new Appraisal at Borrowers’ expense for the purpose of calculating the Loan to Value Ratio; provided, however, that so long as no Event of Default exists, Borrowers shall have no obligation to pay for more than one (1) Appraisal in any calendar year. Agent shall notify Borrowers in writing if the Loan to Value Ratio is greater than eighty percent (80%), and, so long as no other Event of Default then exists, Borrowers shall have ten (10) Business Days to make a partial prepayment of principal to Agent for the benefit of Lenders, in the amount necessary, as determined

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by Agent, to cause the Loan to Value Ratio to be equal to or less than eighty percent (80%); provided, however, such partial prepayment shall be in an amount equal to or greater than $500,000. Borrowers shall not be required to pay any Prepayment Premium in connection with any partial prepayment of principal in relation thereto.
Section 5.28    Anti-Terrorism; OFAC; Patriot Act. No Borrower Party shall permit any person Controlling, Controlled by or under common Control with any Borrower Party or any other Transaction Person to, (a) be or become a Person whose property or interests in property are blocked or subject to blocking pursuant to Section 1 of Executive Order 13224 of September 23, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit or Support Terrorism (66 Fed. Reg. 49079 (2001)), (b) engage in any dealings or transactions prohibited by Section 2 of such executive order, or otherwise be associated with any such Person in any manner in violation of Section 2 of such executive order, or (c) otherwise become a Person on the list of Specially Designated Nationals and Blocked Persons in violation of the limitations or prohibitions under any other OFAC regulation or executive order. Borrowers shall, promptly following a request by Agent, provide all documentation and other information that Agent requests in order to comply with its ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the Patriot Act.
Section 5.29    Material Contracts. Borrower shall: (a) pay, observe and perform in all material respects all terms, covenants and conditions of each Material Contract (other than the Property Management Agreement and any Franchise Agreement) prior to the expiration of any applicable grace period provided therein, (b) not cause or permit the occurrence of any event that would cause any Material Contract (other than the Property Management Agreement and any Franchise Agreement) to terminate, or that would entitle any other party to a Material Contract to terminate such Material Contract or that could give rise to the creation of a lien on the Property or any portion thereof; (c) not enter into a Material Contract (other than the Property Management Agreement and Franchise Agreement) without Agent’s prior written consent, not to be unreasonably withheld; (d) not agree to or permit the termination of any Material Contract (other than the Property Management Agreement and any Franchise Agreement); and (e) not cause or permit any Material Contract (other than the Property Management Agreement and any Franchise Agreement) to be modified or supplemented without Agent’s consent, which consent shall, so long as no Event of Default is continuing, not be unreasonably withheld or delayed.
Section 5.30    Limitation on Debt. Neither any Borrower nor Parent shall directly or indirectly create, incur or assume any Debt other than Permitted Debt.
Section 5.31    Interest Rate Protection Agreement. By not later than one (1) Business Day after the Closing Date, and thereafter so long as any Obligations remain outstanding hereunder, Holding shall maintain an Interest Rate Protection Agreement which shall be subject to the Assignment of Interest Rate Agreement or, in each case, a replacement thereof.
Section 5.32    Approved Operating Budget.
(a)    Each Borrower shall prepare and submit (or shall cause to be prepared and submitted) to Agent by November 30th of each year occurring during the Term, an operating expense

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budget for Operating Expenses for such Borrower for the succeeding calendar year. Such operating expense budget shall show, on a month by month basis, in reasonable detail, each line item of such Borrower’s anticipated Operating Revenues and Operating Expenses (on an accrual basis), including amounts required to establish, maintain and/or increase any monthly payments required hereunder (and once such operating expense budget has been submitted to Agent, it shall constitute an Approved Operating Budget for such Borrower). Until such time that any operating expense budget has been submitted for any Borrower, the Approved Operating Budget for such Borrower for the immediately preceding calendar year shall apply for all purposes hereunder (with such adjustments as reasonably determined by Agent (including increases for any nondiscretionary expenses)).
(b)    The Approved Operating Budget for each Borrower for calendar year 2014 are attached as Schedule 5.32(b) hereto.
(c)    Upon the occurrence of a DSCR Cash Management Period, the Approved Operating Budget then in effect, and, during the continuance of any DSCR Cash Management Period, each subsequent operating expense budget submitted to Agent pursuant to Section 5.32(a) above, shall be subject to approval by Agent, in its sole discretion, which approval shall not be unreasonably withheld or delayed and during the continuance of the DSCR Cash Management Period, it shall constitute the Approved Operating Budget for such Borrower.
Section 5.33    Replacement Note. Upon receipt of evidence reasonably satisfactory to Borrowers of the mutilation, destruction, loss or theft of any Note and the ownership thereof, Borrowers shall, upon the written request of the holder of such Note, execute and deliver in replacement thereof new Note in the same form, in the same original principal amount and dated the same date as the Note so mutilated, destroyed, lost or stolen; and such Note so mutilated, destroyed, lost or stolen shall then be deemed no longer outstanding hereunder. If the Note being replaced has been mutilated, they shall be surrendered to Borrowers.
Section 5.34    Hotel Operation.
Without in any way limiting the covenants set forth in this Article 5 or elsewhere in the Loan Documents, the hotel located on each Property shall be operated and managed pursuant to a Property Management Agreement and shall not be subject to any Franchise Agreement and Property Management Agreement at the same time. If Agent provides its prior written consent, to be given or withheld in its sole discretion, to any Borrower to terminate its Property Management Agreement and gives such Borrowers its written consent, to be given or withheld in its sole discretion, to enter into a Franchise Agreement, Borrowers:
(a)    shall (i) cause the hotel located on the applicable Property to remain subject to such Franchise Agreement; (ii) promptly perform and observe, as and when due, all of the covenants and obligations required to be performed and observed by the Borrower under such Franchise Agreement and do all things necessary to preserve and to keep unimpaired, in all material respects, all of the rights of any Borrower under any Franchise Agreement and (iii) cause each hotel on each Property to be operated solely under the name as set forth in the applicable Franchise Agreement pursuant to the terms of the applicable Franchise Agreement.

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(b)    shall not, without Agent’s prior consent, which may be granted or withheld in Agent’s Permitted Discretion: (i) surrender, terminate, cancel or assign any Franchise Agreement; (ii) reduce or consent to the reduction of the term of any Franchise Agreement; (iii) increase or consent to the increase of the amount of any fees or charges under any Franchise Agreement; (iv) otherwise modify, change, supplement, alter or amend, or waive or release any of the rights or remedies of any Borrower under any Franchise Agreement, (v) suffer or permit the occurrence or continuance of a breach or default beyond any applicable notice and/or cure period under any Franchise Agreement on the part of the Borrower thereunder, or (vi) fail to take any action which, if not taken, would entitle the Franchisor to terminate any Franchise Agreement (irrespective of whether such failure constitutes a “default” or “event of default” under any Franchise Agreement).
Section 5.35    Credit Card Processors. In no event shall any Borrower Party send a notice or provide an instruction to all or any of the Payment Processors to direct, disburse or distribute funds to any account other than the Operating Account.
Section 5.36    Property Management Agreement.
(a)    Borrowers shall (i) cause each hotel located on each Property to be operated and managed pursuant to the applicable Property Management Agreement; (ii) promptly perform and observe, as and when due, all of the covenants and obligations required to be performed and observed by any Borrower under the applicable Property Management Agreement and do all things necessary to preserve and to keep unimpaired all of the rights of any Borrower under the applicable Property Management Agreement; (iii) promptly notify Agent of any default under any Property Management Agreement; (iv) promptly deliver to Agent a copy of each financial statement or report, business plan, capital expenditures budget and/or plan, FF&E budget and/or plan received by any Borrower under any Property Management Agreement; and (v) promptly enforce the performance and observance of all of the covenants and obligations required to be performed and observed by the Property Manager under each Property Management Agreement.
(b)    Borrowers shall not, without Agent’s prior consent, which may be granted or withheld in Agent’s Permitted Discretion: (i) surrender, terminate, cancel or assign any Property Management Agreement; (ii) reduce or consent to the reduction of the term of any Property Management Agreement; (iii) increase or consent to the increase of the amount of any fees or charges under any Property Management Agreement; (iv) otherwise modify, change, supplement, alter or amend, or waive or release any of the rights or remedies of any Borrower under any Property Management Agreement, (v) suffer or permit the occurrence or continuance of a default beyond any applicable notice and/or cure period under any Property Management Agreement on the part of any Borrower, or (vi) fail to take any action which, if not taken, would entitle the Property Manager to terminate any Property Management Agreement (irrespective of whether such failure constitutes a “default” or “event of default” under any Property Management Agreement).
(c)    Except for ordinary course advances and reimbursements in accordance with the Property Management Agreement which shall be subject to the Assignment of Management Agreement, Borrowers shall not request, suffer or permit the Property Manager to make any loans to any Borrower Party or which are repayable to Property Manager out of any revenue of the Properties, including any loans for working capital.

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(d)    Borrowers shall notify Lender within five (5) Business Days after Property Manager requests that any Borrower consent to or approve any matter which will materially adversely affect any Property, such notice shall include copies of all correspondence and other documentation received by any Borrower related thereto. During the continuance of a DSCR Cash Management Period, no Borrower shall grant any consent or approval under the Property Management Agreement, without Agent’s consent (which may be given or withheld in Agent’s sole discretion).
(e)    If any Property Management Agreement shall be terminated for any reason, Borrowers shall cause a new hotel management company acceptable to Agent to enter into a new management agreement in form and substance acceptable to Agent in its Permitted Discretion prior to the date of such termination. Agent may condition its approval of any new property management agreement on receipt from the replacement property manager of an assignment and subordination of property management agreement, in form and substance satisfactory to Agent in Agent’s Permitted Discretion and a determination, by Agent in its Permitted Discretion, that the terms and provisions of the replacement property management agreement are consistent with this Agreement.
(f)    Notwithstanding the foregoing, in the event that Borrower has the right to terminate any Property Management Agreement in accordance with the terms thereof as a result of a purchase by Shelbourne Investors of the Equity Interests owned by RLH in Parent, Borrower may terminate such Property Management Agreement subject to Agent’s approval, in Agent’s Permitted Discretion, of a replacement Property Manager and a replacement Property Management Agreement.
Section 5.37    Restrictions on Payment of Affiliate Fees. Except for (a) fees payable pursuant to the Property Management Agreement, any Franchise Agreement or as approved by Agent prior to the Closing Date, (b) an acquisition fee payable at Closing to Shelbourne Capital in an amount equal to $888,360, and (c) a financing fee in the amount of Two Hundred Thousand Dollars ($200,000) payable at Closing to Shelbourne Capital, Borrower shall not use the Loan proceeds to pay any fees to Borrower, or any Affiliate of Borrower, or any Borrower Party or any Public Control Affiliate.
Section 5.38    Contribution Provisions.
(a)    As a result of the transactions contemplated by this Agreement, each Borrower will benefit, directly and indirectly, from each Borrower’s obligation to pay the Indebtedness and perform the Obligations and in consideration therefore each Borrower agrees among themselves as set forth in this Section 5.38 to allocate such benefits among themselves and to provide a fair and equitable agreement to make contributions among each of Borrowers in the event any payment is made by any individual Borrower hereunder to Agent (such payment being referred to herein as a “Contribution,” and for purposes of this Section 5.38, includes any exercise of recourse by Agent against any Collateral of a Borrower and application of proceeds of such Collateral in satisfaction of such Borrower’s obligations, to Agent under the Loan Documents).
(b)    Each Borrower shall be liable hereunder with respect to the Obligations only for such total maximum amount (if any) that would not render its Obligations hereunder or under

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any of the Loan Documents subject to avoidance under Section 548 of the Bankruptcy Code or any comparable provisions of any state law.
(c)    In order to provide for a fair and equitable contribution among Borrowers in the event that any Contribution is made by an individual Borrower (a “Funding Borrower”), such Funding Borrower shall be entitled to a reimbursement Contribution (“Reimbursement Contribution”) from all other Borrowers for all payments, damages and expenses incurred by that Funding Borrower in discharging any of the Obligations, in the manner and to the extent set forth in this Section 5.38. The financial statements provided by Borrowers shall not be required to track this allocation.
(d)    For purposes hereof, the “Benefit Amount” of any individual Borrower as of any date of determination shall be the net value of the benefits to such Borrower and the other Borrowers from extensions of credit made by Lender to (i) such Borrower and (ii) the other Borrowers hereunder and the Loan Documents to the extent such other Borrowers have mortgaged their property to secure the Obligations of such Borrower to Lender.
(e)    Each Borrower shall be liable to a Funding Borrower in an amount equal to the greater of (i) the ratio of (A) the Benefit Amount of such Borrower to the total amount of Obligations, multiplied by (B) the amount of Obligations paid by such Funding Borrower, or (ii) ninety-five percent (95%) of the excess of the fair saleable value of the property of such Borrower over the total liabilities of such Borrower (including the maximum amount reasonably expected to become due in respect of contingent liabilities) determined as of the date on which the payment made by a Funding Borrower is deemed made for purposes hereof (giving effect to all payments made by other Funding Borrowers as of such date in a manner to maximize the amount of such Contributions).
(f)    In the event that at any time there exists more than one Funding Borrower with respect to any Contribution (in any such case, the “Applicable Contribution”), then Reimbursement Contributions from other Borrowers pursuant hereto shall be allocated among such Funding Borrowers in proportion to the total amount of the Contribution made for or on account of the other Borrowers by each such Funding Borrower pursuant to the Applicable Contribution. In the event that at any time any Borrower pays an amount hereunder in excess of the amount calculated pursuant to this Section 5.38, that Borrower shall be deemed to be a Funding Borrower to the extent of such excess and shall be entitled to a Reimbursement Contribution from the other Borrowers in accordance with the provisions of this Section 5.38.
(g)    Each Borrower acknowledges that the right to Reimbursement Contribution hereunder shall constitute an asset in favor of Borrower to which such Reimbursement Contribution is owing.
(h)    No Reimbursement Contribution payments payable by a Borrower pursuant to the terms of this Section 5.38 shall be paid until all amounts then due and payable by all of Borrowers to Lenders, pursuant to the terms of the Loan Documents, are paid in full in cash. Nothing contained in this Section 5.38 shall limit or affect in any way the Obligations of any Borrower to Lenders under the Note or any other Loan Documents.

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(i)    Each Borrower acknowledges and agrees that the obligations and liabilities of each Borrower under this Agreement, the Note and the other Loan Documents shall be joint and several and in connection with such joint and several liability each Borrower hereby waives:
(i)    any right to require Agent to proceed against any other Borrower or any other Person or to proceed against or exhaust any security held by Lender at any time or to pursue any other remedy in Agent’s power before proceeding against Borrower;
(ii)    any defense based upon any legal disability or other defense of any other Borrower, any Guarantor or any other Person or by reason of the cessation or limitation of the liability of any other Borrower or any guarantor from any cause other than full payment of all sums payable under the Note, this Agreement and any of the other Loan Documents;
(iii)    any defense based upon any lack of authority of the officers, directors, partners or agents acting or purporting to act on behalf of any other Borrower or any principal of any other Borrower or any defect in the formation of any other Borrower or any principal of any other Borrower;
(iv)    any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in any other respects more burdensome than that of a principal;
(v)    any defense based upon any failure by Agent to obtain collateral for the indebtedness or failure by Agent to perfect a lien on any collateral;
(vi)    presentment, demand, protest and notice of any kind (except as otherwise set forth in the Loan Documents);
(vii)    any defense based upon any failure of Agent to give notice of sale or other disposition of any collateral to any other Borrower or to any other person or entity or any defect in any notice that may be given in connection with any sale or disposition of any collateral;
(viii)    any defense based upon any failure of Agent to comply with applicable laws in connection with the sale or other disposition of any collateral, including any failure of Agent to conduct a commercially reasonable sale or other disposition of any collateral;
(ix)    any defense based upon any use of cash collateral under Section 363 of the Bankruptcy Code;
(x)    any defense based upon any agreement or stipulation entered into by Agent with respect to the provision of adequate protection in any bankruptcy proceeding;
(xi)    any defense based upon any borrowing or any grant of a security interest under Section 364 of the Bankruptcy Code;

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(xii)    any defense based upon the avoidance of any security interest in favor of Agent for any reason;
(xiii)    any defense based upon any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, liquidation or dissolution proceeding, including any discharge of, or bar or stay against collecting, all or any of the obligations evidenced by the Note or owing under any of the Loan Documents;
(xiv)    any defense or benefit based upon Borrower’s, or any other Person’s, resignation of the portion of any obligation secured by the Security Instruments to be satisfied by any payment from any other Borrower or any such Person;
(xv)    all rights and defenses arising out of an election of remedies by Agent even though the election of remedies, such as nonjudicial foreclosure with respect to security for the Loan or any other amounts owing under the Loan Documents, has destroyed Borrower’s rights of subrogation and reimbursement against any other Borrower;
(xvi)    to the extent permitted by law, all rights and defenses that Borrower may have because any of the Indebtedness is secured by real property. This means, among other things: (1) Agent may collect from any Borrower without first foreclosing on any real or personal property collateral pledged by any other Borrower, (2) if Agent forecloses on any real property collateral pledged by any other Borrower, (I) the amount of the Indebtedness may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, (II) Agent may collect from any Borrower even if any other Borrower, by foreclosing on the real property collateral, has destroyed any right such Borrower may have to collect from any other Borrower. This is an unconditional and irrevocable waiver of any rights and defenses any Borrower may have because any of the Indebtedness is secured by real property; and
(xvii)    except as may be expressly and specifically permitted herein, any claim or other right which any Borrower might now have or hereafter acquire against any other Borrower or any other person that arises from the existence or performance of any obligations under the Note, this Agreement, the Security Instruments or the other Loan Documents, including any of the following: (A) any right of subrogation, reimbursement, exoneration, contribution, or indemnification; or (B) any right to participate in any claim or remedy of Agent against any other Borrower or any collateral security therefor, whether or not such claim, remedy or right arises in equity or under contract, statute or common law.
Section 5.39    Loan Assumption.
(a)    So long as no Default or Event of Default has occurred and is continuing, in the event Borrower desires to transfer all of the Properties to another party (the “Transferee”) and have the Transferee assume all of Borrowers’ obligations under this Agreement and all of the other Loan Documents (collectively, the “Transfer and Assumption”), Borrower may make a written application to Agent for Agent’s consent to the Transfer and Assumption, which consent shall be in Agent’s sole discretion. Together with such written application (and afterwards if requested by

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Agent), Borrower will submit to Agent true, correct and complete copies of any and all information and documents of any kind requested by Agent concerning the Properties, Transferee and/or Borrower, together with any review fee required by Agent, in Agent’s sole discretion.
(b)    If Agent consents to the Transfer and Assumption, the Transferee and/or Borrower as the case may be, shall deliver the following to Agent:
(i)    Borrower shall deliver to Agent the assumption fee;
(ii)    Borrower and Transferee shall execute and deliver to Lender any and all documents required by Agent, in form and substance required by Agent, in Agent’s Permitted Discretion (the “Assumption Documents”);
(iii)    Borrower shall cause to be delivered to Agent, an endorsement to each Title Insurance Policy in form and substance acceptable to Agent, in Agent’s sole discretion (the “Endorsement”); and
(iv)    Borrower shall deliver to Agent a payment in the amount of all costs incurred Agent Lender in connection with the Transfer and Assumption, including but not limited to, Agent’s reasonable attorneys fees and expenses, all recording fees for the Assumption Documents, and all fees payable to the title company for the delivery to Agent of the Endorsement.
(c)    Notwithstanding anything contained in this Section 5.18 to the contrary, (i) under no circumstances may the Property and Loan be transferred and assumed by any party under the terms of this Section 5.18 more than once during the Term, and (ii) except based on Agent’s written agreement to the Transfer and Assumption and Borrower’s and Transferee’s compliance with all of the terms and provisions of this Section 5.18, the terms and provisions of this paragraph shall in no way amend or modify the terms and provisions contained in Section 5.18 of this Agreement.
Section 5.40    Property Use.
(a)    Borrowers shall continue to use the building located at the southeast side of the Pasco Property and noted as a “Two-Story Brick Structure” on the ALTA Survey prepared by Duryea & Associates, P.S., job no. 14-1880D, dated October 13, 2014, last revised on November 10, 2014, in accordance with the Concomitant Zoning Agreement.
(b)    Borrowers shall comply, at its sole cost, with its obligations, under the Contract of Sale recorded December 6, 1979 as document number 397328 in the Official Records of Franklin County, Washington, to make a good faith effort to add additional units to the Pasco Property at any time the occupancy rate for the Pasco Property exceeds 85% for any twelve month period. If Borrowers are required to make any such alterations or additions to the Pasco Property to comply with such obligation, Agent’s Construction Consultant and Agent must provide approve such alteration or addition in writing in its Permitted Discretion.

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(c)    Borrowers shall (i) comply with the provisions of the Encroachment Permit #s L-95-S-3036G, L-95-S-3036H, L-95-S-5320, and L-95-S-30361, and any successor permit (collectively, the “Encroachment Permits”), upon which the Commercial Submerged Lands Lease, dated January 1, 2008 (the “Marina Lease”), by and between the State Board of Land Commissioners and RLH are based; (ii) not to terminate the Marina Lease without Agent’s prior written consent; and (iii) apply for renewal of the Marina Lease pursuant to Section 4 of the Marina Lease.
(d)    Borrowers shall not terminate the California Department of Transportation Lease, dated October 15, 2013 by and between State of California, Department of Transportation, and WHC840 LLC DBA Red Lion Hotel Redding (the “Parking Lease”), without Agent’s prior written consent.
(e)    With respect to the Pasco Property, Borrower shall cause the implementation of the Voluntary Cleanup Program (“Pasco VCP”) approved by the Washington Department of Ecology (“WDOE”) and shall continuously pursue the completion of the Pasco VCP until such time as WDOE has issued a “no further action” letter or otherwise terminates Borrowers’ obligations with respect to all cleanup of such Property.
(f)    With respect to the Port Angeles Property, Borrower shall diligently pursue its application for approval of the proposed Voluntary Cleanup Program (the “Port Angeles VCP”) by WDOE, and shall comply with directives of the WDOE with respect to the Port Angeles Property and shall implement the Port Angeles VCP or such other Voluntary Cleanup Program required by the WDOE (the “Mandated Plan”) until such time as WDOE has issued a “no further action” letter with respect to such Property or otherwise terminates Borrowers’ obligations with respect to all cleanup of such Property. Borrowers shall deliver to Agent a copy of the Port Angeles VCP (if approved by WDOE) or the Mandated Plan, within ten (10) Business Days of receipt thereof by Borrowers.
Section 5.41    Ground Lease
(a)    Borrower shall make full and timely payments of all Ground Lease Rent due and owing each month; provided, such payments shall not be made more than thirty (30) days in advance.
(b)    In the event of a rejection of the Ground Lease by the Ground Lessor or any trustee or receiver of the Ground Lessor pursuant to Section 365(h) of the Bankruptcy Code, or any other applicable law relating to bankruptcy or insolvency now or hereinafter in effect, Borrower shall not exercise its right to elect to terminate the Ground Lease, pursuant to Section 365(h)(1) of the Bankruptcy Code, or any other applicable law relating to bankruptcy or insolvency now or hereafter in effect, without prior written consent from Agent, which shall be provided in Agent’s sole discretion.
(c)    As of the Closing Date, Boise PropCo and its predecessor in interest under the Ground Lease, have no offsets, counterclaims, defenses, deduction or credits with respect to the Ground Lease.

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(d)    Boise PropCo has no knowledge of any pending eminent domain proceedings or other governmental actions against the Boise Property.
ARTICLE 6    
DEFAULTS.
Section 6.1    Event of Default. Each of the following events shall constitute an event of default hereunder (an “Event of Default”):
(a)    (i) any monthly installment of interest due under this Agreement is not paid when due, or (ii) any payment of principal due under this Agreement or the payment due on the Maturity Date is not paid when due, or (iii) any other portion of the Indebtedness, or any other amount required to be paid hereunder or under any other Loan Document is not paid within five (5) days of when due, or, if no due date is stated, within five (5) days of written demand;
(b)    The failure to pay Taxes when the same are due and payable (unless there are sufficient funds in the Tax Reserve to pay such Taxes and Agent has failed to pay such Taxes or release the applicable Reserve funds to Borrowers in accordance with this Agreement) subject to Borrowers’ right to contest Taxes pursuant to Section 5.11;
(c)    Any representation or warranty made by any Borrower Party herein or in any other Loan Document or in any report, certificate, financial statement or other instrument, agreement or document furnished by any Borrower Party in connection with the Loan or any Loan Document shall have been false or misleading in any material respect (taking the Borrower Parties or the Properties, as applicable, as a whole) as of the date the representation or warranty was made (or remade in accordance with the terms of this Agreement or any other Loan Document);
(d)    The existence of any collusion, fraud, dishonesty or bad faith by or with the acquiescence of any Borrower Party which in any way relates to or affects the Loan or the Property;
(e)    Borrowers shall fail to comply with the requirements of Section 5.14(d) and Guarantors shall fail to satisfy their Guaranteed Obligations related thereto, time being of the essence, following demand by Agent pursuant to the Completion Guaranty;
(f)    Any Borrower Party shall:
(i)    file a voluntary petition in bankruptcy or for an arrangement or reorganization under any federal or state bankruptcy, insolvency or debtor relief law or statute (hereinafter referred to as a “Bankruptcy Proceeding”);
(ii)    file any answer in any Bankruptcy Proceeding or any other action or proceeding admitting insolvency or inability to pay its debts;
(iii)    fail to oppose, or fail to obtain a vacation or stay of, any involuntary Bankruptcy Proceeding within sixty (60) days after the filing thereof;

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(iv)    solicit or cause to be solicited, or any Affiliate of any Borrower Party solicits or causes to be solicited, petitioning creditors for any involuntary Bankruptcy Proceeding against Borrower Party;
(v)    be granted a decree or order for relief, or be adjudicated a bankrupt or declared insolvent in any Bankruptcy Proceeding, whether voluntary or involuntary;
(vi)    have a trustee or receiver appointed for or have any court take jurisdiction of its property, or the major part thereof, or all of any portion of the Properties, in any voluntary or involuntary proceeding for the purpose of reorganization, arrangement, dissolution or liquidation, and, with respect to an involuntary proceeding only, such trustee or receiver is not discharged or such jurisdiction is not relinquished, vacated or stayed on appeal or otherwise, within sixty (60) days after the commencement thereof;
(vii)    make an assignment for the benefit of creditors;
(viii)    consent to any appointment of a receiver or trustee or liquidator of all of its property, or the major part thereof, or all or any portion of the Properties or all or any portion of the property of Borrower Party;
(ix)    have an attachment or execution levied with respect to, or other judicial seizure be effected for, all or substantially all of its assets or all or any portion of the Property, or the placing of any attachment, levy of execution, charging order, or other judicial seizure on the interest of Parent in Borrower; or
(g)    The occurrence of any Transfer other than a Permitted Transfer;
(h)    The breach of any of the representations, warranties or covenants contained in Sections 5.3, 5.8, 5.15, 5.18, 5.19(a), 5.20, 5.21, 5.22, 5.23, 5.26, 5.27, 5.28, 5.30, 5.31, 5.34 (other than subsection (a)(ii) thereof), 5.35, 5.36(a)(i) and (b) and 5.37 of this Agreement;
(i)    Failure of Borrower to endorse any Property Claim Proceeds to Agent pursuant to Section 5.13(a)(ii);
(j)    The dissolution, termination or merger (other than mergers of RLH), whether voluntarily or involuntarily, of any Borrower Party that is not a natural person;
(k)    Failure by the Guarantors, in the aggregate, to comply with the financial covenants set forth in Section 4.03 of the Guaranty;
(l)    The entry of a final judgment, final order or final decree for the payment of money against any Borrower Party (other than Guarantor) in excess of one percent (1%) of the Loan Proceeds, which is not satisfied and paid, or enforcement of which has not been stayed, within thirty (30) days after the date of entry of such judgment, order or decree;
(m)    (i) the term of any Policy required by this Agreement shall expire or lapse, or any Borrower receives notice of cancellation of any such Policy and Borrowers do not provide

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Agent with written evidence of a replacement or renewal Policy complying with this Agreement at least ten (10) Business Days prior to the date of cancellation or expiration of such Policy or (ii) any Borrower adjusts or settles any loss or claim in violation of Section 5.12(d);
(n)    This Agreement or any other Loan Document shall, in whole or in part, terminate, cease to be effective or cease to be a legally valid, binding and enforceable obligation of any Borrower Party; any Borrower Party to any Loan Document shall assert in writing that such document has ceased to be in full force and effect; or the Liens created pursuant to any Loan Document shall cease to be a fully perfected enforceable first priority security interest due to an act or omission of any Borrower Party;
(o)    Borrower attempts to assign its rights under this Agreement or any of the other Loan Documents or any interest herein or therein, except in accordance with Section 5.39;
(p)    Any required permit, certificate or approval with respect to a Property is not obtained by or on behalf of the applicable Borrower, lapses or ceases to be in full force and effect (i) which would result in a Material Adverse Change as determined by Agent in its Permitted Discretion or (ii) for more than fifteen (15) days without the applicable Borrower providing evidence to Agent that all conditions precedent to the issuance, granting or reinstatement of such permit, certificate or approval have been satisfied;
(q)    Any Event of Default identified in any other provision of this Agreement occurs, or any Event of Default (as defined in the Security Instrument or any other Loan Document) occurs, or a default occurs under any term, covenant or provision set forth herein or in any other Loan Document which specifically contains a notice requirement or grace period and such notice has been given and such grace period has expired;
(r)    A default or breach by Borrower under any Major Lease which shall not be cured within any applicable grace period set forth therein;
(s)    Failure of the Membership Interest Sale to close, for an amount not less than the Membership Interest Sale Price, on the Business Day immediately following the Closing Date; or
(t)    Any Borrower Party fails to perform or cause to be performed any other obligation or observe any other condition, covenant, term, agreement or provision required to be performed or observed by any Borrower Party contained in this Agreement or any other Loan Document and not specifically referred to elsewhere in this Section 6.1 or the default section of such other Loan Document; provided, however, that if such failure by its nature can be cured, then so long as the continued operation and safety of the Property, and the priority, validity and enforceability of the Liens created by the Security Instrument or any of the other Loan Documents and the value of the Properties are not impaired, threatened or jeopardized in any material respect, then Borrower shall have a period of thirty (30) days after Parent obtains knowledge of such failure or receives written notice of such failure to cure the same (provided, however, that such period shall be limited to ten (10) days if such failure can be cured by the payment of money) and an Event of Default shall not be deemed to exist during the cure period, provided, further, that if such failure

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cannot be cured by the payment of money and Borrower commences to cure such failure during the cure period and is diligently and in good faith attempting to effect such cure, the cure period shall be extended for thirty (30) additional days, but in no event shall the cure period be longer than ninety (90) days in the aggregate.
Section 6.2    Remedies Conferred upon Agent. Upon the occurrence and continuance of any Event of Default in addition to any other rights or remedies available to it pursuant to the Loan Documents or at law or in equity, Agent may take such action, without notice, or demand, that Agent deems advisable to protect and enforce its rights against Borrower and in and to the Properties, and without limiting the foregoing, Agent may pursue any one or more of the following remedies concurrently or successively, it being the intent hereof that none of such remedies shall be to the exclusion of any others:
(a)    Take possession of the Collateral and do anything required, necessary or advisable in Agent’s sole judgment to fulfill the Obligations of Borrowers. Without restricting the generality of the foregoing and for the purposes aforesaid, Borrowers hereby appoint and constitute Agent as each Borrower’s lawful attorney-in-fact with full power of substitution in the premises to perform the following actions:
(i)    make Protective Advances or advance funds in excess of the stated amount of the Loan to preserve the Collateral;
(ii)    without inquiring into and without respect to the validity thereof, pay, settle or compromise all existing bills and claims which may be Liens, or to avoid such bills and claims becoming Liens, against the Collateral or any portion of the Collateral or as may be necessary or desirable for the clearance of title to any of the Collateral;
(iii)    prosecute and defend actions or proceedings in connection with the Collateral;
(iv)    take action and require such performance as Agent deems necessary or advisable under any of the bonds to be furnished hereunder and to make settlements and compromises with the surety or sureties thereunder, and in connection therewith, to execute instruments of release and satisfaction; and
(v)    do any and every act which any Borrower might do in its own behalf with respect to the Collateral, including but not limited to executing new Leases and complying with any obligations of the landlord thereunder, it being understood and agreed that this power of attorney shall be a power coupled with an interest and cannot be revoked;
(b)    Withhold further disbursement of the proceeds of the Loan and terminate any of its obligations to Borrowers;
(c)    Declare all Indebtedness to be due and payable forthwith, without presentment, demand, protest or other notice of any kind, all of which each Borrower hereby expressly waives; provided, that without limiting the foregoing, upon any Event of Default described

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in Section 6.1(f), the entire Indebtedness and all other Obligations shall immediately and automatically become due and payable, without notice or demand, and each Borrower hereby expressly waives any such notice or demand, anything contained in any Loan Document to the contrary notwithstanding;
(d)    In addition to any rights of setoff that Agent may have under applicable law, Agent, without notice of any kind to any Borrower, may appropriate and apply to the payment of the Indebtedness or of any sums due under this Agreement any and all balances, deposits, credits, accounts, certificates of deposit, instruments or money of Borrowers then or thereafter in the possession of Agent; and
(e)    Exercise or pursue any other remedy or cause of action permitted at law or in equity or under this Agreement or any other Loan Document, including, but not limited to, foreclosure of the Security Instruments and enforcement of all Loan Documents.
Section 6.3    Right of Agent to Make Advances to Cure Event of Defaults; Obligatory Advances. If any Borrower shall fail to perform any of its covenants or agreements herein or in any of the other Loan Documents contained after the occurrence and continuance of an Event of Default, Agent, on behalf of the Lenders, may (but shall not be required to) perform any of such covenants and agreements, and any amounts expended by Agent in so doing, and any amounts expended by Agent on behalf of the Lenders in so doing, any amounts expended by Agent and/or the Lenders pursuant to Section 6.2 hereof and any amounts advanced by Agent on behalf of the Lenders and/or the Lenders pursuant to this Agreement shall be deemed advanced by Agent on behalf of the Lenders and/or the Lenders, as the case may be, under an obligation to do so regardless of the identity of the Person or Persons to whom said funds are disbursed.
Section 6.4    Payment of Costs, Expenses and Attorneys’ Fees. All costs and expenses incurred by Agent and/or the Lenders pursuant to this Article 6 (including court costs and reasonable attorneys’ fees and costs) whether or not incurred in litigation and whether or not foreclosure is concluded, including, without limitation, reasonable attorney’s fees and costs incurred in connection with any judicial or nonjudicial foreclosure of the Security Instruments or the other Loan Documents, or in connection with both judicial and nonjudicial foreclosure, if Agent shall elect to pursue each such remedy whether concurrently or independently, and the costs and expenses of retaking, holding, preparing for sale or selling all or any portion of the Collateral shall be secured by the Security Instrument and shall bear interest at the Default Rate from the date of expenditure until such sums have been paid. In addition, Borrowers acknowledge and agree that upon the occurrence and during the continuance of a Default or an Event of Default, (a) each Lender shall have the right to retain counsel for itself and (b) Borrowers shall be responsible for paying all of the costs and expenses described above that are incurred by each such Lender. All such costs and expenses incurred by each Lender shall be secured by the Security Instruments and shall bear interest at the Default Rate from the date of expenditure until such sums have been paid.
Section 6.5    Remedies Cumulative; No Waiver. All rights and remedies of Agent and Lenders hereunder and under the other Loan Documents are cumulative and not alternative, and are in addition to all rights and remedies otherwise provided by law. No exercise of any right or remedy by Agent and/or Lenders shall constitute a waiver of any other right or remedy. No delay

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or omission by Agent and/or Lenders to exercise any right, power or remedy hereunder shall impair any such right or remedy, or be construed as a waiver of any Event of Default, or any acquiescence therein. Without limiting the generality of the foregoing, Borrowers agree that if an Event of Default is continuing, (i) to the extent permitted by applicable law, Agent and Lenders are not subject to any “one action” or “election of remedies” law or rule, and (ii) all Liens and other rights, remedies or privileges provided to Agent and Lenders shall remain in full force and effect until Agent and Lenders have exhausted all of its remedies against the Collateral, the Security Instruments have been foreclosed, the Collateral has been sold and/or otherwise realized upon in satisfaction of the Indebtedness or the Indebtedness has been paid in full. Nothing contained herein or in any other Loan Document shall be construed as requiring Agent to resort to any particular portion of any Collateral for the satisfaction of any of the Obligations in preference or priority to any other portion of the Collateral, and Agent and Lenders may seek satisfaction out of the entire Collateral or any part thereof, in its sole discretion, in respect of the Obligations. By accepting payment of any part of the Indebtedness after its due date or later performance of any Obligation, Agent and Lenders shall not waive its right against any Person obligated directly or indirectly hereunder, or on any Obligation, either to require prompt payment when due of all other Indebtedness or to declare an Event of Default for failure to make such prompt payment or render such performance; and Agent’s and Lenders’ acceptance of partial payment of any portion of the Indebtedness after its due date (which may be applied to such outstanding payment obligations as Agent and Lenders may elect, notwithstanding Borrowers’ instructions to the contrary), or acceptance of partial performance of any Obligation in default, shall not cure such payment failure or default, or affect any notice of an Event of Default or sale heretofore given or recorded, unless such notice is expressly revoked in writing by Agent. For avoidance of doubt, any reference in this Agreement or in any other Loan Document to an Event of Default “continuing” or words of similar import, shall not be deemed to imply or create any obligation on the part of Agent to waive, or to accept a cure of, an Event of Default, and once an Event of Default “occurs” it shall be deemed to continue unless and until Agent agrees in writing to waive or accept the cure of such Event of Default, which Agent shall decide in its sole discretion.
Section 6.6     Severance. During the continuance of an Event of Default, Agent shall have the right from time to time to sever this Agreement, the Note and the other Loan Documents into one or more separate notes, mortgages and other security documents in such denominations and priorities of payment and liens as Agent shall determine in its sole discretion for purposes of evidencing and enforcing its rights and remedies. Borrowers shall execute and deliver to Agent from time to time, promptly after the request of Agent, a severance agreement and such other documents as Agent shall request in order to effect the severance described in the preceding sentence, all in form and substance reasonably satisfactory to Agent; provided, however, that in each such instance the outstanding principal balance of all notes (or other components of the Loan) immediately after the effective date of such severance equals the outstanding principal balance of the Loan immediately prior to such severance and the weighted average of the interest rates for all notes (or such other components of the Loan) immediately after the effective date of such modification equals the interest rate on the Loan immediately prior to such modification. Each Borrower hereby absolutely and irrevocably appoints Agent as its true and lawful attorney, coupled with an interest, in its name and stead to make and execute all documents necessary or desirable to effect such severance, each Borrower ratifying all that such attorney shall do by virtue thereof, provided, that

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Agent shall not exercise its rights under such appointment unless any Borrower has failed to execute any such documents within five (5) Business Days after request by Agent. All costs and expenses (including reasonable attorneys’ fees) incurred by Agent in connection with any such severance shall be paid by Borrowers upon request by Agent.
Section 6.7    Default Rate. From and after the occurrence and during the existence of an Event of Default, interest on all Indebtedness shall accrue at the Default Rate and be payable on demand. The failure of Agent to charge interest at the Default Rate shall not be evidence of the absence of an Event of Default or waiver of an Event of Default by Agent.
ARTICLE 7    
MISCELLANEOUS.
Section 7.1    Notices. All notices or other written communications hereunder shall be deemed to have been properly given (i) upon delivery if delivered in person, (ii) one (1) Business Day after having been deposited for overnight delivery with any reputable overnight courier service, (iii) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage prepaid, return receipt requested, or (iv) one (1) Business Day after delivery if sent by email, provided that the recipient has acknowledged receipt by telephone and that a carbon copy of such notice is sent simultaneously by the other methods provided in this Section. All notices or other written communications hereunder shall be addressed to the individuals at the addresses set forth below, or at such other address as such party may, at least ten (10) days in advance, designate by written notice to the other parties. Any notice to legal counsel or other Person other than the primary addressee for Borrowers or Agent below shall be a courtesy copy only and shall not affect the timeliness or effectiveness of delivery of any notice. All notices or other written communications to be given by any Borrowers under this Agreement or the other Loan Documents may be given by Holding on behalf of all Borrowers.
To Borrowers:
RL Venture Holding LLC
c/o Red Lion Hotels Corporation
201 W. North River Drive
Spokane, WA 99201
Attn: General Counsel
Email: Tom.McKeirnan@redlion.com
With a copy to:
Davis Wright Tremaine LLP
1201 Third Avenue, Suite 2200
Seattle, WA 98101-3045
Attn: Matt LeMaster, Esq.
Email: mattlemaster@dwt.com
And with a copy to:
Shelbourne Falcon RLHC Hotel Investors, LLC
c/o Shelbourne Capital, LLC
595 E. Lancaster Avenue, Suite 300

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Radnor, PA 19087
Attn: Joseph L. Fox
Email: jfox@shelbournecap.com
And with a copy to:
Duane Morris LLP
30 South 17th Street
Philadelphia, PA 19103
Attn: David I. Haas, Esq.
Email: dihaas@duanemorris.com
To Agent:
Pacific Western Bank
5404 Wisconsin Ave, 2nd Floor
Chevy Chase, Maryland 20815
Attn: SFB Credit Administration
Email: Sfbcreditadministration@capitalsourcebank.com
With copy to:
Arent Fox LLP
1717 K Street NW
Washington, DC 20006
Attn: David Martin, Esq.
Email: david.martin@arentfox.com

Section 7.2    Reimbursement for Expenses. Borrowers shall pay (on the date of the initial funding of the Loan, and thereafter, as the case may be) all of the following fees, costs, and expenses incurred by Agent, any Lender or Servicer or any of their Affiliates (individually or collectively, as the context may apply, a “Reimbursement Party”): (1) all reasonable out-of-pocket expenses incurred by any Reimbursement Party in connection with the Loan, including, without limitation, all documentation and diligence expenses; all search, appraisal, recording and filing fees and expenses (including, without limitation, UCC filings (and any continuations thereto from time to time), and fees for post-Closing UCC, litigation, lien, and judgment, searches, and updates to title); all reasonable fees related to attorneys, environmental consultants, engineers, appraisers, and other consultants; Other Taxes, directly or indirectly, arising out of the Collateral; wire transfer fees; furnishing all legal opinions by counsel for any Borrower Party; and any other fees, charges or taxes for the negotiation, modification, recording or filing of the Loan Documents (and all modifications, restatements, consents, waivers, or extensions thereto); (2) all out-of-pocket expenses of any Reimbursement Party in connection with the administration of the Loan, including all reasonable in-house collateral and portfolio management out-of-pocket expenses, costs of travel to any Property for property inspections; audit costs; inspection costs and expenses; attorneys’ fees and any other third party professional fees; and monitoring Borrowers’ ongoing performance of and compliance with the Loan Documents, and (3) all out-of-pocket amounts expended, advanced or incurred by any Reimbursement Party to enforce, protect, or collect payment of the Indebtedness or to enforce any Loan Document, or to defend or assert the rights and claims of any Reimbursement Party under the Loan Documents or with respect to the Collateral by any Proceeding, including all court costs,

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attorneys’ fees and expenses, fees of auditors, accountants, and investigation expenses, together with interest at the Default Rate from the date of disbursement until the date of reimbursement, all of which shall constitute part of the Loan and shall be secured by the Loan Documents. The parties hereto acknowledge that the reasonable out-of-pocket costs of any in-house counsel (including, for the avoidance of doubt, any hourly-billed legal fees), auditors, or other in-house consultants or employees used for any of the purposes set forth under this Agreement shall be considered a reimbursable expense. All costs and expenses described in this Section 7.2 shall be deemed “Loan Expenses”.
Section 7.3    Indemnity.
(a)    Borrowers shall indemnify, defend and hold harmless each Indemnified Person from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever, including the reasonable fees and disbursements of counsel for any Indemnified Person, in connection with any Proceeding (whether or not such Indemnified Person shall be designated a party thereto), that may be imposed on, incurred by, or asserted against any Indemnified Person by any Person (other than an Indemnified Person) in any manner, directly or indirectly, arising out of the Properties, the Loan or the Loan Document (collectively, the “Indemnified Liabilities”). Notwithstanding the foregoing, Borrowers shall not have any obligation to an Indemnified Person hereunder to the extent that it is determined, by court of competent jurisdiction in a final nonappealable ruling, that any such Indemnified Liabilities were directly caused by the gross negligence or willful misconduct of such Indemnified Person.
(b)    To the extent that the undertaking to indemnify, defend and hold harmless set forth in this Section may be unenforceable because it violates any law or public policy, Borrowers shall pay the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Agent or any other Indemnified Person. Any amounts payable to any Indemnified Person by reason of the application of this Section shall be payable within ten (10) Business Days of demand and shall bear interest at the Default Rate from the date loss or damage is sustained by any Indemnified Person until paid. The obligations and liabilities of Borrowers under this Section 7.3 shall survive the Term and the exercise by Agent or any Lender of any of their rights or remedies under the Loan Documents.
(c)    To the extent Borrowers are obligated, pursuant to any Loan Document, to indemnify, defend, or prosecute any Proceeding in favor of any Indemnified Person, such Indemnified Person shall have the right of full participation in any such Proceeding, with counsel of such Indemnified Person’s choice. Any Indemnified Person may, in its sole discretion, take such actions as it deems necessary and appropriate to investigate, defend or settle any event or other remedial or corrective actions with respect to such event as may be necessary for the protection of such Indemnified Person or Collateral. The parties hereto acknowledge that the use of the words “counsel” herein shall include in-house legal counsel and outside legal counsel. Borrowers shall give notice to Agent and the Lenders of the initiation of all Proceedings prosecuted or required to be defended by any Borrower, or which are subject to Borrowers’ indemnity obligations under any Loan Document, promptly after the receipt by any Borrower of notice of the existence of any such

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proceeding. As used herein, “Proceeding” shall mean litigation, arbitration, investigative, or administrative proceedings, actions, matters, hearings, whether commenced, threatened, or potential in nature.
Section 7.4    Amendments and Waivers. Any consent or waiver by Agent to or of any term, covenant or condition under the Loan Documents, or of any Default or Event of Default, or failure by Agent to insist upon strict performance by Borrower Party of any term, covenant or condition contained in any Loan Document, shall be effective or binding upon Lenders only if made in writing by Agent; and no such consent, waiver or failure to insist shall be implied from any conduct, course of conduct, or act of Lenders, or any omission by Lenders to take any action with respect thereto. No failure by Lenders to insist upon the strict performance of any covenant, agreement, term or condition of any Loan Document or to exercise any right, power or remedy consequent upon a breach thereof shall constitute a waiver, express or implied, of any such breach or of such covenant, agreement, term or condition. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. No modification, amendment, extension, discharge, termination or waiver of any provision of any Loan Document shall in any event be effective unless the same shall be in a writing signed by Borrowers.
Section 7.5    Invalid Provisions. If any provision of any Loan Document is held to be illegal, invalid or unenforceable, such provision shall be fully severable; the Loan Documents shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part thereof; the remaining provisions thereof shall remain in full effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom; and in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part of such Loan Document a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible to be legal, valid and enforceable.
Section 7.6    Loan Agreement Provisions Control over Other Instruments. The provisions of this Agreement shall prevail notwithstanding any contrary provisions in any other Loan Document.
Section 7.7    Approvals; Third Parties; Conditions. Except where otherwise expressly provided in the Loan Documents, in any instance where the approval, consent or the exercise of Agent’s judgment is required, the granting or denial of such approval or consent and the exercise of such judgment shall be (a) within the sole discretion of Agent and/or the Lenders; and (b) deemed to have been given only by a specific writing intended for such purpose executed by Agent. All approval rights retained or exercised by Agent on behalf of the Lenders with respect to leases, contracts, plans, studies and other matters are solely to facilitate Agent’s and/or any Lender’s credit underwriting, and shall not be deemed or construed as a determination that Agent and/or such Lender has passed on the adequacy thereof for any other purpose and may not be relied upon by Borrowers or any other Person. This Agreement is for the sole and exclusive use of Agent, the Lenders, Borrowers and each Guarantor and may not be enforced, nor relied upon, by any Person other than Agent, the Lenders, Borrowers and each Guarantor. All conditions of the obligations of Agent and/or the Lenders hereunder, are imposed solely and exclusively for the benefit of Agent and the Lenders, their successors and assigns, and no other Person shall have standing to require satisfaction

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of such conditions or be entitled to assume that Agent or any Lender will refuse to make advances in the absence of strict compliance with any or all of such conditions, and no other Person shall, under any circumstances, be deemed to be a beneficiary of such conditions, any and all of which may be freely waived in whole or in part by Agent and/or the Lenders at any time in Agent’s and/or the Lenders’ sole discretion, as the case may be.
Section 7.8    Agent Not in Control; No Partnership. None of the covenants or other provisions contained in this Agreement shall, or shall be deemed to, give Agent the right or power to exercise control over the affairs or management of any Borrower, the power of Agent being limited to the rights to exercise the remedies referred to in the Loan Documents. Borrowers covenant and agree that the relationship between Borrowers and Agent is, and at all times shall remain, solely that of debtor and creditor. No covenant or provision of the Loan Documents is intended, nor shall it be deemed or construed, to create a partnership, joint venture, agency or common interest in profits or income between Agent and Borrowers or to create equity in the Property in Agent. Agent neither undertakes nor assumes any responsibility or duty to Borrowers or to any other Person with respect to the Property or the Loan, except as expressly provided in the Loan Documents; and notwithstanding any other provision of the Loan Documents: (a) Agent is not, and none shall be construed as, a partner, joint venturer, alter ego, manager, controlling person or other business associate or participant of any kind of any Borrower or its stockholders, members, or partners and Agent does not intend to ever assume such status; (b) Agent shall not in any event be liable for any debts, expenses or losses incurred or sustained by any Borrower; and (c) Agent shall not be deemed responsible for or a participant in any acts, omissions or decisions of any Borrower or its stockholders, members, or partners. Agent, on the one hand, and Borrower Parties, on the other hand, disclaim any intention to create any partnership, joint venture, agency or common interest in profits or income between Agent, on the one hand, and Borrower Parties, on the other hand, or to create an equity in the Properties in Agent, or any sharing of liabilities, losses, costs or expenses. The Borrower Parties are experienced in the ownership and operation of properties similar to the Properties, and Borrowers are solely relying upon such expertise and their business plan in connection with the ownership and operation of the Properties. Borrowers are not relying on either Agent or Lender’s expertise, business acumen or advice in connection with the Properties.
Section 7.9    Time of the Essence. Time is of the essence with respect to this Agreement and the other Loan Documents, and each representation, warranty, covenant and condition hereunder and thereunder.
Section 7.10    Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that (a) Borrowers may not assign or transfer their rights hereunder or any interest herein or delegate its duties hereunder without the prior written consent of Agent, and (b) Agent and any Lender shall have the right to assign its rights (in whole or in part, whether by operation of law (pursuant to a merger or other successor in interest) or otherwise) hereunder in accordance with this Agreement. Any reference to a Person under the Loan Documents shall be deemed to include such Person’s successors and assigns, to the extent permitted by the terms hereof.

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Section 7.11    Renewal, Extension or Rearrangement. All provisions of the Loan Documents shall apply with equal effect to each and all amendments thereof and any Notes hereinafter executed which in whole or in part represent a renewal, extension, increase or rearrangement of the Loan.
Section 7.12    Cumulative Rights. The rights and remedies of Agent and Lenders as provided in the Loan Documents shall be cumulative and concurrent and may be pursued singly, successively or together against any Borrower Party, the Collateral, or any other Persons who are, or may become liable for all or any part of the Obligations, and any other funds, property or security held by Agent for the payment hereof, or otherwise, at the sole discretion of Agent. Failure to exercise any such right or remedy shall in no event be construed as a waiver or release of such rights or remedies, or the right to exercise them at any later time. The right, if any, of Borrowers, and all other Persons, who are, or may become, liable for the Obligations, to plead any and all statutes of limitation as a defense is expressly waived by each and all of such parties to the full extent permissible by law.
Section 7.13    Singular and Plural; Phases; Construction. Wherever the context of any Loan Document may so require, the gender shall include the masculine, feminine and neuter, and the singular shall include the plural and vice versa. When used in the Loan Documents, the phrase “including” (or a word of similar import) shall mean “including, but not limited to,” the phrase “satisfactory to Agent” shall mean “in form and substance satisfactory to Agent in all respects”, and the words “herein,” “hereof,” “hereunder” and other words of similar import shall refer to this Agreement as a whole and not to any particular provision. The Loan Documents shall be construed as though drafted by all of the parties thereto and shall not be construed against or in favor of any party. All accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP as applied on a consistent basis.


Section 7.14    Exhibits; Schedules; and Recitals. The exhibits, schedules, and recitals described in the beginning paragraphs of this Agreement and attached to this Agreement and the other Loan Documents, as applicable, are incorporated herein and therein and shall be considered a part of this Agreement and such other Loan Documents for the purposes stated herein and therein.
Section 7.15    Titles of Articles, Sections and Subsections. All titles or headings to articles, sections, subsections or other divisions of this Agreement and the other Loan Documents or the exhibits hereto and thereto are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto.
Section 7.16    Survival. All of the representations, warranties, covenants, and indemnities hereunder and under the other Loan Documents, and any reaffirmation, modification or amendment thereof made in accordance with the terms and conditions of the Loan Documents, shall survive

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(a) with respect to indemnities only, the repayment in full of the Indebtedness and the release of the Liens securing the Loan, (b) the transfer (by sale, foreclosure, conveyance in lieu of foreclosure or otherwise) of any or all right, title and interest in and to the Property to any Person, whether or not an Affiliate, and (c) in the case of any Lender that may assign any interest in its the Loan in accordance with the terms of this Agreement, the making of such assignment, notwithstanding that such assigning Lender may cease to be a “Lender” hereunder.
Section 7.17    Representation by Legal Counsel. Each Borrower acknowledges that it has been advised by Agent to seek the advice of legal counsel in connection with the negotiation and preparation of the Loan Documents. If any Borrower has chosen not to obtain legal representation, whether due to cost considerations or for other reasons, the lack of such representation shall not furnish Borrowers with any defense to the enforcement of Agent’s rights under the Loan Documents.
Section 7.18    Waiver of Jury Trial
(a)    EACH PARTY, TO THE MAXIMUM EXTENT PERMITTED BY LAW, (i) EXPRESSLY, KNOWINGLY AND VOLUNTARILY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY WAY CONNECTED WITH OR INCIDENTAL TO THE DEALINGS OF THE PARTIES WITH RESPECT TO ANY LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED BY ANY LOAN DOCUMENT, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AND (ii) AGREES AND CONSENTS THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS LOAN AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION AS WRITTEN EVIDENCE OF THE CONSENTS OF THE PARTIES TO THE WAIVER OF THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY.
(b)    If any such claim or cause of action is brought or filed in any United States federal court sitting in the State of California or in any state court of the State of California, and the waiver of jury trial set forth in Section 7.18(a) is determined or held to be ineffective or unenforceable, the parties agree that all claims and causes of action shall be resolved by reference to a private judge sitting without a jury, pursuant to California Code of Civil Procedure Section 638, before a mutually acceptable referee or, if the parties cannot agree, a referee selected by the Presiding Judge of the Los Angeles County, California. Such proceeding shall be conducted in Los Angeles County, California, with California rules of evidence and discovery applicable to such proceeding. If Claims or causes of action are to be resolved by judicial reference, any party may seek from any court having jurisdiction over such Claims or causes of action any prejudgment order, writ or other relief and have such prejudgment order, writ or other relief enforced to the fullest extent permitted by law notwithstanding that all claims and causes of action are otherwise subject to resolution by judicial reference.
Section 7.19    Governing Law.

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(a)    THIS AGREEMENT IS GOVERNED BY THE LAWS OF THE STATE OF NEW YORK PURSUANT TO NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1401, WITHOUT GIVING EFFECT TO ITS CHOICE OF LAW PROVISIONS THAT WOULD RESULT IN APPLICATION OF THE LAWS OF A DIFFERENT JURISDICTION. TO THE FULLEST EXTENT PERMITTED BY LAW, BORROWERS HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVE ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT.
(b)    BY EXECUTION AND DELIVERY OF EACH LOAN DOCUMENT TO WHICH IT IS A PARTY, EACH BORROWER PARTY DOES, AND HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT LENDER MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AGAINST ANY CREDIT PARTY OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.
(c)    EACH PARTY TO THIS AGREEMENT IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN THIS AGREEMENT.
Section 7.20    Waivers. EACH BORROWER PARTY AGREES THAT IT WILL NOT ASSERT ANY CLAIM, AND HEREBY WAIVES ANY CLAIM, AGAINST AGENT OR ANY OTHER INDEMNIFIED PERSON UNDER ANY LOAN DOCUMENT ON ANY THEORY OF LIABILITY FOR SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES. BORROWER EXPRESSLY AND UNCONDITIONALLY WAIVES, IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING BROUGHT BY AGENT PURSUANT TO ANY LOAN DOCUMENT, ANY AND EVERY RIGHT IT MAY HAVE TO (a) INTERPOSE ANY COUNTERCLAIM THEREIN UNLESS UNDER THE APPLICABLE RULES OF COURT SUCH COUNTERCLAIM MUST BE ASSERTED IN SUCH PROCEEDING, OR (b) HAVE THE SAME CONSOLIDATED WITH ANY OTHER OR SEPARATE SUIT, ACTION OR PROCEEDING UNLESS UNDER THE APPLICABLE RULES OF COURT SUCH SUIT, ACTION OR PROCEEDING MUST BE CONSOLIDATED WITH THE PROCEEDING BROUGHT BY AGENT.

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Section 7.21    Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement and understanding among Agent, Lenders and Borrower and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. Accordingly, the Loan Documents may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.
Section 7.22    Injunctive Relief. Borrower recognizes that in the event Borrower fails to perform, observe or discharge any of its Obligations hereunder or under any of the other Loan Documents, no remedy of law will provide adequate relief to Agent, and agrees that Agent shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.
Section 7.23    Counterparts. This Agreement may be executed in multiple counterparts, each of which shall constitute an original, but all of which shall constitute one document. Receipt of an executed signature page to this Agreement by facsimile, electronic mail, or other electronic transmission shall constitute effective delivery thereof.
Section 7.24    Joint and Several.
(a)    Each Borrower acknowledges that it is jointly and severally liable for all of the Obligations under the Loan Documents. Each Borrower expressly understands, agrees and acknowledges that (i) Borrowers are all Affiliated entities by common ownership, (ii) each Borrower desires to have the availability of one common credit facility instead of separate credit facilities, (iii) each Borrower has requested that Lenders extend such a common credit facility on the terms herein provided, (iv) Lenders will be lending against, and relying on a Lien upon, all of Borrowers’ assets even though the proceeds of the Loan made hereunder may not be advanced directly to a particular Borrower, (v) each Borrower will nonetheless benefit by the making of such Loan by Lenders and the availability of a single credit facility of a size greater than each could independently warrant, (vi) all of the representations, warranties, covenants, obligations, conditions, agreements and other terms contained in the Loan Documents shall be applicable to and shall be binding upon each Borrower and (vii) each Borrower has executed or will execute the Note as a co-maker of the Note and that it would not be able to obtain the credit provided by Lenders hereunder without the financial support provided by the other Borrowers. Each Borrower hereby absolutely and unconditionally guarantees to Agent and Lenders and their respective successors and assigns, the full and prompt payment (whether at stated maturity, by acceleration or otherwise) and performance of, all Obligations owed or hereafter owing to Lenders by each other Borrower. Except as set forth in Section 2.13, each Borrower agrees that its guaranty obligation hereunder is a continuing guaranty of payment and performance and not of collection, that its obligations under this Section 7.24 shall not be discharged until payment and performance, in full, of the Obligations has occurred, and that its obligations under this Section 7.24 shall be absolute and unconditional.
(b)    If (i) any court holds that Borrowers are guarantors and not jointly and severally liable as principal obligors or (ii) Bankruptcy Proceedings are instituted by or against any Borrower, then each Borrower hereby: (A) expressly and irrevocably waives, to the fullest extent possible, on behalf of such Borrower, any and all rights at law or in equity to subrogation,

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reimbursement, exoneration, contribution, indemnification, set off or any other rights that could accrue to a surety against a principal, to a guarantor against a maker or obligor, to an accommodation party against the party accommodated, to a holder or transferee against a maker, or to the holder of a claim against any Person, and which such Borrower may have or hereafter acquire against any Person in connection with or as a result of such Borrower’s execution, delivery and/or performance of this Agreement, or any other documents to which such Borrower is a party or otherwise; (B) expressly and irrevocably waives any “claim” (as such term is defined in the Bankruptcy Code) of any kind against any other Borrower, and further agrees that it shall not have or assert any such rights against any Person (including any surety), either directly or as an attempted set off to any action commenced against such Borrower by Lender or any other Person; and (C) acknowledges and agrees (I) that this waiver is intended to benefit Lender and shall not limit or otherwise affect such Borrower’s liability hereunder or the enforceability of this Agreement, and (II) that Lender and its successors and assigns are intended beneficiaries of this waiver, and the agreements set forth in this Section 7.24 and their rights under this Section 7.24 shall survive payment in full of the Obligations.
(c)    EACH BORROWER WAIVES THE FILING OF A CLAIM WITH A COURT IN THE EVENT OF RECEIVERSHIP OR BANKRUPTCY OF ANY BORROWER, AND WAIVES EVERY DEFENSE, CAUSE OF ACTION, COUNTERCLAIM OR SETOFF WHICH ANY BORROWER MAY NOW HAVE OR HEREAFTER MAY HAVE TO ANY ACTION BY LENDER IN ENFORCING THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, EVERY DEFENSE, COUNTERCLAIM OR SETOFF WHICH SUCH BORROWER MAY NOW HAVE, OR HEREAFTER MAY HAVE, AGAINST ANOTHER BORROWER OR ANY OTHER PARTY LIABLE AS LENDER IN ANY MANNER. AS FURTHER SECURITY, ANY AND ALL DEBTS AND LIABILITIES NOW OR HEREAFTER ARISING AND OWING TO ANY BORROWER BY ANY OTHER BORROWER, OR TO ANY OTHER PARTY LIABLE TO LENDER, ARE HEREBY SUBORDINATED TO LENDER’S CLAIMS AND UPON THE OCCURRENCE OF AN EVENT OF DEFAULT ARE ASSIGNED TO LENDER. EACH BORROWER RATIFIES AND CONFIRMS WHATEVER LENDER MAY DO PURSUANT TO THE TERMS HEREOF, AND AGREES THAT LENDER SHALL NOT BE LIABLE FOR ANY ERROR IN JUDGMENT OR MISTAKES OF FACT OR LAW. EACH BORROWER HEREBY AGREES THAT IT MAY BE JOINED AS A PARTY DEFENDANT IN ANY LEGAL PROCEEDING (INCLUDING, BUT NOT LIMITED TO, A FORECLOSURE PROCEEDING) INSTITUTED BY LENDER AGAINST ANY OTHER BORROWER.
Section 7.25    Assignments, Participations, and Syndications.
(a)    Each Lender may (at the sole cost of such Lender) at any time assign all or a portion of its rights and delegate all or a portion of its obligations under the Loan Documents (including all its rights and obligations with respect to the Loan) to one or more Persons (a “Transferee”). There shall be no limitation or restriction on any Lender’s ability to assign, pledge or otherwise transfer any Note or other Obligation. The Transferee and such Lender shall execute such loan assignment and assumption documentation as may be required by Lender, which shall be in form and substance reasonably acceptable to Lender in its discretion. Upon such transfer, (i) the Transferee thereunder shall be a party hereto and, have the same rights, benefits and

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obligations as it would if it were a Lender hereunder, (ii) the assigning Lender shall be relieved of its obligations hereunder with respect to its Pro Rata Share of the Loan or the assigned portion thereof, as the case may be. Borrowers hereby acknowledge and agree that any assignment will give rise to a direct obligation of Borrowers to the Transferee and that the Transferee shall be considered to be a “Lender” hereunder.
(b)    Lender (at the sole cost of Lender) may at any time sell participations in all or any part of its rights and obligations under this Agreement and the other Loan Documents (including all its rights and obligations with respect to the Loan) to one or more Persons (each, a “Participant”). In the event of any such sale by Lender of a participation to a Participant, (i) Lender’s obligations under this Agreement to the other parties to this Agreement shall remain unchanged, (ii) Lender shall remain solely responsible for the performance thereof, (iii) Lender shall remain the holder of the Loan (and any Note evidencing the Loan) for all purposes under this Agreement and the other Loan Documents, (iv) Borrowers (and any other party to the Loan Documents) shall continue to deal solely and directly with Lender in connection with Lender’s rights and obligations under this Agreement and the other Loan Documents, and (v) all amounts payable pursuant to Agreement by Borrowers hereunder shall be determined as if Lender had not sold such participation. Any agreement pursuant to which Lender shall sell any such participation shall provide that Lender shall retain the sole right and responsibility to exercise Lender’s rights and enforce Lender’s obligations hereunder, including the right to consent to any amendment, supplement, modification or waiver of any provision of this Agreement or any of the other Loan Documents. Borrowers hereby acknowledge and agree that the Participant under each participation shall, solely for the purposes of any indemnity obligations of Borrowers hereunder, be considered to be a “Lender” hereunder, and Borrowers agree to use commercially reasonable efforts to assist Lender in assigning or selling participations in all or any part of the Loan made by any Lender to another Person identified by such Lender. In connection with the obligations of Borrowers in the immediately preceding sentence, Borrowers shall pay to PacWest costs incurred by PacWest in an amount not to exceed $50,000, within five (5) Business Days of written demand, in connection with the participation to Jeffries LoanCore LLC on or about the Closing Date, provided, that Borrower shall not be obligated to pay any costs of any Lender in connection with any other participation.
(c)    Agent, on behalf of Borrowers, shall maintain at its address set forth herein a copy of any documentation entered into in connection with a transfer of the Loan by a Lender and a written or electronic register (the “Register”) for the recordation of the names and addresses of the Lenders and the Advances made by, and the principal amount of the Loan owing to, and the Notes evidencing the Loan owned by, each Lender from time to time. Borrowers and the Agent shall treat each Person whose name is recorded in the Register as the owner of the Loan, the Notes and the Advances recorded therein for all purposes of this Agreement. The Register shall be available for inspection by Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice.
(d)    Notwithstanding anything in this Agreement to the contrary, no assignment under Section 7.25(a) of any rights or obligations under or in respect of the Loan or the Notes evidencing the Loan shall be effective unless and until Agent shall have recorded the assignment pursuant to Section 7.25(c) and give notice of such acceptance to such Lender. Agent shall promptly

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record any such transfer of a Lender’s interests in the Loan in the Register. On or prior to such effective date, the assigning Lender shall surrender any outstanding Notes held by it, all or a portion of which are being assigned, and Borrowers, at their own expense, shall, upon the request of Agent by the assigning Lender or the Transferee, as applicable, execute and deliver to Agent, within five (5) Business Days of any request, new Notes substantially in the form of the original Note executed by Borrower on the Closing Date with changes as required to reflect the interest held by the assigning Lender and its Transferee.
(e)    Except as otherwise provided in this Section 7.25 Lender shall not, as between Borrower Parties and Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment, transfer or negotiation of, or granting of participation in, all or any part of the Loan or other Obligations owed to Agent and Lenders. Lender may furnish any information concerning Borrower Parties in the possession of Lender from time to time to assignees and participants (including prospective assignees and participants), subject to confidentiality requirements hereunder.
(f)    Notwithstanding any other provision set forth in this Agreement:
(i)    Lender may at any time create a security interest in all or any portion of its rights under this Agreement, including, without limitation, the Loan owing to it and the Notes held by it and the other Loan Documents and Collateral.
(ii)    (A) Lender and its Affiliates shall not be required to execute and deliver any documentation in connection with any transaction involving its Affiliates or lenders, (B) no lender to or funding or financing source of Lender or its Affiliates shall be considered a Transferee, (C) there shall be no limitation or restriction on Lender’s ability to assign or otherwise transfer any Loan Document to any such Affiliate or lender or funding or financing source, and (D) there shall be no limitation or restriction on such Affiliates’ or lenders’ or financing or funding sources’ ability to assign or otherwise transfer any Loan Document, Loan, Note or Obligation (or any of its rights thereunder or interest therein).
(g)    The Loan Documents shall inure to the benefit of Agent, Lenders, any Transferee, Participant (to the extent expressly provided herein only) and all future holders of the Notes, the Obligations and/or any of the Collateral, and each of their respective successors and permitted assigns. Each Loan Document shall be binding upon the Persons other than Agent that are parties thereto and their respective successors and assigns, and no such Person may assign, delegate or transfer any Loan Document or any of its rights or obligations thereunder without the prior written consent of Agent. No rights are intended to be created under any Loan Document for the benefit of any third party donee, creditor or incidental beneficiary of Borrowers. Nothing contained in any Loan Document shall be construed as a delegation to Lender of any other Person’s duty of performance. Borrowers acknowledge and agree that Lender at any time and from time to time may (i) divide and reissue (without substantive changes other than those resulting from such division) the Notes, and/or (ii) sell, assign or grant participating interests in or transfer all or any part of its rights or obligations under any Loan Document, Note, the Obligations and/or the Collateral to other Persons, in each case on the terms and conditions provided herein. Each Transferee and Participant shall have all of the rights, obligations and benefits with respect to the Obligations,

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Notes, Collateral and/or Loan Documents held by it as fully as if the original holder thereof; provided, that, notwithstanding anything to the contrary in any Loan Document, Borrowers shall not be obligated to pay under this Agreement to any Transferee or Participant any sum in excess of the sum which it would have been obligated to pay to Agent had such participation not been effected. Lender may disclose to any Transferee or Participant all information, reports, financial statements, certificates and documents obtained under any provision of any Loan Document; provided, that Transferees and Participants shall be subject to the confidentiality provisions contained herein that are applicable to Lender. Borrowers shall, at Borrowers’ sole cost and expense, execute and deliver to Lender such documents, instruments, certificates, assignments and other writings, and do such other acts necessary or desirable, to consummate the actions contemplated by this Section 7.25.
(h)    Any Lender may assign or pledge all or any portion of the Loans or Notes held by it to any Federal Reserve Bank, Federal Home Loan Bank or the United States Treasury as collateral security to secure obligations of such Lender, including without limitation, any assignment or pledge pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank, provided, that any payment in respect of such assigned Loans or Notes made by Borrower to or for the account of the assigning or pledging Lender in accordance with the terms of this Agreement shall satisfy Borrowers’ obligations hereunder in respect to such assigned Loans or Notes to the extent of such payment. No such assignment shall release the assigning Lender from its obligations hereunder.
Section 7.26    Limitation on Liability of Agent’s and Lenders’ Members, Employees, etc. Any obligation or liability whatsoever of Agent or any Lender which may arise at any time under this Agreement or any other Loan Document shall be satisfied, if at all, out of Agent’s or such Lender’s assets only. No such obligation or liability shall be personally binding upon, nor shall resort for the enforcement thereof be had to, the property of Agent’s or such Lender’s members, shareholders, directors, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort or otherwise.
Section 7.27    Confidentiality and Publicity.
(a)    Borrowers and Agent hereby agree that either party or any Affiliate thereof may (i) disclose a general description of transactions arising under the Loan Documents for advertising, marketing or other similar purposes and (ii) use any Borrower Party’s name, logo or other indicia germane to such party in connection with such advertising, marketing or other similar purposes. Each Borrower agrees, and agrees to cause each of its Affiliates, except as required by law (including, without limitation, any filing by RLH) (i) not to transmit or disclose any provision of any Loan Document to any Person (other than to any Borrower’s advisors and officers on a need-to-know basis) without Agent’s prior written consent, (ii) to inform all Persons of the confidential nature of the Loan Documents and to direct them not to disclose the same to any other Person and to require each of them to be bound by these provisions and (iii) not to use Agent’s name (or the name of any of Agent’s Affiliates) in connection with any press releases or such similar purposes without Agent’s prior written consent.
(b)    Agent and Borrowers shall exercise commercially reasonable efforts to maintain in confidence, in accordance with its customary procedures for handling confidential

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information, all written nonpublic information of any party to any Loan Document that any party to any Loan Document furnishes on a confidential basis (“Confidential Information”), other than any such Confidential Information that becomes generally available to the public or becomes available to Agent or Borrowers from a source other than a party to a Loan Document and that is not known to such recipient to be subject to confidentiality obligations; provided, that Agent, Borrowers and their respective Affiliates shall have the right to disclose Confidential Information to: (i) any Borrower Party or its Affiliates, (ii) such Person’s Affiliates; (iii) such Person’s or such Person’s Affiliates’ lenders, funding or financing sources; (iv) such Person’s or such Person’s Affiliates’ directors, officers, trustees, partners, members, managers, employees, agents, advisors, representatives, attorneys, equity owners, professional consultants, portfolio management services and rating agencies; (v) any Person to whom Agent offers or proposes to offer to sell, assign or transfer the Loan or any part thereof or any interest or participation therein; (vi) any Person that provides statistical analysis and/or information services to Agent or its Affiliates; or (vii) any Governmental Authority to which Agent is subject at the request or pursuant to any requirement of such Governmental Authority, or in connection with an examination of Agent by any such Governmental Authority; and any Person (A) to the extent required by applicable law, (B) in response to any subpoena or other legal process or informal investigative demand, or (C) in connection with any Proceeding.
Section 7.28    Estoppel Certificates. Within ten (10) Business Days after Agent’s request therefor, Borrowers shall deliver a duly acknowledged written statement setting forth the amount of the Indebtedness, stating whether any setoffs or defenses exist and the specific nature thereof, and attesting to such other matters with respect to the Loan Documents, or any Indebtedness, which Agent may request. Failure of Borrowers to execute, acknowledge and return such statement within the time period herein specified shall be deemed an admission by Borrowers that the information contained in the statement is true and correct. Borrowers acknowledge that any such statement may be relied upon by any transferee or assignee of Agent, or any other Person participating in the Loan or the Loan Documents.
Section 7.29    Retention of Servicer. Agent reserves the right to retain a servicer (a “Servicer”) selected by Agent to service the Loan, including any “master servicer” or “special servicer” appointed under the terms of any pooling and servicing agreement or similar agreement entered into as a result of a securitization. Such Servicer shall act as its agent hereunder with such powers as are specifically delegated to the Servicer by it, whether pursuant to the terms of this Agreement, any pooling and servicing agreement or similar agreement entered into as a result of a securitization or otherwise, together with such other powers as are reasonably incidental thereto. Borrowers shall pay any reasonable fees and expenses of the Servicer including, without limitation, fees for portfolio management, capital analytics fees and other Servicer related fees.
Section 7.30    Taxes.
(a)    Subject to Section 7.30(f), any and all payments by or on account of any obligations of Borrowers to Lenders under this Agreement or any other Loan Document shall be made free and clear of, and without deduction or withholding for, any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto

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(including penalties, interest and additions to tax), imposed by any Governmental Authority, excluding, in the case of Lenders, (i) such taxes (including income taxes or franchise taxes) as are imposed on or measured by gross receipts, the net income, overall receipts or total capital of Lenders by the jurisdiction in which such Lender is organized or maintains a lending office or any political subdivision thereof, and (ii) any branch profits taxes imposed by the United States of America (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being referred to specifically for purposes of this Section 7.30 as “Covered Taxes”).
(b)    In addition, Borrowers shall pay to the relevant Governmental Authority any present or future stamp or documentary taxes or any other excise, transfer, or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as “Other Taxes”).
(c)    Subject to Section 7.30(f), Borrowers shall indemnify and hold harmless Lenders for the full amount of any and all Covered Taxes or Other Taxes (including any Covered Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 7.30) paid or payable by Lenders and any liability (other than any penalties, interest, additions, and expenses that accrue both (i) after the 180th day after the receipt by Lenders of written notice of the assertion of such Covered Taxes or Other Taxes and (ii) before the date that such Lender provides Borrowers with a certificate relating thereto pursuant to Section 7.30(i)) arising therefrom or with respect thereto, whether or not such Covered Taxes or Other Taxes were correctly or legally asserted by the relevant Governmental Authority. Payments under this indemnification shall be made within ten (10) Business Days after the date Agent makes written demand therefor.
(d)    If Borrowers shall be required by applicable law to deduct or withhold any Covered Taxes or Other Taxes from or in respect of any sum payable hereunder to Lenders, then, subject to Section 7.30(f):
(i)    the sum payable shall be increased to the extent necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 7.30), each Lender receives an amount equal to the sum it would have received had no such deductions been made;
(ii)    Borrowers shall make such deductions; and
(iii)    Borrowers shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.
(e)    Within ten (10) Business Days after the date of any payment by Borrowers of Covered Taxes or Other Taxes to a Governmental Authority, Borrowers shall furnish to Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to Agent.
(f)    Borrowers will not be required to pay any additional amounts in respect of any income tax pursuant to Section 7.30(d) to Lenders or to indemnify Lenders pursuant to Section

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7.30(c) to the extent that (i) the obligation to withhold amounts with respect to United Stated Federal income tax existed on the date Lenders became a party to this Agreement or, with respect to payments to a lending office newly designated by such Lender (a “New Lending Office”), the date such Lender designated such New Lending Office with respect to the applicable Loan; provided, however, that this clause (i) shall not apply to the extent the additional amounts Lenders (or any assignee therefrom) through a New Lending Office, would be entitled to receive (without regard to this clause (i)) do not exceed the additional amounts that the Person making the transfer, or Lenders (or such assignee) making the designation of such New Lending Office, would have been entitled to receive in the absence of such transfer or designation; or (ii) the Internal Revenue Service has determined (which determination shall be final and nonappealable) that such Lender is treated as a “conduit entity” within the meaning of Treasury Regulation Section 1.881-3 or any successor provision; provided, however, nothing contained in this clause (ii) shall preclude the payment of additional amounts or indemnity payments by Borrowers to the person for whom the “conduit entity” is acting.
(g)    If Borrowers are required to pay additional amounts to or for the account of Lenders pursuant to this Section 7.30, then Lenders shall use their reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document reasonably requested by Borrowers or to designate a lending office from a different jurisdiction (if such a lending office exists) so as to eliminate or reduce any such additional payments by Borrowers which may accrue in the future if such filing or changes, in the reasonable judgment of Lenders, would not require Lenders to disclose information Lenders deem confidential and is not otherwise disadvantageous to Lenders.
(h)    If a Lender, in its reasonable judgment, receives a refund of any Covered Taxes or Other Taxes as to which it has been indemnified by Borrowers or with respect to which Borrowers have paid additional amounts pursuant to this Section 7.30 it shall promptly pay to Borrowers an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by Borrowers under this Section 7.30 with respect to the Covered Taxes or Other Taxes giving rise to such refund) and any interest paid by the relevant Governmental Authority with respect to such refund, provided, that Borrowers, upon the request of such Lender, shall repay the amount paid over to Borrowers (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to such Lender in the event such Lender is required to repay the applicable refund to such Governmental Authority.
(i)    Lenders, if claiming reimbursement or compensation pursuant to this Section 7.30, shall deliver to Borrowers a certificate setting forth in reasonable detail the amount payable to Lenders hereunder and such certificate shall be conclusive and binding on Borrower in the absence of manifest error.
(j)    The agreements and obligations of Borrowers in this Section 7.30 shall survive the payment of all other Obligations.
Section 7.31    Refinancing Right of First Offer. Agent shall have the right to provide the first offer with respect to refinancing proposals for all of the Properties. Each Borrower agrees to provide Agent with a financing package prior to delivering such package to any other lender. Agent shall have ten (10) days after receipt of such package to provide a refinancing proposal.

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Notwithstanding the foregoing, the Borrowers acknowledges that Agent is under no obligation whatsoever to make or match any proposal to the Borrowers on any specific terms and conditions, and Agent acknowledges that Borrower is under no obligation whatsoever to accept any proposal to Borrowers. Agent’s rights under this Section 7.31 shall be void and of no further force and effect upon repayment of the Loan so long as Agent first shall have had the opportunity to exercise its rights under this Section 7.31.
ARTICLE 8    
ADMINISTRATIVE AGENT.
Section 8.1    Appointment and Authorization. The Lenders hereby designate and appoint, and Borrowers hereby acknowledge and consent to the designation and appointment of, PacWest as agent of the Lenders under the Loan Documents, and authorizes PacWest (and any successor thereto designated in accordance with the provisions hereof), as agent for the benefit of the Lenders, to take such action on its behalf under the provisions of the Loan Documents and to exercise such powers and perform such duties as are expressly delegated to Agent by the terms of this Agreement and the Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender or Borrowers, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against Agent. Each Lender hereby agrees that any action taken by Agent in accordance with the provisions of this Agreement shall be authorized and binding upon all of the Lenders. Nothing herein shall be construed to deem the Agent a trustee or fiduciary for any Lender or to impose on the Agent any fiduciary duty or other duties or obligations other than those expressly provided for herein. Without limiting the generality of the foregoing, the use of the terms “Agent”, “agent” and similar terms in this Agreement or any of the Loan Documents with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, use of such terms is merely a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties.
Section 8.2    Agent to act as Agent. The Agent shall deliver to each Lender, promptly upon receipt thereof by the Agent, copies of each of the financial statements, certificates, notices and other documents delivered to the Agent pursuant to Section 5.10 of this Agreement. The Agent will also furnish to any Lender, upon the request of such Lender, a copy (or, where appropriate, an original) of any document, instrument, agreement, certificate or notice furnished to the Agent by Borrowers, any Borrower Party or any Affiliate, pursuant to this Agreement or any other Loan Document not already delivered to such Lender pursuant to the terms of this Agreement or any such other Loan Document. Payments received by Agent with respect to the Loan shall be held in trust for the benefit of the Lenders in accordance with their respective interests under this Agreement (but without creating any fiduciary or other obligations on the part of the Agent except as otherwise expressly set forth in this Agreement). As to any matters not expressly provided for by the Loan Documents (including, without limitation, enforcement or collection of any of Borrowers’

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obligations thereunder), Agent shall, except as otherwise provided in Article 8 or any other provisions of this Agreement, be required to act or to refrain from acting upon the instructions of the applicable Lenders, and such instructions shall be binding upon all Lenders and all holders of any of the obligations of Borrowers; provided, however, that, notwithstanding anything in this Agreement to the contrary, the Agent shall not be required to take any action which is contrary to this Agreement or any other Loan Document or Legal Requirements or which would subject Agent to any criminal liability or material civil liability. Without limiting the foregoing, no Lender shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting under this Agreement, the other Loan Documents, in accordance with the instructions of the applicable Lenders, or where applicable, all the Lenders. All payments or other sums received by PacWest in its capacity as Agent under the Loan shall not constitute property or assets of PacWest and shall be held by PacWest, solely in its capacity as Agent for itself and the other Lenders, subject to the Loan Documents, any separate agreement between Agent and the Lenders and the provisions of this Agreement. Each of the Lenders agrees that it shall not, unless specifically requested to do so by the Agent, take or cause to be taken any action to enforce its rights under any of the Loan Documents against any Borrower Party, including the commencement of any legal or equitable proceedings, to foreclose any lien on, or otherwise enforce any security interest in, any of the Collateral.
Section 8.3    Agent’s Reliance, Etc. Notwithstanding any other provisions of this Agreement or any other Loan Documents, neither the Agent nor any of its directors, officers, agents, employees or counsel shall be liable for any action taken or not taken by it under or in connection with this Agreement or any other Loan Document, except for the Agent’s own gross negligence or willful misconduct in connection with its obligations expressly set forth herein or therein, as determined by a court of competent jurisdiction in a final, non-appealable judgment. Without limiting the generality of the foregoing, the Agent: may consult with legal counsel (including its own counsel or counsel for any Borrower Party), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. Neither the Agent nor any of its directors, officers, agents, employees or counsel: (a) makes any warranty or representation to any Lender or any other Person and shall be responsible to any Lender or any other Person for any recitals, statement, warranty or representation made or deemed made by any Borrower Party or any other Person in or in connection with this Agreement or any other Loan Document; (b) shall have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any other Loan Document or the satisfaction of any conditions precedent under this Agreement or any Loan Document on the part of Borrowers or other Persons or inspect the property, books or records of Borrowers or any other Person; (c) shall be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document, any other instrument, certificate, report or document furnished pursuant thereto or any Collateral covered thereby or the perfection or priority of any Lien in favor of the Agent on behalf of the Lenders in any such Collateral; (d) shall have any liability in respect of any recitals, statements, certifications, representations or warranties contained in any of the Loan Documents or any other document, instrument, agreement, certificate or statement delivered in connection therewith; and (e) shall incur any liability under or in respect of this Agreement or any other Loan Document by acting upon any notice, consent, certificate or

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other instrument or writing (which may be by telephone, telecopy or electronic mail) reasonably believed by it to be genuine and signed, sent or given by the proper party or parties. The Agent may execute any of its duties under the Loan Documents by or through agents, employees or attorneys-in-fact and shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct.
Section 8.4    Indemnification of Agent. Regardless of whether the transactions contemplated by this Agreement and the other Loan Documents are consummated, each Lender agrees to indemnify the Agent (to the extent not reimbursed by Borrowers and without limiting the obligation of Borrowers to do so) pro rata in accordance with such Lender’s respective Pro Rata Share, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against the Agent (in its capacity as Agent or in its capacity as the entity named as “Lender” under any Loan Document, but not in its capacity as an individual “Lender” under this Agreement) in any way relating to or arising out of the Loan Documents, any transaction contemplated hereby or thereby or any action taken or omitted by the Agent under the Loan Documents (collectively, “Indemnifiable Amounts”); provided, however, that no Lender shall be liable to Agent for any portion of such Indemnifiable Amounts to the extent resulting from Agent’s gross negligence or willful misconduct as determined by a court of competent jurisdiction in a final, non-appealable judgment provided, however, that no action taken in accordance with the directions of the applicable Lenders pursuant to any agreement between Agent and Lenders shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section 8.4. Without limiting the generality of the foregoing, each Lender agrees to reimburse the Agent (to the extent not reimbursed by Borrowers and without limiting the obligation of Borrowers to do so) within two (2) Business Days after receipt of written demand from Agent for its Pro Rata Share of any out-of-pocket expenses (including the reasonable fees and expenses of the counsel to the Agent) incurred by the Agent in connection with the Loan or any Collateral, including, without limitation, in connection with the preparation, negotiation, execution, administration, or enforcement (whether through negotiations, legal proceedings, or otherwise) of, or legal advice with respect to the rights or responsibilities of the parties under, the Loan Documents, any suit or action brought by the Agent to enforce the terms of the Loan Documents and/or collect any obligation of Borrowers hereunder, any “lender liability” suit or claim brought against the Agent and/or the Lenders, and any claim or suit brought against the Agent and/or the Lenders arising under any Hazardous Materials Laws (whether before or after the foreclosure of any Collateral). Such out–of–pocket expenses (including counsel fees) shall be advanced by the Lenders on the request of the Agent notwithstanding any claim or assertion that the Agent is not entitled to indemnification hereunder upon receipt of an undertaking by the Agent that the Agent will reimburse the Lenders if it is actually and finally determined by a court of competent jurisdiction that the Agent is not so entitled to indemnification. If Borrowers shall reimburse the Agent for any Indemnifiable Amount following payment by any Lender to the Agent in respect of such Indemnifiable Amount pursuant to this Section 8.4, the Agent shall share such reimbursement on a ratable basis with each Lender making any such payment based on each Lender’s Pro Rata Share.
Section 8.5    Removal and Resignation. Agent may resign at any time as Agent under the Loan Documents by giving written notice thereof to the Lenders and Borrowers. Subject to the

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provisions of the last sentence in this Section 8.5 in the event of a material breach of any of its obligations in this Agreement by the Agent and the failure to cure same within fifteen (15) days after it receives written notice of such material breach, the Agent may be removed as Agent under the Loan Documents pursuant to the terms of any agreement between Agent and the Lenders upon thirty (30) day’s prior notice. Upon any such resignation or removal, the applicable Lenders shall have the right to appoint a successor Agent. Any such successor Agent shall be either (a) a Lender or (b) a Person meeting the qualifications of a permitted Lender assignee. If no successor Agent shall have been so appointed in accordance with the immediately preceding sentence, and shall have accepted such appointment, within thirty (30) days after the current Agent’s removal or giving of notice of resignation as described above, then the current Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a Lender, if any Lender shall be willing to serve. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the current Agent, and the current Agent shall be discharged from its duties and obligations under the Loan Documents. After any Agent’s resignation or removal hereunder as Agent, the provisions of this Agreement shall continue to inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Documents. Notwithstanding anything contained herein to the contrary, the Agent may assign its rights and duties under the Loan Documents to any of its Affiliates, and after such assignment, Agent shall promptly thereafter give written notice to Borrowers and each Lender. If Agent becomes obligated under the terms of this Agreement to take or not take an action at the direction of the Lenders pursuant to a separate agreement which Agent for any reason does not want to execute, then, notwithstanding anything to the contrary contained in this Agreement, Agent shall have the right to resign as Agent prior to taking or not taking such action, whether or not any other Lender is willing to serve as Agent, provided, that Agent gives the other Lenders at least five (5) Business Days prior notice of such resignation; in such event the appointment of a new Agent shall become effectively immediately upon written notice of such appointment to the previous Agent, Borrowers and the Lenders.
Section 8.6    Notice of Defaults. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default under the Loan Documents (other than nonpayment of principal of or interest on the Loan) unless Agent has actual knowledge thereof or Agent has received notice in writing from a Lender or Borrowers referring to this Agreement or the other Loan Documents, describing such event or condition and expressly stating that such notice is a notice of an Event of Default.
Section 8.7    Expenses. Any Protective Advances and Approved Expenses funded by Agent or Lenders shall be deemed part of the Indebtedness and Borrower shall reimburse Agent within five (5) Business Days after the date written demand by Agent is received by the Lenders. Agent shall have the right, but not the obligation, to incur such Protective Advances and Approved Expenses prior to reimbursement therefor by the Lenders.
[Signature Pages Follow]
 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
BORROWERS:

RL VENTURE HOLDING LLC, a Delaware limited liability company

By:/s/ Thomas L. McKeirnan
Name: Thomas L. McKeirnan
Title: Executive Vice President

RL BEND, LLC,
RL BOISE, LLC,
RL COOS BAY, LLC,
RL EUREKA, LLC,
RL OLYMPIA, LLC,
RL PASCO, LLC,
RL PORT ANGELES, LLC,
RL POST FALLS, LLC,
RL REDDING, LLC,
RL RICHLAND, LLC,
RL SALT LAKE, LLC,
RL SPOKANE, LLC,
each a Delaware limited liability company

By:/s/ Thomas L. McKeirnan
Name: Thomas L. McKeirnan
Title: Executive Vice President
 


[SIGNATURE PAGE TO LOAN AGREEMENT]


AGENT AND LENDER:

PACIFIC WESTERN BANK, a California
state-chartered bank
 
By:/s/ Jason Schwartz
Name: Jason Schwartz
Title: SVP, Managing Director


[SIGNATURE PAGE TO LOAN AGREEMENT]

 
EXHIBIT A
Legal Description
See Attached

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EXHIBIT A-1
Legal Description for Bend Property
LEGAL DESCRIPTION: Real property in the County of Deschutes, State of Oregon, described as follows:
LOTS 1 THROUGH 12 IN BLOCK 3 OF WIESTORIA, CITY OF BEND, DESCHUTES COUNTY, OREGON. TOGETHER WITH THAT PORTION OF A VACATED ALLEY WHICH INURED THERETO UPON THE VACATION THEREOF, BY ORDINANCE NO-850, RECORDED JULY 8, 1971 IN BOOK 176, PAGE 956 OF DESCHUTES COUNTY DEED RECORDS.
EXCEPTING THEREFROM THAT PORTION OF SAID LOTS 6 AND 7 IN BLOCK 3, CONVEYED TO THE CITY OF BEND BY WARRANTY DEED RECORDED MARCH 09, 2000 IN INSTRUMENT NO. 2000-9063 AND INSTRUMENT NO. 2000-9064.

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EXHIBIT A-2
Legal Description for Boise Property
LEGAL DESCRIPTION: Real property in the County of Ada, State of Idaho, described as follows:
Parcel A:
Parcel I:
All of Lots 1 and 2 in Block 40 and all of Block 41 of Fairview Addition, according to the plat thereof, filed in Book 2 of Plats at Page 73, Records of Ada County, Idaho, and all of Block 40‑A Citizens Right-Of-Way, according to the plat thereof, filed in Book 7 of Plats at Page 341, and a portion of Lots 1 and 2 in Block 10 and all of Lots 11, 12, 13 and 14 in Block 9 of McCarty’s Second Addition, according to the plat thereof, filed in Book 2 of Plats at Page 85, Records of Ada County, Idaho, and the vacated streets and alley included within the boundaries thereof, more particularly described as follows:
Beginning at the intersection of the Easterly boundary of 22nd Street and Northerly boundary of Fairview Avenue, being the Southwest corner of Block 41 of Fairview Addition, said point being The True Point Of Beginning; thence
North 0°00’00” East 350.16 feet along the Easterly boundary of said 22nd street to a point on the Southerly boundary of Main Street; thence
North 89°59’20” East 157.99(8) feet along the said Southerly boundary of Main Street to a point; thence South 89°50’40” East 157.98(151.50) feet along the said Southerly boundary of Main Street to a point; thence
South 54°50’40” East 57.50 feet along the said Southerly boundary of Main Street to a point; thence South 1°57’20” West 192.00 feet to a point, said point being the Southeast corner of said Lot 14 in Block 9 of said McCarty’s Second Addition; thence
North 88°02’40” West 230.08 feet to a point; thence South 2°53’20” West 136.32 feet to a point on the Northerly boundary of said Fairview Avenue; thence
North 88°13’50” West 113.20 feet along the said Northerly boundary of said Fairview Avenue to the Point Of Beginning.
Parcel II:
Lots 9 and 10 in Block 9 of McCarty’s Second Addition, according to the plat thereof, filed in Book 2 of Plats at Page 85, Official Records.
Except Therefrom that portion of said Lot 10, more particularly described as follows:
Commencing at the Northwest corner of said Lot 10, said point being the True Point Of Beginning; thence
South 88°02’40” East 20.00 feet along the Northerly boundary of said Lot 10 to a point; thence South 46°57’20” West 28.28 feet to a point on the Westerly boundary of said Lot 10; thence North 1°57’20” East 20.00 feet along the said Westerly boundary of said Lot 10 to the Point Of Beginning.
Also Except a parcel of land for public right-of-way being a portion of Lots 9 and 10 of Block 9 of McCarty’s Second Addition, a subdivision according to the plat thereof, filed in Book 2 of

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Plats at Page 85, lying in the Southeast quarter of Section 4, Township 3 North, Range 2 East, Boise Meridian, Ada County Idaho, and more particularly described as follows:
Beginning at a lead plug and tack marking the Northwest corner of Lot 2 of Block 40 of Fairview Addition, a subdivision, according to the official plat thereof, filed in Book 2 of Plats at Page 73, Official Records; thence
South 0°00’00” West 350.16 feet along the Westerly boundaries of said Lot 2 of Block 40 of Fairview Addition, Block 40-A Citizen’s Right-Of-Way, a subdivision, according to the official plat thereof, filed in Book 7 of Plats at Page 341, and Block 41 of said Fairview Addition, which is also the Easterly right-of-way line 22nd Street, to a point marking the Southwest corner of the said Block 41 of Fairview Addition; thence
South 88°13’50” East 190.58 feet along the Southerly boundary of the said Block 41 of Fairview Addition, Block 40-A of Citizens Right-of-Way, the adjacent alley to the said Lot 10 of Block 9, McCarty’s Second Addition, all of Lot 10 and a portion of Lot 9 of Block 9 of McCarty’s Second Addition, which is also the Northerly right-of-way line of Fairview Avenue, to a point, also said point being the Real Point Of Beginning; thence continuing
South 88°13’50” East 30.0 feet along the said Southerly boundaries of Lots 10 and 9 of Block 9 of McCarty’s Second Addition to a point; thence
North 1°57’20” East 99.95 feet along a line 25.00 feet Westerly of and parallel with the Easterly boundary of the said Lot 9 of Block 9 of McCarty’s Second Addition to a iron pin; thence
North 46°57’20” East 28.28 feet to an iron pin on the Northerly boundary line of the said Lot 9 of Block 9 of McCarty’s Second Addition; thence
North 88°02’40” West 50.00 feet along the said Northerly boundary of Lot 9 and the Northerly boundary of the said Lot 10 of Block 9 of McCarty’s Second Addition to a iron pin; thence
South 1°57’20” West 120.05 feet along line 5.00 feet Westerly of and parallel with Easterly boundary of the said Lot 10 of Block 9 of McCarty’s Second Addition to The Real Point Of Beginning.
Parcel III:
The East 150 feet of Lot 1 in Block 38 and all of Block 39 of Fairview Addition, according to the official plat thereof, filed in Book 2 of Plats at Page 73 and the East 150 feet of Block 38-A of Citizen’s Right-Of-Way, according to the plat thereof, filed in Book 7 of Plats at Page 341, Records of Ada County, Idaho.
Parcel IV:
Lots 15 and 16 of Block 9 of McCarty’s Second Addition, according to the official plat thereof, filed in Book 2 of Plats at Page 85, Records of Ada County, Idaho and that portion of 18th Street, now vacated, described as follows:
Beginning at the Northeast corner of said Lot 16; thence West 100 feet; thence
North 69.88 feet; thence
Southeast 119.28 feet; thence
South 4.86 feet to The Point Of Beginning.
Parcel V:
A parcel of land being all of the alley lying Westerly of and adjacent with the Westerly boundary of Lot 10 of Block 9 and a portion of the 16.00 foot alley lying Northerly of and adjacent with said Lot 10 of Block 9 of McCarty’s Second Addition, a subdivision according to the plat thereof, filed in Book 2 of Plats at Page 85, lying in the Southeast quarter of Section

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4, Township 3 North, Range 2 East, Boise Meridian, Ada County Idaho, more particularly described as follows:
Beginning at a lead plug and tack marking the Northwest corner of Lot 2 of Block 40 of Fairview Addition, a subdivision, according to the official plat thereof, filed in Book 2 of Plats at Page 73, Official Records; thence
South 0°00’00” West 350.16 feet along the Westerly boundaries of said Lot 2 of Block 40 of Fairview Addition, Block 40-A Citizen’s Right-Of-Way, a subdivision, according to the official plat thereof, filed in Book 7 of Plats at Page 341, and Block 41 of said Fairview Addition, which is also the Easterly right-of-way line 22nd Street, to a point marking the Southwest corner of the said Block 41 of Fairview Addition; thence
South 88°13’50” East 145.58 feet along the Southerly boundaries of said Block 41 of Fairview Addition and Block 40-A of Citizens Right-Of-Way and adjacent alley to said Lot 10 of Block 9 of McCarty’s Second Addition which is also the Northerly right-of-way line of Fairview Avenue, to a point marking the Southwest corner of the said Lot 10 of Block 9 of McCarty’s Second Addition, also said point being the Real Point Of Beginning; thence
North 1°57’20” East 100.20 feet along the Westerly boundary of the said Lot 10 of Block 9 of McCarty’s Second Addition to an iron pin; thence
North 46°57’20” East 26.28 feet to an iron pin on the Northerly boundary of the said Lot 10 of Block 9 of McCarty’s Second Addition; thence
South 88°02’40” East 25.00 feet along the said Northerly boundary of the said Lot 10 of Block 9 of McCarty’s Second Addition to an iron pin; thence
North 1°57’20” East 16.0 feet along a line Westerly of and parallel with the Westerly boundary extended of the said Lot 9 in Block 9 of McCarty’s Second Addition to an iron pin on the Northerly boundary of the said 16-foot alley; thence
North 88°02’40” West 75.16 feet along the said Northerly boundary of the said 16-foot alley to an iron pin on the Westerly boundary of the said McCarty’s Second Addition; thence
South 2°53’20” West 136.32 feet along the said Westerly boundary of McCarty’s Second Addition, which is also the Westerly boundary of the said adjacent alley to Lot 10 of Block 9 of McCarty’s Second Addition, to a point marking the Southwest corner of the said adjacent alley to Lot 10 of Block 9 of McCarty’s Second Addition; thence
South 88°13’50” East 32.38 feet along the said Southerly boundary of the adjacent alley to Lot 10 of Block 9 of McCarty’s Second Addition to the Real Point Of Beginning.
Parcel VI:
Lots 7 and 8 in Block 9 of McCarty’s Second Addition, according to the official plat thereof, filed in Book 2 of Plats at Page 85, Official Records of Ada County, Idaho.
Parcel B:
Lots 3, 4, 5, 6 and 17 in Block 9 of McCarty’s Second Addition, according to the official plat thereof, filed in Book 2 of Plats at Page 85, Records of Ada County, Idaho, and Lot 18 and in Block 9, Except the hereinafter described:
A parcel of land being on the Westerly side of the center line of Boise One-Way Couplet, Project No. U-3021 (21) Highway Survey, as shown on the plans thereof now on file in the office of the Department of Highways of the State of Idaho, and being a portion of Lot 18 in Block 9 of McCarty’s Second Addition, according to the official plat thereof, filed in Book 2 of Plats at Page 85, Official Records of Ada County, Idaho, described as follows:

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Beginning at the Northeast corner of Lot 18 in Block 9 of said McCarty’s Second Addition; thence Southerly along the Easterly boundary line of said Lot 18 a distance of 12.2 feet to a point that bears
North 87°54’04” West, 58.74 feet from Station 80456.72 of Boise, One Way Couplet Project No. U-3021 (21) Highway Survey; thence
Northwesterly along a 140.50 foot radius curve left 35.94 feet to a point that bears South 35°10’41” West 42.38 feet from Station 79462.58 of said Highway Survey; thence
Northerly 3.0 feet, more or less, to a point in the Northeasterly line of said Lot 18 that bears South 35°10’41” West 40.00 feet from Station 79460.90 of said Highway Survey; thence
Southeasterly along the Northeasterly line of said Lot 18 to the Place Of Beginning.
And
All of Lot 19, Block 9 of McCarty’s Second Addition, according to the plat thereof, filed in Book 2 of Plats at Page 85, Records of Ada County, Idaho.
Excepting Therefrom a parcel of land being on both sides of the centerline of Boise One-Way Couplet, Project No. U-3021 (21) Highway Survey as shown on the plans thereof now on file in the office of the Department of Highways of the State of Idaho and being a portion of Lot 19 in Block 9 of McCarty’s Second Subdivision, according to the official plat thereof, filed in Book 2 of Plats at Page 85, Official Records of Ada County, Idaho, described as follows:
Beginning at the East corner of Lot 19 in Block 9 of said McCarty’s Second Addition; thence
Westerly along the South boundary line of said Lot 19, a distance of 95.44 feet to the Southwest corner thereof; thence
North 62°17’36” East 23.12 feet to a point that bears North 87°54’04” West 38.67 feet from Station 80194.74 of Boise, One-Way Couplet, Project No. U-3021 (21) Highway Survey; thence
Northwesterly along a 140.50 foot radius curve left 55.10 feet to a point in the Westerly line of said Lot 19 that bears North 87°54’04” West, 58.74 feet from Station 80+56.73 of said Highway Survey; thence Northerly along said Westerly line 12.7 feet, to the Northwesterly corner of said Lot 19; thence Southeasterly along the Northeasterly boundary line of said Lot 19 to the Real Point Of Beginning.
Parcels A and B are also described as follows pursuant to Survey dated May 13, 1994, and revised July 17, 1995, by Toothman-Orton Engineering Company as File No. 1-94025-SHTI‑1:
Parcel 1:
The East 150 feet of Lot 1 in Block 38, and all of Block 39 of Fairview Addition according to the plat thereof, filed in the office of the Ada County Recorder in Book 2 of Plats at Page 73, and the East 150.00 feet of Block 38-A of Citizen’s Right Of Way, according to the plat thereof, filed in Book 7 of Plats at 341, being more particularly described as follows:
Beginning at a 5/8 inch iron pin at the Northeasterly corner of said Block 39 being the point of intersection of the Southerly sideline of West Main Street and the Westerly sideline of North 22nd Street; thence
1.)S.00°00’00”E., 165.60 feet along the Westerly sideline of said 22nd Street to a 5/8 inch iron pin; thence

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2.)N.89°00’42”W., 150.02 feet along the Southerly line of said Lot 1 Block 38 to a 5/8 inch iron pin; thence
3.)N.00°00’00”W., 162.98 feet along a line parallel with and 150.00 feet West of the Westerly sideline of 22nd Street to a 5/8 inch iron pin; thence
4.)N.89°59’20”E., 150.00 feet along the Southerly sideline of said West Main Street to the Point Of Beginning.
Parcel 2:
All of Lots 1 and 2 of Block 40 and all of Block 41 of Fairview Addition, according to the plat thereof in the office of the Ada County Recorder in Book 2 of Plats at Page 73; all of Block 40‑A of Citizen’s Right Of Way, according to the official plat thereof, filed in Book 7 of Plats at Page 341; portions of Lots 1 and 2 of Block 10 and a portion of Lot 10 and all of Lots 11, 12, 13, 14, 15 and 16 of Block 9 of McCarty’s 2nd Addition, according to the plat thereof, filed in Book 2 of Plats at Page 85; and certain vacated portions of streets and alleys shown on said plat and included within the following more particularly described
Parcel 2: Beginning at the point of intersection of the Easterly sideline of North 22nd with the Northerly sideline of Fairview Avenue, said point being the Southwesterly corner of said Block 41 of the Fairview Addition; thence,
1.) N.00°00’00”W., 350.18 feet along the Easterly sideline of said North 22nd Street, being along the Westerly lines of said Block 41, Block 40-A of said Citizen’s Right Of Way and Block 40 of said Fairview Addition to the point of intersection of said Easterly sideline of North 22nd Street with the Southerly sideline of West Main Street; thence,
2.) N.89°59’20”E., 157.98 feet along the Southerly sideline of West Main Street being along the Northerly line of Lots 1 and 2 of Block 40 of Fairview Addition and along the Northerly terminus of a vacated portion of 18th Street to a point in the Westerly line of Lot 2 Block 10 of McCarty’s 2nd Addition; thence
3.) S.89°50’40”E., 151.50 feet along said sideline of West Main Street to a point in the Northeasterly line of Lot 1 of said Block 10; thence
4.) S.54°50’40”E., 185.34 feet along said sideline, being along the Northeasterly line of said Lot 1, and along the Easterly terminus of vacated 18th Street to a point in the Northerly line of Lot 17 of Block 9 of said McCarty’s 2nd Addition; thence,
5.) N.88°02’40”W., 6.97 feet along the Northerly line of said Lot 17 to the Northwesterly corner thereof; thence,
6.) S.01°57’20”W., 122.00 feet along the Westerly line of said Lot 17 to the Southwesterly corner of said Lot 17 Block 9; thence,
7.) N.88°02’40”W., 255.00 feet along the Southerly lines of Lots 16, 15, 14, 13, 12 and 11 to a point; thence,
8.) S.01°57’20”W., 136.05 feet along the Easterly terminus of the vacated portion of a 16 foot wide alley and along a line parallel with and 5.00 feet Westerly of the Easterly line of Lot 10 Block 9 to a point in the Southerly line of said Lot 10, being the Northerly sideline of West Fairview Avenue; thence

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9.) N.88°13’50”W., 190.48 feet along the Southerly lines of said Lot 10 Block 9, the vacated portion of 19th Street, Lot 40-A of Citizen’s Right Of Way and Block 41 of the Fairview Addition, being along the Northerly sideline of West Fairview Avenue, to the Point Of Beginning.
Parcel 3:
All of Lots 7 and 8 and a portion of Lot 9, of Block 9, McCarty’s 2nd Addition, according to the plat thereof filed in the office of the Ada County Recorder in Book 2 of Plats at Page 85, and being more particularly described as follows:
Commencing at the point of intersection of the Easterly sideline of North 22nd Street with the Northerly sideline of Fairview Avenue, said point being the Southwesterly corner of Block 41 of the Fairview Addition according to the official plat thereof filed in Book 2 of Plats at Page 73; thence
A.) S.88°13’50”E., 220.48 feet along the Southerly lines of said Block 41 Fairview Addition, Block 40-A of Citizen’s Right of Way, the vacated portion of 19th Street and Lots 10 and 9 of Block 9 of said McCarty’s 2nd Addition to a point 25 feet Easterly of the Westerly line of said Lot 9, being the Point Of Beginning; thence
1.) N.01°57’20”E., 99.95 feet along a line parallel with and 25.00 feet Easterly of the Westerly line of said Lot 9; thence,
2.) N.46°57’20”E., 28.28 feet to a point in the Northerly line of said Lot 9; thence,
3.) S.88°02’40”E., 105.00 feet along the Northerly lines of Lots 9, 8 and 7 to the Northeasterly corner of said Lot 7; thence
4.) S.01°57’20”W., 119.55 feet along the Easterly line of said Lot 7 to a point in the Northerly sideline of West Fairview Avenue; thence
5.) N.88°13’50”W., 125.00 feet along said sideline to the Point Of Beginning.
Parcel 4:
All of Lot 17 and portions of Lots 18 and 19, Block 9, McCarty’s 2nd Addition, according to the plat thereof filed in the office of the Ada County Recorder in Book 2 of Plats at Page 85, and being more particularly described as follows:
Commencing at the point of intersection of the Easterly sideline of North 22nd Street with the Northerly sideline of Fairview Avenue, said point being the Southwesterly corner of Block 41 of the Fairview Addition according to the official plat thereof filed in the office of the Ada County Recorder in Book 2 of Plats at Page 73; thence,
A.) S.88°13’50”E., 190.48 feet along the Southerly lines of said Block 41 Fairview Addition, Block 40-A of Citizen’s Right of Way, the vacated portion of 19th Street, and Lot 10, Block 9 of said McCarty’s 2nd Addition to a point 5.00 feet West of the Easterly line of said Lot 10; thence,
B.) N.01°57’20”E., 136.05 feet along a line parallel with any 5.00 feet Westerly of the Easterly line of said Lot 10 to a point in the Southerly line of Lt 11 Block 9; thence,

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C.) S.88°02’40”E., 255.00 feet along the Southerly lines of Lots 11, 12, 13, 14, 15 and 16 to the Southwesterly corner of said Lot 17 and the Point Of Beginning; thence,
1.) N.01°57’20”E., 122.00 feet along the Westerly line of said Lot 17 to the Northwesterly corner of same; thence,
2.) S.88°02’40”E., 6.97 feet along the Northerly line of said Lot 17 to the point of intersection of same with the Southerly sideline of West Main Street; thence,
3.) S.54°50’40”E., 81.62 feet along said sideline of West Main Street to a point in the Westerly sideline of West Grove Street, also known as the Boise One Way Couplet, according to the plans of Project No. U‑3021 (21) on file with the Idaho Department of Transportation, District 3; thence,
4.) S.01°01’48”W., 2.88 feet (formerly 3.0 feet more or less) along said Westerly sideline of West Grove Street to a point on a non-tangent curve; thence
5.) Southeasterly along said sideline along a curve to the right having a radius of 140.50 feet, an arc length of 79.12 feet, a central angle of 32°16’38” a chord bearing S.32°44’09”E., and a chord distance of 78.07 feet, crossing through Lots 18 and 19 of said Block 9 to an angle point in said sideline; thence,
6.) S.64°33’28”W., 22.25 feet (formerly S.62°17’36”W., 23.12) along said sideline to the Southeasterly corner of said Lot 18 Block 9; thence,
7.) N.88°02’40”W., 100.00 feet along the Southerly lines of Lots 18 and 17 of Block 9 to the Point Of Beginning.
Parcel 5:
All of Lots 3, 4, 5 and 6 of Block 9, McCarty’s 2nd Addition, according to the plat thereof filed in the office of the Ada County Recorder in Book 2 of Plats at Page 85, and being more particularly described as follows:
Commencing at the point of intersection of the Easterly sideline of North 22nd Street with the Northerly sideline of Fairview Avenue, said point being the Southwesterly corner of Block 41 of the Fairview Addition according to the official plat thereof filed in Book 2 of Plats at Page 73; thence,
A.) S.88°13’50”E., 345.48 feet along the Southerly lines of Block 41 Fairview Addition, Block 40-A of Citizen’s Right of Way, the vacated portion of 19th Street and Lots 10, 9, 8 and 7 of Block 9 of said McCarty’s 2nd Addition to the Southwesterly corner of Lot 6 Block 9 and the Point Of Beginning; thence,
1.) N.01°57’20”E., 119.55 feet along the Westerly line of said Lot 6 to the Northwesterly corner of said; thence,
2.) S.88°02’40”E., 200.00 feet along the Northerly lines of Lots 6, 5, 4 and 3 to the Northeasterly corner of Lot 3 Block 9; thence,
3.) S.01°57’20”W., 118.90 feet along the Easterly line of said Lot 3 to a point in the Northerly sideline of West Fairview Avenue; thence,

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4.) N.88°13’50”W., 200.00 feet along said sideline to the Point Of Beginning.

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EXHIBIT A-3
Legal Description for Coos Bay Property
LEGAL DESCRIPTION: Real property in the County of Coos, State of Oregon, described as follows:
BEING A PORTION OF BLOCKS 35 AND 36, OF NASBURG’S ADDITION ALONG WITH A PORTION OF BLOCKS 36, 32, 63 AND 62 OF BENNETT’S ADDITION TO COOS BAY. INCLUDING THAT PORTION OF VACATED 4TH, 5TH AND 6TH STREET AND 7TH COURT.
MORE PARTICULARLY DESCRIBED AS FOLLOWS:
BEGINNING AT THE SOUTHWEST CORNER OF BLOCK 35, NASBURG’S ADDITION TO COOS BAY; THENCE NORTH 00º 00’ 20” WEST A DISTANCE OF 171.17 FEET; THENCE NORTH 60º 30’ 00” EAST A DISTANCE OF 591.96 FEET TO A POINT LOCATED ON THE WESTERLY LINE OF U.S. HIGHWAY 101; THENCE ALONG SAID WESTERLY LINE ALONG A CURVE TO THE LEFT HAVING A RADIUS OF 1949.86 FEET AND A CENTRAL ANGLE OF 1º 36’ 18” A DISTANCE OF 54.62 FEET (WHOSE LONG CHORD BEARS SOUTH 40º 18’ 48” EAST 54.62 FEET); THENCE ALONG A SPIRAL CURVE TO THE LEFT HAVING A CENTERLINE LENGTH OF 300.00 FEET AND AN S VALUE OF 4º 30’ (WHOSE LONG CHORD BEARS SOUTH 42º 24’ 10” EAST 303.05 FEET); THENCE SOUTH 43º 54’ 35” EAST A DISTANCE OF 241.83 FEET TO THE BEGINNING OF A CURVE; THENCE ALONG A CURVE TO THE RIGHT HAVING A RADIUS OF 13.50 FEET AND A CENTRAL ANGLE OF 133º 54’ 00” A DISTANCE OF 31.54 FEET (WHOSE LONG CHORD BEARS SOUTH 23º 02’ 25” WEST 24.84 FEET); THENCE SOUTH 89º 59’ 25” WEST A DISTANCE OF 471.94 FEET; THENCE NORTH 00º 04’ 35” EAST A DISTANCE OF 99.97 FEET; THENCE SOUTH 89º 59’ 25” WEST A DISTANCE OF 242.89 FEET, MORE OR LESS; THENCE SOUTH 00º 04’ 35” WEST A DISTANCE OF 99.97 FEET; THENCE SOUTH 89º 59’ 25” WEST A DISTANCE OF 197.97 FEET TO THE POINT OF BEGINNING.
SAVE AND EXCEPT THAT PORTION CONVEYED TO STATE OF OREGON, BY AND THROUGH ITS DEPARTMENT OF TRANSPORTATION BY INSTRUMENT RECORDED AUGUST 27, 2012 AS MICROFILM NO. 2012-7064, RECORDS OF COOS COUNTY, OREGON

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EXHIBIT A-4
Legal Description for Eureka Property
A.P.N.: 002-102-009 and 002-102-003
Real property in the City of Eureka, County of Humboldt, State of California, described as follows:
PARCEL ONE:
BEGINNING AT THE SOUTHEAST CORNER OF THIRD AND “T” STREETS, AS SHOWN ON THE MAP OF THE EDDY TRACT ADDITION TO THE CITY OF EUREKA ON FILE IN THE RECORDER’S OFFICE OF HUMBOLDT COUNTY IN BOOK 1 OF MAPS, PAGE 56; AND RUNNING
THENCE SOUTH ALONG “T” STREET, 240 FEET TO FOURTH STREET;
THENCE EAST ALONG FOURTH STREET, 541 FEET TO “V” STREET;
THENCE NORTH ALONG “V” STREET, 130 FEET TO A POINT THAT IS 110 FEET SOUTH, ALONG THE WEST LINE OF “V” STREET, FROM THE SOUTH LINE OF THIRD STREET;
THENCE WEST, PARALLEL WITH THIRD STREET, 65 FEET;
THENCE NORTH, PARALLEL WITH “V” STREET, 110 FEET TO THIRD STREET; AND
THENCE WEST ALONG THIRD STREET, 476 FEET TO THE POINT OF BEGINNING.
PARCEL TWO:
THOSE PORTIONS OF LOTS 1 AND 2 IN BLOCK 33, AS SHOWN ON THE MAP OF EDDY TRACT ADDITION TO THE CITY OF EUREKA, ON FILE IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY IN BOOK 1 OF MAPS, PAGE 56, DESCRIBED AS FOLLOWS:
BEGINNING AT THE SOUTHWEST CORNER OF THIRD AND “V” STREETS, AS SHOWN ON THE MAP OF EDDY TRACT ADDITION ABOVE REFERRED TO;
THENCE SOUTH ALONG “V” STREET, 110 FEET TO THE NORTHEAST CORNER OF THE PARCEL OF LAND DESCRIBED IN THE DEED FROM MARY BRANBANI TO TOD E. MCCLASKEY, RECORDED MAY 15, 1973 IN BOOK 1191 OF OFFICIAL RECORDS, PAGE 422, UNDER RECORDER’S FILE NO. 8768, HUMBOLDT COUNTY RECORDS;
THENCE WEST ALONG THE NORTH LINE OF SAID MCCLASKEY PARCEL, 65 FEET;
THENCE NORTH PARALLEL WITH “V” STREET, 110 FEET TO THIRD STREET; AND
THENCE EAST ALONG THIRD STREET, 65 FEET TO THE POINT OF BEGINNING.


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EXHIBIT A-5
Legal Description for Olympia Property
LEGAL DESCRIPTION: Real property in the County of Thurston, State of Washington, described as follows:
BEING A PORTION OF LOTS 11 AND 12 AND LOTS 13, 13A AND 14 OF “EVERGREEN PARK”, AS RECORDED IN VOLUME 16 OF PLATS, PAGES 61 AND 62, THURSTON COUNTY PLAT RECORDS, STATE OF WASHINGTON MORE PARTICULARLY DESCRIBED AS FOLLOWS:
BEGINNING AT THE NORTHWEST CORNER OF SAID LOT 14 AND THE INTERSECTION OF THE SOUTH AND EAST RIGHT-OF-WAY LINE OF S.W. 24TH WAY (60 FEET WIDE);
THENCE ALONG SAID SOUTH RIGHT-OF-WAY LINE, NORTH 89°55’51” WEST, A DISTANCE OF 60.00 FEET TO THE NORTHEAST CORNER OF SAID LOT 12;
THENCE ALONG THE EAST LINE OF SAID LOT 12, SOUTH 00°04’09” WEST, A DISTANCE OF 136.50 FEET TO THE SOUTHEAST CORNER OF PARCEL A, AS RECORDED IN VOLUME 3, PAGES 398 THROUGH 403, THURSTON COUNTY DEED RECORDS, BOUNDARY LINE ADJUSTMENT NO. SS 5378;
THENCE ALONG THE EASTERLY LINE OF PARCEL B OF SAID BOUNDARY LINE ADJUSTMENT NO. SS 5378, SOUTH 14°19’09” WEST, A DISTANCE OF 148.06 FEET TO THE NORTH LINE OF LOT 13A OF SAID “EVERGREEN PARK”;
THENCE ALONG THE NORTH LINE OF SAID LOT 13A, NORTH 89°55’51” WEST, A DISTANCE OF 400.98 FEET TO THE EAST RIGHT-OF-WAY LINE OF EVERGREEN PARK DRIVE (80 FEET WIDE) AND A POINT OF NON-TANGENT CURVE, CONCAVE EASTERLY, HAVING A RADIUS OF 2044.59 FEET;
THENCE ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 01°41’09” (CHORD BEARS SOUTH 04°18’52” WEST, A DISTANCE OF 60.17 FEET) AN ARC DISTANCE OF 60.17 FEET TO THE SOUTHWEST CORNER OF SAID LOT 13A; THENCE ALONG THE SOUTH LINE OF SAID LOT 13A, SOUTH 89°55’51” EAST, A DISTANCE OF 501.88 FEET TO THE NORTHEAST CORNER OF LOT 10 OF SAID “EVERGREEN PARK”;
THENCE ALONG THE EAST LINE OF SAID LOT 10, SOUTH 00°04’09” WEST, A DISTANCE OF 310.55 FEET TO A POINT ON THE NORTHERLY RIGHT-OF-WAY LINE OF STATE HIGHWAY NO. 9 AND A POINT OF NON-TANGENT CURVE, CONCAVE SOUTHERLY, HAVING A RADIUS OF 1737.73 FEET;
THENCE ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 26°05’05” (CHORD BEARS SOUTH 55°28’49” EAST, A DISTANCE OF 784.31 FEET) AN ARC DISTANCE OF 791.13 FEET TO A POINT ON THE WESTERLY RIGHT-OF-WAY LINE OF DESCHUTES PARKWAY AND THE CUSP;
THENCE ALONG SAID WESTERLY RIGHT-OF-WAY LINE NORTH 35°05’09” WEST, A DISTANCE OF 5.58 FEET TO A POINT OF CURVATURE, CONCAVE EASTERLY, HAVING A RADIUS OF 600.96 FEET; THENCE ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 60°52’29” (CHORD BEARS NORTH 04°38’55” WEST, A DISTANCE OF 608.90 FEET) AN ARC DISTANCE OF 638.50 FEET; THENCE CONTINUING ALONG SAID RIGHT-OF-WAY LINE NORTH 25°47’20” EAST, A DISTANCE OF 328.10 FEET TO A POINT OF TANGENT CURVE, CONCAVE WESTERLY, HAVING A RADIUS OF 449.46 FEET;
THENCE CONTINUING ALONG SAID CURVE, THROUGH A CENTRAL ANGLE

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OF 21°15’10” (CHORD BEARS NORTH 15°09’45” EAST, A DISTANCE OF 165.76 FEET) AN ARC DISTANCE OF 166.72 FEET; THENCE NORTH 04°32’01” EAST, A DISTANCE OF 27.29 FEET TO THE NORTHEAST CORNER OF LOT 14 OF SAID “EVERGREEN PARK”;
THENCE ALONG THE NORTH LINE OF SAID LOT 14, NORTH 89°55’51” WEST, A DISTANCE OF 211.85 FEET TO THE SOUTHEAST CORNER OF LOT 15, OF SAID “EVERGREEN PARK”;
THENCE SOUTH 35°55’59” WEST, A DISTANCE OF 53.73 FEET;
THENCE NORTH 75°55’51” WEST, A DISTANCE OF 180.00 FEET TO A POINT ON THE NORTH LINE OF SAID LOT 14;
THENCE ALONG SAID NORTH LINE, NORTH 89°55’51” WEST, A DISTANCE OF 363.18 FEET TO THE POINT OF BEGINNING.
Tax Parcel ID No. 4683-00-00900 and 4683-00-01400 and 9900-03-89000 and 4683-00-01300

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EXHIBIT A-6
Legal Description for Pasco Property
LEGAL DESCRIPTION: Real property in the County of Franklin, State of Washington, described as follows:
A PORTION OF GOVERNMENT LOT 2, SECTION 19, TOWNSHIP 9 NORTH, RANGE 30 EAST, W.M., FRANKLIN COUNTY, WASHINGTON, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
BEGINNING AT THE WEST QUARTER CORNER OF SAID SECTION 19; THENCE NORTH 2°03’58” EAST ALONG THE WEST LINE THEREOF A DISTANCE OF 895.65 FEET; THENCE LEAVING SAID WEST LINE SOUTH 87°56’02” EAST A DISTANCE OF 50.01 FEET TO THE TRUE POINT OF BEGINNING; THENCE CONTINUING SOUTH 87°56’02” EAST A DISTANCE OF 660.21 FEET; THENCE SOUTH 36°01’47” EAST A DISTANCE OF 341.64 FEET; THENCE SOUTH 02°22’54” WEST A DISTANCE OF 223.59 FEET; THENCE SOUTH 89°02’43” WEST A DISTANCE OF 126.29 FEET; THENCE SOUTH 00°59’33” WEST A DISTANCE OF 275.76 FEET; THENCE SOUTH 81°56’49” EAST A DISTANCE OF 97.28 FEET; THENCE SOUTH 89°00’24” EAST A DISTANCE OF 222.61 FEET; THENCE NORTH 04°20’23” EAST A DISTANCE OF 26.67 FEET; THENCE SOUTH 86°39’24” EAST A DISTANCE OF 41.08 FEET TO THE WEST LINE OF EXCEPTION RECORDED UNDER AUDITOR’S FILE NO. 427870; THENCE SOUTH 00°59’36” WEST ALONG SAID WEST LINE A DISTANCE OF 34.94 FEET TO THE NORTH RIGHT OF WAY LINE OF W.S.R. NO. 395; THENCE NORTH 89°00’24” WEST ALONG SAID NORTH RIGHT OF WAY LINE A DISTANCE OF 265.83 FEET; THENCE NORTH 81°54’05” WEST A DISTANCE OF 420.00 FEET; THENCE NORTH 66°54’02” WEST A DISTANCE OF 445.00 FEET; THENCE NORTH 00°32’48” EAST A DISTANCE OF 456.28 FEET; THENCE NORTH 02°03’58” EAST A DISTANCE OF 135.00 FEET TO THE TRUE POINT OF BEGINNING.
(AKA LOT 1 OF BINDING SITE PLAN NO. 2003-04, RECORDED JUNE 12, 2003 IN VOLUME 1 OF SURVEYS, PAGE 70, UNDER AUDITOR’S FILE NO. 162608, RECORDS OF FRANKLIN COUNTY, WASHINGTON.)

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EXHIBIT A-7
Legal Description for Port Angeles Property
LEGAL DESCRIPTION: Real property in the County of Clallam, State of Washington, described as follows:
PARCEL “A”:
LOTS 1 TO 8, INCLUSIVE, BLOCK 2;
ALSO LOTS 1 TO 9 INCLUSIVE, BLOCK 3, TOGETHER WITH THAT PORTION OF RAILROAD AVENUE ABUTTING THEREON AS VACATED BY THE CITY OF PORT ANGELES IN THE YEAR 1914 BY ORDINANCE NO. 472,
EXCEPT RIGHT OF WAY FOR RAILROAD AVENUE AS EXISTED IN JANUARY, 1968; ALSO THE NORTHERLY 96 FEET OF LOT 9, BLOCK 2;
ALSO THE NORTHERLY 60 FEET OF THE SOUTHERLY 204 FEET OF LOT 9, BLOCK 2; ALL IN PORT ANGELES TIDELANDS EAST OF LAUREL STREET, CLALLAM COUNTY, WASHINGTON, ACCORDING TO THE OFFICIAL PLAT THEREOF RECORDED IN THE OFFICE OF THE COMMISSIONER OF PUBLIC LANDS AT OLYMPIA, WASHINGTON ON MARCH 9, 1894.
SITUATE IN THE COUNTY OF CLALLAM, STATE OF WASHINGTON.
PARCEL “B”:
THAT PORTION OF VACATED CHASE STREET IN THE CITY OF PORT ANGELES LYING BETWEEN THE NORTH LINE OF FRONT STREET AND THE SOUTH LINE OF RAILROAD AVENUE, AS IT EXISTED IN DECEMBER, 1967.
SITUATE IN THE COUNTY OF CLALLAM, STATE OF WASHINGTON.
Tax Parcel ID No. 06300500100


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EXHIBIT A-8
Legal Description for Post Falls Property
LEGAL DESCRIPTION: Real property in the County of Kootenai, State of Idaho, described as follows:
Parcel 1:
Tracts 1 and 2 of the Heirs of Margaret Post Estates, in Government Lot 8, Section 3, Township 50 North, Range 5, W.B.M., Kootenai County, State of Idaho, according to the plat recorded in Book “C” of Plats, Page 111.
Together With that portion of vacated 1st Street, recorded by Ordinance 483, which attaches by operation of law.
Parcel 2:
Easement rights as set out in Grant of Sewer Easement, recorded April 23, 1993 as Instrument No. 1301726 and Amendment recorded October 23, 1995 as Instrument No. 1419204.
and Easement rights as set out in Sewer Agreement, recorded September 19, 1988 as Instrument No. 1129187.

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EXHIBIT A-9
Legal Description for Redding Property
A.P.N.: 107-170-046-000 and 107-170-046-000
Real property in the City of Redding, County of Shasta, State of California, described as follows:
ALL THAT PORTION OF THE SOUTHEAST ONE-QUARTER OF SECTION 31, TOWNSHIP 32, NORTH, RANGE 4 WEST, M.D.M., ACCORDING TO THE OFFICIAL PLAT THEREOF, DESCRIBED; AS FOLLOWS:
BEGINNING AT THE SOUTHEAST CORNER OF THE PARCEL DESCRIBED IN THE DEED TO THE TITLE INSURANCE AND TRUST COMPANY RECORDED SEPTEMBER 13, 1968 IN BOOK 966, PAGE 445, OFFICIAL RECORDS; THENCE ALONG THE WESTERLY LINE OF THE PARCEL DESCRIBED IN THE DEED TO THE CITY OF REDDING RECORDED SEPTEMBER 18, 1967 IN BOOK 929, PAGE 193, OFFICIAL RECORDS, SOUTHERLY 650 FEET, MORE OR LESS TO THE NORTHERLY LINE OF THE PARCEL DESCRIBED IN THE DEED TO RICHARD MARK CORDI, ET AL., RECORDED JUNE 14, 1971 IN BOOK 1071, PAGE 465, OFFICIAL RECORDS; THENCE, NORTH 89 DEGREES 43’ WEST, 500 FEET, MORE OR LESS, TO THE EASTERLY LINE OF PARCEL 1 AS DESCRIBED IN THE DEED TO THE STATE OF CALIFORNIA RECORDED JANUARY 18, 1961 IN BOOK 655, PAGE 316, OFFICIAL RECORDS; THENCE ALONG SAID EASTERLY LINE, NORTH 655 FEET, MORE OR LESS, TO A POINT WHICH BEARS, SOUTH 88 DEGREES 01’ 18” WEST, FROM THE TRUE POINT OF BEGINNING, SAID POINT BEING THE SOUTHWEST CORNER OF THE PARCEL DESCRIBED IN THE DEED TO LEVITT AND SONS OF CALIFORNIA, INC., RECORDED JUNE 30, 1971 IN BOOK 1073, PAGE 529, OFFICIAL RECORDS; THENCE, NORTH 88 DEGREES 01’ 18” EAST, 400 FEET, MORE OR LESS, TO THE TRUE POINT OF BEGINNING.


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EXHIBIT A-10
Legal Description for Richland Property
LEGAL DESCRIPTION: Real property in the County of Benton, State of Washington, described as follows:
LOTS 5 AND 6, BLOCK 630, PLAT OF RICHLAND, ACCORDING TO THE PLAT THEREOF RECORDED IN VOLUMES 6 AND 7 OF PLATS, RECORDS OF BENTON COUNTY, WASHINGTON, TOGETHER WITH THAT PORTION OF VACATED KNIGHT STREET, VACATED BY THE CITY OF RICHLAND, A MUNICIPAL CORPORATION BY ORDINANCE NO. 61.76, RECORDED AUGUST 1976 UNDER AUDITOR’S FILE NO. 709789, DESCRIBED AS FOLLOWS:
COMMENCING AT THE NORTHWEST CORNER OF LOT 5, BLOCK 630, PLAT OF RICHLAND; THENCE NORTH 89°12’07” EAST A DISTANCE OF 2.00 FEET TO THE TRUE POINT OF BEGINNING; THENCE NORTH 0°49’50” WEST A DISTANCE OF 45.00 FEET; THENCE NORTH 89°12’07” EAST A DISTANCE OF 163.00 FEET;
THENCE SOUTH 0°49’50” EAST A DISTANCE OF 45.00 FEET; THENCE SOUTH 89°12’07” WEST A DISTANCE OF 163.00 TO THE TRUE POINT OF BEGINNING; AND TOGETHER WITH AN ALLEY OVER AND ACROSS LOT 5, BLOCK 630, PLAT OF RICHLAND, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
COMMENCING AT THE NORTHEAST CORNER OF SAID LOT 5, THE TRUE POINT OF BEGINNING; THENCE SOUTH 00°49’50” EAST, A DISTANCE OF 100.01 FEET; THENCE SOUTH 89°12’24” WEST, A DISTANCE OF 25.00 FEET; THENCE NORTH 00°49’50” WEST A DISTANCE OF 100.01 FEET; THENCE NORTH 89°12’07” EAST, A DISTANCE OF 25.00 FEET TO THE TRUE POINT OF BEGINNING.
BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
BEGINNING AT THE NORTHWEST CORNER OF THAT CERTAIN LOT 6, BLOCK 630, AS SHOWN ON THE PLAT OF RICHLAND RECORDED IN VOLUMES 6 AND 7 OF PLATS IN BENTON COUNTY, WASHINGTON; THENCE FROM THE POINT OF BEGINNING ALONG THE NORTHERLY, EASTERLY, SOUTHERLY AND WESTERLY LINES OF LOTS 6 AND 5, AND A PORTION OF VACATED KNIGHT STREET THE FOLLOWING COURSES AND DISTANCES:
NORTH 89°12’54” EAST 319.83 FEET; SOUTH 02°13’05” EAST 268.80 FEET; SOUTH 00°31’38” EAST 501.90 FEET; SOUTH 34°40’08” WEST 43.13 FEET; SOUTH 63°22’42” WEST 150.64 FEET; NORTH 00°49’50” WEST 112.81 FEET; SOUTH 89°12’24” WEST 165.00 FEET; NORTH 00°49’50” WEST 100.00 FEET; NORTH 89°12’07” EAST 2.00 FEET; AND NORTH 00°49’50” WEST 658.61 FEET TO THE SAID POINT OF BEGINNING.
Tax Parcel ID No. 1-1198-402-0630-005 and 1-1198-402-0630-006


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EXHIBIT A-11
Legal Description for Salt Lake Property
LEGAL DESCRIPTION: Real property in the County of Salt Lake, State of Utah, described as follows: PARCEL 1:
BEGINNING AT THE SOUTHWEST CORNER OF LOT 4, BLOCK 23, PLAT “A”, SALT LAKE CITY SURVEY AND RUNNING THENCE NORTH 00°01’07” WEST, A DISTANCE OF 214.959 FEET ALONG THE WEST LINE OF BLOCK 23; THENCE NORTH 89°57’31” EAST, A DISTANCE OF 115.537 FEET; THENCE NORTH 00°01’07” WEST, A DISTANCE OF 115.040 FEET TO THE NORTH LINE OF BLOCK 23; THENCE NORTH 89°57’31” EAST, A DISTANCE OF 400.416 FEET ALONG THE NORTH LINE OF BLOCK 23; THENCE SOUTH 00°01’08” EAST, A DISTANCE OF 113.789 FEET; THENCE SOUTH 66°56’14” WEST, A DISTANCE OF 21.743 FEET; THENCE SOUTH 00°01’08” EAST, A DISTANCE OF 42.765 FEET; THENCE SOUTH 89°57’31” WEST 1.005 FEET; THENCE SOUTH 00°01’13” EAST 82.529 FEET; THENCE NORTH 89°57’31” EAST 165.059 FEET; THENCE SOUTH 00°01’07” EAST 140.241 FEET ALONG THE EAST LINE OF BLOCK 23; THENCE SOUTH 89°57’31” WEST, A DISTANCE OF 165.054 FEET; THENCE SOUTH 00°01’08” EAST, A DISTANCE OF 41.264 FEET; THENCE SOUTH 89°57’31” WEST, A DISTANCE OF 165.035 FEET TO THE WEST LINE OF LOT 8, BLOCK 23; THENCE NORTH 00°01’09” WEST, A DISTANCE OF 99.036 FEET TO THE NORTHWEST CORNER OF LOT 8; THENCE SOUTH 89°57’31” WEST, A DISTANCE OF 329.913 FEET ALONG THE SOUTH LINE OF LOT 4 TO THE POINT OF BEGINNING.
PARCEL 2:
A RIGHT OF WAY APPURTENANT TO PARCEL 1 AS DISCLOSED BY QUIT CLAIM DEED RECORDED JUNE 27, 2008 AS ENTRY NO. 8707718 IN BOOK 8827 AT PAGE 4285 OF TH OFFICIAL RECORDS BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
BEGINNING AT A POINT 6 RODS SOUTH FROM THE NORTHEAST CORNER OF LOT 8, BLOCK 23, PLAT “A”, SALT LAKE CITY SURVEY, AND RUNNING THENCE WEST 20 RODS; THENCE SOUTH 1 ROD; THENCE EAST 20 RODS; THENCE NORTH 1 ROD TO THE PLACE OF BEGINNING.
PARCEL 3:
BEGINNING AT THE SOUTHWEST CORNER OF LOT 1, BLOCK 23 PLAT “A”, SALT LAKE CITY SURVEY AND RUNNING THENCE NORTH 00°01’09” WEST, A DISTANCE OF 214.574 FEET ALONG THE WEST LINE OF LOT 1 AND LOT 8; THENCE NORTH 89°57’31” EAST, A DISTANCE OF 164.939 FEET; THENCE SOUTH 00°01’09” EAST, A DISTANCE OF 49.517 FEET; THENCE SOUTH 89°57’31” WEST, A DISTANCE OF 41.265 FEET; THENCE SOUTH 00°01’09” EAST, A DISTANCE OF 165.057 FEET TO THE SOUTH LINE OF LOT 1; THENCE SOUTH 89°57’31” WEST, A DISTANCE OF 123.674 FEET ALONG THE SOUTH LINE OF LOT 1 TO THE POINT OF BEGINNING.
PARCEL 4:

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BEGINNING AT A POINT WHICH IS NORTH 00°01’07” WEST 1.501 FEET FROM THE NORTHEAST CORNER OF LOT 7, BLOCK 23, PLAT “A”, SALT LAKE CITY SURVEY, RUNNING THENCE SOUTH 89°57’31” WEST 132.048 FEET; THENCE NORTH 00°01’08” WEST 64.465 FEET; THENCE NORTH 89°57’31” EAST 132.045 FEET TO THE EAST LINE OF BLOCK 23; THENCE ALONG SAID LINE SOUTH 00°01’07” EAST 64.465 FEET TO THE POINT OF BEGINNING.
PARCEL 5:
A NON EXCLUSIVE RIGHT OF WAY APPURTENANT TO PARCEL 4 AS DISCLOSED BY QUIT CLAIM DEED RECORDED JUNE 27, 2008 AS ENTRY NO. 8707718 IN BOOK 8827 AT PAGE 4285 OF TH OFFICIAL RECORDS BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS
BEGINNING AT A POINT 132 FEET WEST FROM THE NORTHEAST CORNER OF LOT 6, BLOCK 23, PLAT “A”, SALT LAKE CITY SURVEY, AND RUNNING THENCE SOUTH 165 FEET; THENCE WEST 32 FEET; THENCE NORTH 42.75 FEET; THENCE IN A NORTHEASTERLY DIRECTION 21.75 FEET TO A POINT 144 FEET WEST AND 113.75 FEET SOUTH OF THE NORTHEAST CORNER OF SAID BLOCK 23; THENCE NORTH 113.75 FEET TO THE NORTH LINE OF SAID BLOCK 23; THENCE EAST 12 FEET TO THE POINT OF BEGINNING.


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EXHIBIT A-12
Legal Description for Spokane Property
LEGAL DESCRIPTION: Real property in the County of Spokane, State of Washington, described as follows:
PARCEL A:
A PARCEL OF LAND SITUATED IN THE EAST HALF OF SECTION 18, TOWNSHIP 25 NORTH, RANGE 43 EAST, W.M., IN THE CITY OF SPOKANE, SPOKANE COUNTY, WASHINGTON, MORE PARTICULARLY DESCRIBED AS FOLLOWS:
COMMENCING AT THE EAST QUARTER CORNER OF SAID SECTION 18;
THENCE ALONG THE EAST LINE OF SAID SECTION, SOUTH 00º11’49” WEST, A DISTANCE OF 459.90 FEET, MORE OR LESS, TO THE NORTHWESTERLY CORNER OF THAT CERTAIN PARCEL OF LAND CONVEYED BY PERCY B. THOMPSON TO THE SPOKANE INTERNATIONAL RAILWAY COMPANY BY QUIT CLAIM DEED DATED DECEMBER 12, 1905, RECORDED DECEMBER 14, 1905, IN VOLUME 164, PAGE 587, RECORDS OF DEEDS OF SAID COUNTY;
THENCE ALONG THE NORTHERLY LINE OF SAID DEEDED PARCEL, NORTH 89º39’21” WEST 194.31 FEET;
THENCE NORTH 89º18’30” WEST 330.69 FEET;
THENCE NORTH 78º46’00” WEST 183.02 FEET;
THENCE NORTH 74º06’30” WEST 145.65 FEET;
THENCE SOUTH 84º00’30” WEST 68.13 FEET;
THENCE NORTH 73º51’00” WEST 42.67 FEET TO THE TRUE POINT OF BEGINNING OF THIS DESCRIPTION;
THENCE CONTINUING ALONG SAID NORTHERLY LINE, NORTH 73º51’00” WEST 252.68 FEET;
THENCE NORTH 80º51’15” WEST 149.99 FEET;
THENCE NORTH 78º32’15” WEST 110.96 FEET;
THENCE NORTH 79º10’30” WEST 114.06 FEET, MORE OR LESS, TO THE EASTERLY RIGHT OF WAY LINE OF WASHINGTON STREET;
THENCE NORTH 16º23’00” EAST ALONG SAID EASTERLY LINE, 25.28 FEET;
THENCE NORTH 02º19’00” EAST ALONG SAID EASTERLY LINE, 400.43 FEET TO A POINT WHICH IS 178.33 FEET NORTHERLY OF THE EAST-WEST CENTERLINE OF SECTION 18; THENCE SOUTH 89º34’53” EAST 770.00 FEET;
THENCE SOUTH 00º25’07” WEST 340.25 FEET TO THE SOUTHERLY LINE OF NORTH RIVER DRIVE AS CONVEYED TO THE CITY OF SPOKANE BY THAT CERTAIN DEED RECORDED IN VOLUME 627 OF DEEDS AT PAGE 647, SPOKANE COUNTY RECORDS;
THENCE ALONG THE SOUTHERLY LINE OF NORTH RIVER DRIVE, NORTHWESTERLY ALONG A CURVE TO THE RIGHT, FROM A POINT WITH A RADIAL BEARING OF SOUTH 09º52’36” WEST, HAVING A RADIUS OF 490.00 FEET, THROUGH A CENTRAL ANGLE OF 14º26’42”, AN ARC LENGTH OF 123.53 FEET TO A POINT WITH A RADIAL BEARING OF SOUTH 24º19’18” WEST;
THENCE LEAVING SAID SOUTHERLY LINE, SOUTH 13º41’40” WEST 259.69 FEET TO THE SAID TRUE POINT OF BEGINNING OF THIS DESCRIPTION,

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EXCEPT ALL THAT PORTION LYING WITHIN THE BOUNDS OF NORTH RIVER DRIVE AND WASHINGTON STREET AS CONVEYED TO THE CITY OF SPOKANE BY THAT CERTAIN DEED RECORDED UNDER AUDITOR’S FILE NO. 8303040033, IN VOLUME 627 OF DEEDS AT PAGE 647, AND BY THAT CERTAIN DEED RECORDED UNDER AUDITOR’S FILE NO. 5040407, SPOKANE COUNTY RECORDS, AS DISCLOSED BY CERTIFICATE OF APPROVAL OF BOUNDARY LINE ADJUSTMENT RECORDED JULY 16, 2001 UNDER RECORDING NO. 4609148.
PARCEL A1:
RECIPROCAL RIGHTS FOR INGRESS, EGRESS, PARKING AND WALKWAYS AS GRANTED IN PARKING AGREEMENT RECORDED APRIL 13, 2001 UNDER SPOKANE COUNTY RECORDING NO. 4575852 OVER THE FOLLOWING DESCRIBED PARCELS:
PARCEL F OF SHORT PLAT NO. CITY 89-07, ACCORDING TO PLAT RECORDED IN VOLUME 7 OF SHORT PLATS, PAGES 91 AND 92, UNDER RECORDING NO. 9108130271, TOGETHER WITH THE WEST 148 FEET OF PARCEL D OF THE NORTHBANK DEVELOPMENT (#CITY 91-07) ACCORDING TO SHORT PLAT RECORDED IN VOLUME 8 OF SHORT PLATS, PAGES 22 AND 23, IN THE CITY OF SPOKANE, SPOKANE COUNTY, WASHINGTON.
PARCEL A2:
AN EASEMENT FOR INGRESS, EGRESS, PARKING AND WALKWAYS AS CREATED BY PARKING AGREEMENT AND RESTRICTIVE COVENANT RECORDED JULY 25, 2001, UNDER SPOKANE COUNTY RECORDING NO. 4613090 AND 4613091 OVER THE FOLLOWING DESCRIBED PROPERTY:
A PARCEL OF LAND IN THE EAST HALF OF SECTION 18, TOWNSHIP 25 NORTH, RANGE 43 EAST, W.M., SPOKANE COUNTY, WASHINGTON, DESCRIBED AS FOLLOWS:
COMMENCING AT THE EAST QUARTER CORNER OF SAID SECTION 18;
THENCE ALONG THE EAST LINE OF SAID SECTION, SOUTH 00°11’49” WEST, A DISTANCE OF 459.90 FEET, MORE OR LESS, TO THE NORTHWESTERLY CORNER OF THAT CERTAIN PARCEL OF LAND CONVEYED BY PERCY B. THOMPSON TO THE SPOKANE INTERNATIONAL RAILWAY COMPANY BY QUIT CLAIM DEED DATED DECEMBER 12, 1905, RECORDED DECEMBER 14, 1905, IN VOLUME 164 OF DEEDS AT PAGE 587;
THENCE ALONG THE NORTHERLY LINE OF SAID DEEDED PARCEL, NORTH 89°39’21” WEST 194.31 FEET;
THENCE NORTH 89°18’30” WEST 330.69 FEET;
THENCE NORTH 78°46’00” WEST 183.02 FEET;
THENCE NORTH 74°06’30” WEST 29.00 FEET TO THE TRUE POINT OF BEGINNING OF THIS DESCRIPTION; THENCE CONTINUING NORTH 74°06’30” WEST 116.65 FEET;
THENCE SOUTH 84°00’30” WEST 68.13 FEET;
THENCE NORTH 73°51’00” WEST 42.67 FEET;
THENCE LEAVING SAID NORTHERLY LINE, NORTH 13°41’40” EAST 259.69 FEET TO THE SOUTHERLY LINE OF NORTH RIVER DRIVE, AS ESTABLISHED BY THAT

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CERTAIN DEED TO THE CITY OF SPOKANE RECORDED IN VOLUME 627 AT PAGE 647, SPOKANE COUNTY RECORDS;
THENCE ALONG SAID SOUTHERLY LINE, SOUTHEASTERLY ALONG A CURVE TO THE LEFT, FROM A POINT WITH A RADIAL BEARING OF SOUTH 24°19’18” WEST, HAVING A RADIUS OF 490.00 FEET, THROUGH A CENTRAL ANGLE OF 14°26’42”, AN ARC LENGTH OF 123.53 FEET;
THENCE LEAVING SAID SOUTHERLY LINE SOUTH 00°25’07” WEST 9.75 FEET;
THENCE SOUTH 89°34’53” EAST, 43.54 FEET TO A POINT LYING NORTH 00°25’07” EAST FROM THE TRUE POINT OF BEGINNING;
THENCE SOUTH 00°25’07” WEST 242.72 FEET TO THE SAID TRUE POINT OF BEGINNING.
PARCEL B:
A PARCEL OF LAND SITUATED IN THE EAST HALF OF SECTION 18, TOWNSHIP 25 NORTH, RANGE 43 EAST, W.M., SPOKANE COUNTY, WASHINGTON, DESCRIBED AS FOLLOWS:
COMMENCING AT THE EAST QUARTER CORNER OF SAID SECTION 18;
THENCE ALONG THE EAST LINE OF SAID SECTION, SOUTH 00°11’49” WEST, A DISTANCE OF 459.90 FEET, MORE OR LESS, TO THE NORTHWESTERLY CORNER OF THAT CERTAIN PARCEL OF LAND CONVEYED BY PERCY B. THOMPSON TO THE SPOKANE INTERNATIONAL RAILWAY COMPANY BY QUIT CLAIM DEED DATED DECEMBER 12, 1905, RECORDED DECEMBER 14, 1905, IN VOLUME 164 OF DEEDS AT PAGE 587;
THENCE ALONG THE NORTHERLY LINE OF SAID DEEDED PARCEL, NORTH 89°39’21” WEST 194.31 FEET;
THENCE NORTH 89°18’30” WEST 330.69 FEET;
THENCE NORTH 78°46’00” WEST 183.02 FEET;
THENCE NORTH 74°06’30” WEST 29.00 FEET TO THE TRUE POINT OF BEGINNING OF THIS DESCRIPTION;
THENCE CONTINUING NORTH 74°06’30” WEST 116.65 FEET;
THENCE SOUTH 84°00’30” WEST 68.13 FEET;
THENCE NORTH 73°51’00” WEST 42.67 FEET;
THENCE LEAVING SAID NORTHERLY LINE, NORTH 13°41’40” EAST 259.69 FEET TO THE SOUTHERLY LINE OF NORTH RIVER DRIVE, AS ESTABLISHED BY THAT CERTAIN DEED TO THE CITY OF SPOKANE RECORDED IN VOLUME 627 AT PAGE 647, SPOKANE COUNTY RECORDS;
THENCE ALONG SAID SOUTHERLY LINE, SOUTHEASTERLY ALONG A CURVE TO THE LEFT, FROM A POINT WITH A RADIAL BEARING OF SOUTH 24°19’18” WEST, HAVING A RADIUS OF 490.00 FEET, THROUGH A CENTRAL ANGLE OF 14°26’42”, AN ARC LENGTH OF 123.53 FEET;
THENCE LEAVING SAID SOUTHERLY LINE SOUTH 00°25’07” WEST 9.75 FEET;
THENCE SOUTH 89°34’53” EAST, 43.54 FEET TO A POINT LYING NORTH 00°25’07” EAST FROM THE TRUE POINT OF BEGINNING;
THENCE SOUTH 00°25’07” WEST 242.72 FEET TO THE SAID TRUE POINT OF BEGINNING, AS DISCLOSED BY CERTIFICATE OF APPROVAL OF BOUNDARY LINE ADJUSTMENT RECORDED JULY 16, 2001 UNDER RECORDING NO. 4609148.

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PARCEL C:
AN EASEMENT FOR A RESTAURANT IN THE AIRSPACE OVER PUBLIC PROPERTY AS ESTABLISHED BY EASEMENT AND AGREEMENT RECORDED MAY 4, 1984 UNDER SPOKANE COUNTY RECORDING NO. 8405040161.
Tax Parcel ID No. 35184.0025 and 35184-0025 and 35185.0024 and 35184.0025

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EXHIBIT B
Draw Procedures
Disbursements from any of the [PIP Reserve] [FF&E Reserve] shall be used to pay for the purposes provided for each such Reserve as described in Section 3.2 of the Loan Agreement, as applicable. Advances from any such Reserve shall be further subject to the following terms and conditions:
(a)    Following receipt and approval of a draw request substantially in the form attached hereto as Annex I to Exhibit B (each a “Disbursement Request”), Agent shall make advances from the specified Reserve within ten (10) Business Days after receipt of all of the foregoing documentation from or on behalf of Borrowers, further subject to the following:
(1)No advances will be made for deposits, retainers or Stored Materials, other than (a) advances made from the First PIP Bucket, (b) such items as approved by Agent in the PIP Backup pursuant to Section 3.2(a), and (c) items constituting Stored Material (which comply with conditions and covenants set forth in Section 3.2(a)(vii)) as of the date of the Disbursement Request, which items were approved by Agent in the PIP Backup but were not identified in the PIP Backup as items constituting Stored Materials.
(2)If reasonably requested by Agent in relation to any new construction, a notice of commencement shall be filed prior to commencement of applicable work to be performed, if any, in form approved by Agent and as required by applicable law.
(b)    Agent shall disburse any advance from any Reserve directly to Borrowers or their designee to pay any specific invoice. Borrowers hereby irrevocably direct and authorize Agent to so advance such amounts from the applicable Reserve. Agent may, at Borrowers’ expense, conduct an audit, inspection, or review of the Property to confirm the amount of the requested improvements advance.
(c)    Borrowers shall not use any portion of any advance from any Reserve for payment of any other cost except as specifically set forth in a Disbursement Request approved by Agent.
(d)    If so required by Agent in its Permitted Discretion, Borrowers shall have furnished to Agent evidence that all required inspections by governmental authorities, if any, have been satisfactorily completed as and when required by applicable law.
(e)    If so required by Agent in its Permitted Discretion, Agent shall have received a report of Agent’s Construction Consultant, which report shall confirm that the Disbursement Request is accurate and complete, and that the work covered by or goods and services to be received under the applicable request for advance has been performed and the applicable materials, goods, as applicable, have been or will be furnished.
(f)    Agent reserves the right to require, in its Permitted Discretion, a date down endorsement in form acceptable to Agent, in its Permitted Discretion, for the Title Policy in relation to the Property as a condition to any or all advances from any Reserve.

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(g)Such other documents or items as Agent or its counsel may require in their reasonable discretion.
(h)No Default or Event of Default shall have occurred and be continuing.
(i)Unless otherwise disclosed to Agent, the representations and warranties contained in the Loan Documents are true and correct in all material respects as if remade on the date of the advance and on the date that the advance is requested and all representations and warranties of Borrowers contained in the Loan Documents shall be deemed to be remade on the date of any subsequent advances or release.
(j)Borrowers shall have paid Agent’s costs and expenses in connection with such advance (including title charges, and costs and expenses of Agent’s Construction Consultant and attorneys, as applicable), if any, to the extent set forth in the Loan Agreement.
(k)No condemnation or adverse, as determined by Agent, zoning or usage change proceeding shall have occurred or shall have been threatened against the subject Property, the subject Property shall not have suffered any significant damage by fire or other casualty which has not been repaired or is not being restored in accordance with the Loan Agreement; no law, regulation, ordinance, moratorium, injunctive proceeding, restriction, litigation, action, citation or similar proceeding or matter shall have been enacted, adopted, or threatened by any Governmental Authority, which is reasonably like to have, in Agent’s reasonable judgment, a Material Adverse Change.
(l)Borrowers have received no notice and has no knowledge of any litigation, proceedings (including a Bankruptcy Proceeding), Liens or claims of Lien, either filed or threatened against Borrowers or any Property, except the Liens of Agent for the benefit of the Lenders, Permitted Exceptions and Liens that remain unsatisfied or un-bonded for a period of less than twenty (20) days after the date of filing or service.


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Annex 1 to Exhibit B

Disbursement Request
Pacific Western Bank
5404 Wisconsin Ave, 2nd Floor
Chevy Chase, Maryland 20815
Attn: Credit Administration
PROPERTY NAME:            
BORROWERS:                     (collectively, the “Borrowers”)
DRAW NO:                
Reference is hereby made to that certain Loan Agreement, dated as of January 15, 2015 (as may be amended, restated, supplemented, or otherwise modified from time to time, the “Loan Agreement”), executed by and among Borrowers, the Lenders party thereto from time to time, and Pacific Western Bank, as agent (in such capacity, together with its successors and assigns, “Agent”). Capitalized words and phrases used herein without definition shall have the respective meanings ascribed to such words and phrases in the Loan Agreement.
1.Pursuant to the Loan Agreement, Borrowers hereby request a disbursement from the [PIP Reserve] [FF&E Reserve] in the amount of $[            ].
2.Borrowers acknowledge that the approval of this disbursement from the [PIP Reserve] [FF&E Reserve] by Agent is subject to all of the terms and conditions precedent for the disbursement of amounts in such Reserve as set forth in Section 3.2 of the Loan Agreement and Exhibit B to the Loan Agreement, as applicable, which may include, without limitation, inspection of the Property, verification of the matters set forth in this Disbursement Request, and the availability of funds in such Reserve.
3.The Borrowers agree to provide a Vendor Payee List (Sworn Owner’s Statement) showing the name and the amount currently due each party to whom any Borrower is obligated for labor, material, and/or services supplied in relation to the disbursement requested in this Disbursement Request.
4.The Borrowers hereby represent, warrant and covenant with Agent as follows:
(a)
all conditions precedent to the disbursement from the [PIP Reserve] [FF&E Reserve] requested hereunder have been satisfied, including, without limitation, performance of all of the Obligations of Borrowers under the Loan Agreement and the other Loan Documents required to have been performed as of the date hereof;
(b)
except as otherwise identified to Agent in writing, all representations and warranties made by Borrowers to Agent in the Loan Agreement and otherwise in connection with the Loan continue to be accurate;

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(c)
no Default or Event of Default exists under the Loan Agreement;
(d)
Borrowers have not received notice and have no knowledge of any litigation, proceedings (including proceedings under Title 11 of the United States Code), Liens or claims of Lien, either filed or threatened against any Borrower or any Property, except the Liens of Agent and those which have heretofore been specifically identified in writing to Agent;
(e)
the requested disbursement from the [PIP Reserve] [FF&E Reserve] will be used to pay or reimburse Borrowers for expenditures described in the applicable subsection of Section 3.2 of the Loan Agreement or otherwise approved in writing by Agent;
(t)
all disbursements from any Reserve previously advanced or disbursed by Agent to Borrowers for labor, materials, and/or services furnished prior to this Disbursement Request have been paid to the parties entitled to such payment and have been used substantially for the purpose for which they were requested;
(g)
the total amount of the requested disbursement pursuant to this Disbursement Request represents the actual amount payable to those third parties who have performed work on the Property, and all of such disbursement requested hereby will be used as payment for work or materials on the Property described on the attached documentation and for no other reason; and
(h)
Borrowers have attached hereto all lien waivers and documents necessary, if any, to evidence that the materials, work and/or expenditures to be funded by the requested disbursement have been installed, completed and are paid for, or will be paid for, upon such disbursement to Borrowers or their designee; and
(i)
Borrowers shall provide Agent with any additional documentation and/or other evidence as Agent shall request, in its Permitted Discretion, to establish that the expenditures to be funded by the requested disbursement have been contracted for, ordered, installed, completed, as applicable, and are paid for or will be paid upon such disbursement to Borrowers or their designee.
The amount of change orders in dispute between Borrowers and the third party completing the work to be reimbursed and/or funded by the disbursement requested hereby is $[_______________].
Borrowers hereby agree and acknowledge that this affidavit is made for the purpose of inducing Agent to make a disbursement from the [PIP Reserve] [FF&E Reserve] to Borrowers, and Agent and Lenders are relying upon the accuracy of such matters in making such disbursement, and Borrowers certify that the statements made herein and in any documents submitted herewith are true and correct.

4

Borrowers request that this draw be funded and that the funds be deposited to the following account number _______________ at ________________________.
IN WITNESS WHEREOF, the Borrowers have executed this Disbursement Request as of _______________________, 20__
BORROWERS:
RL VENTURE HOLDING LLC,
a Delaware limited liability company
By:                        
Name:                        
Title:                        
RL BEND, LLC,
a Delaware limited liability company
By:                        
Name:                        
Title:                        
RL BOISE, LLC,
a Delaware limited liability company
By:                        
Name:                        
Title:                        
RL COOS BAY, LLC,
a Delaware limited liability company
By:                        
Name:                        
Title:                        
RL EUREKA, LLC,
a Delaware limited liability company

5

By:                        
Name:                        
Title:                        
RL OLYMPIA, LLC,
a Delaware limited liability company
By:                        
Name:                        
Title:                        
RL PASCO, LLC,
a Delaware limited liability company
By:                        
Name:                        
Title:                        
RL PORT ANGELES, LLC,
a Delaware limited liability company
By:                        
Name:                        
Title:                        
RL POST FALLS, LLC,
a Delaware limited liability company
By:                        
Name:                        
Title:                        
RL REDDING, LLC,
a Delaware limited liability company

6

By:                        
Name:                        
Title:                        
RL RICHLAND, LLC,
a Delaware limited liability company
By:                        
Name:                        
Title:                        
RL SALT LAKE, LLC,
a Delaware limited liability company
By:                        
Name:                        
Title:                        
RL SPOKANE, LLC,
a Delaware limited liability company
By:                        
Name:                        
Title:                        



7


EXHIBIT C
Each Borrower and Parent shall at all times be a Single Purpose Entity. As used herein, “Single Purpose Entity” shall mean a corporation, partnership, joint venture, association, joint stock company, trust, trustee, estate, limited liability company, unincorporated organization, real estate investment trust, or any other form of entity, which complies with the provisions set forth herein, including, without limitation, the requirements that each Borrower and Parent, as applicable, has not and shall not:
(a)    (x) with respect to any PropCo Borrower, fail to be organized solely for the purpose of (i) owning the Properties, (ii) entering into the Loan Documents to which it is a party, and (iii) engaging in any activity that is incidental, necessary or appropriate to accomplish the foregoing; (y) with respect to Holding, be organized for any purpose other than (i) owning each PropCo Borrower, (ii) entering into the Loan Documents to which it is a party, and (iii) engaging in any activity that is incidental, necessary or appropriate to the foregoing; and, (z) with respect to Parent, be organized for any purpose other than (i) owning Holding, (ii) entering into the Loan Documents to which it is a party, and (iii) engaging in any activity that is incidental, necessary or appropriate to the foregoing;
(b)    (x) with respect to any PropCo Borrower, engage in any business or activity other than the ownership of a Property, and activities incidental thereto, (y) with respect to Holding, engage in any business or activity other than the ownership of each PropCo Borrower, and activities incidental thereto, and (z) with respect to Parent, engage in any business or activity other than the ownership of Holding, and activities incidental thereto;
(c)    (x) with respect to any PropCo Borrower, own any material assets other than (i) a Property, and (ii) such incidental personal property as may be necessary for the operation of such Property, (y) with respect to Holding, own any material asset other than (i) its interest in each PropCo Borrower, and (ii) such incidental personal property as may be necessary to effectuate its purpose; and (z) with respect to Parent, own any material asset other than (i) its interest in Holding, and (ii) such incidental personal property as may be necessary to effectuate its purpose;
(d)    merge into or consolidate with any Person, to the fullest extent permitted by law, dissolve, terminate, wind up or liquidate in whole or in part, change its legal structure without Agent’s prior consent or, except as permitted by the Loan Documents, transfer or otherwise dispose of all or substantially all of its assets;
(e)    fail to preserve its existence as an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization or formation, and, with respect to any PropCo Borrower, qualification to do business in the state where any Property owned by such PropCo Borrower is located, or without the prior written consent of Agent in its Permitted Discretion, amend, modify, terminate or fail to comply with the provisions of any Borrower’s organizational documents or Parent’s organizational documents, as the case may be;

1

(f)    own, form or acquire any subsidiary or make any investment in, any Person, other than (x) Holding’s ownership of each PropCo Borrower, and (y) Parent’s ownership of Holding;
(g)    commingle its assets with the assets of any of its equitable or beneficial owners, Affiliates, principals or of any other Person (other than Holding as owner of each PropCo Borrower with respect to the management and operation of the PropCo Borrowers or the Properties) nor fail to hold title to all of its assets in its own name;
(h)    with respect to any Borrower and the Parent, incur any Debt other than Permitted Debt;
(i)    fail to pay its debts and liabilities from its assets as the same shall become due, so long as sufficient cash flow from the Property exists;
(j)    fail to maintain its records, books of account and bank accounts separate and apart from those of the equitable or beneficial owners, principals and Affiliates of any Borrower or of Parent, as the case may be, or fail to maintain such books and records in the ordinary course of its business (except that Borrowers may be included in consolidated financial statements of another Person, so long as (i) its separate assets shall be clearly indicated as such on such statement and such statements will indicate that each Borrower’s assets and credit are available to satisfy the debts and other obligations of any other Person, and (ii) such assets shall also be listed on each Borrower’s own separate balance sheet);
(k)    except as permitted by the Loan Documents (including without limitation, each Property Management Agreement, any Franchise Agreement and any fees payable pursuant to the Parent Operating Agreement), enter into any contract or agreement with any equitable or beneficial owner, principal or Affiliate of any Borrower or of Parent any Guarantor, or any equitable or beneficial owner, principal or Affiliate thereof, except upon terms and conditions that are intrinsically fair, commercially reasonable and substantially similar to those that would be available on an arms-length basis with third parties other than any equitable or beneficial owner, principal or Affiliate of Borrower or of Parent, any Guarantor or any equitable or beneficial owner, principal or Affiliate thereof;
(l)    to the fullest extent permitted by law, seek the dissolution or winding up in whole, or in part, of any Borrower or of Parent;
(m)    fail to make best efforts correct any known misunderstandings regarding the separate identity of any Borrower, or of Parent, as the case may be, from any equitable or beneficial owner, principal or Affiliate thereof or any other Person;
(n)    other than in connection with the Loan, guaranty or become obligated for the debts of any other Person or hold out its credit as being able to satisfy the debts of another Person; make any loans or advances to any third party, including any equitable or beneficial owner, principal or Affiliate of any Borrower, or of Parent, as the case may be, or any equitable or beneficial

2

owner, principal or Affiliate thereof, nor buy or hold evidence of indebtedness issued by any other Person (other than cash or investment grade securities);
(o)    fail to pay any taxes required to be paid by it under applicable law; nor fail to file its own tax returns, nor file a consolidated federal income tax return with any other entity, except to the extent that any Borrower is treated as a “disregarded entity” for tax purposes and is not required to file tax returns under any applicable law;
(p)    except for the common branding of any Property with other Properties or properties pursuant to the terms of the Property Management Agreements and/or any Franchise Agreement, fail to hold itself out to the public as a legal entity separate and distinct from any other Person;
(q)    fail to conduct its business solely in its own name, mislead others as to the identity with which such other party is transacting business, or other than in connection with the Loan, suggest that any Borrower or Parent, as the case may be, is responsible for the debts of any third party (including any equitable or beneficial owner, principal or Affiliate of any Borrower, or of Parent, as the case may be, or any equitable or beneficial owner, principal or Affiliate thereof);
(r)    intentionally omitted;
(s)    hold itself out as or be considered as a department or division of (i) any equitable or beneficial owner, principal, or Affiliate of any Borrower or of Parent, as the case may be, (ii) any Affiliate of an equitable or beneficial owner or principal of Borrower or of Parent, as the case may be, or (iii) any other Person;
(t)    fail to maintain separate financial statements and accounting records, showing its assets and liabilities separate and apart from those of any other Person (except that Borrowers may be included in consolidated financial statements of another Person, so long as (i) its separate assets shall be clearly indicated as such on such statement and such statements will indicate that each Borrower’ assets and credit are available to satisfy the debts and other obligations of any other Person, and (ii) such assets shall also be listed on each Borrower’s own separate balance sheet);
(u)    fail to observe all applicable organizational formalities;
(v)    intentionally omitted;
(w)    intentionally omitted;
(x)    fail to allocate fairly and reasonably any overhead expenses that are shared with an Affiliate, including paying for office space and services performed by any employee of an Affiliate;
(y)    fail to use separate stationery, invoices and checks bearing its own name (except for the common branding of any Property with other Properties or properties pursuant to the terms of the Property Management Agreements and/or any Franchise Agreement);

3

(z)    in the case of Borrowers, pledge its assets for the benefit of any other Person, other than in connection with the Loan and, in the case of Parent, in connection with the Loan;
(aa)    acquire the obligations or securities of any equitable or beneficial owner, principal or Affiliate of Borrower or of Parent, as the case may be, any Guarantor or any equitable or beneficial owner, principal or Affiliate thereof, other than (x) Holding’s ownership of each PropCo Borrower, and (y) Parent’s ownership of Holding;
(bb)    fail to maintain its assets in such a manner that it will not be costly or difficult to segregate, ascertain or identify its individual assets from those of any other entity;
(cc)    with respect to any Borrower, have any obligation to indemnify its equitable or beneficial owners or, except as set forth in Section 5.38, Affiliates, as the case may be, or have such an obligation only if it is fully subordinated to the Loan and will not constitute a claim against it in the event that cash flow in excess of the amount required to pay the Loan is insufficient to pay such obligation;
(dd)    intentionally omitted;
(ee)    other than in connection with the Loan, have any of its obligations guaranteed by any equitable or beneficial owner, principal or Affiliate of any Borrower;
(ff)    take for itself or cause any other entity to take any of the following actions without the prior unanimous written consent of its partners, members or managers, as applicable and the Independent Director (as defined below) of each such Person: (i) file or consent to the filing of any bankruptcy, insolvency or reorganization case or proceeding; institute any proceedings under any applicable insolvency law; file an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in any proceeding of this nature or otherwise seek any relief under any laws relating to the relief from debts or the protection of debtors generally, (ii) seek, consent to or acquiesce to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, custodian or any similar official for itself or any other entity, (iii) make an assignment of its assets for the benefit of its creditors or an assignment of the assets of another entity for the benefit of such entity’s creditors, or (iv) take any action in furtherance of the foregoing;
(gg)    with respect to Holding and Parent, fail at any time to have at least one (1) independent manager or director that is not and has not been for at least five (5) years:
(i)    a manager or director (other than in its capacity as an independent manager or director of any Borrower and/or Parent or an Affiliate), officer, employee, trustee, trade creditor, customer, supplier, member attorney, counsel or shareholder (or spouse, parent, sibling or child of the foregoing) of (i) any Borrower or Parent, (ii) a principal of any Borrower or Parent, (iii) any equitable or beneficial owner, partner, principal or Affiliate of any Borrower of Parent or of a principal of any such Person, or (iv) any Affiliate of any equitable or beneficial owner, partner, or principal of any Borrower or Parent or of a principal of any such Person; or

4

(ii)    a creditor, customer, supplier or Person who derives any of its purchases or revenues from its activities with (i) any Borrower or Parent, (ii) a principal of any Borrower or Parent, (iii) any equitable or beneficial owner, partner, principal or Affiliate of any Borrower or Parent or of a principal of any such Person, or (iv) any Affiliate of any equitable or beneficial owner, partner, or principal of any Borrower or Parent or of a principal of any such Person; (each such independent manager or director, an “Independent Director”);
a natural person who satisfies the foregoing definition other than subparagraph (gg)(ii) shall not be disqualified from serving as an Independent Director of Borrower or Parent if such individual is an Independent Director provided by a nationally-recognized company that provides professional independent managers (a “Professional Independent Director”) and other corporate services in the ordinary course of its business. A natural person who otherwise satisfies the foregoing definition other than subparagraph (gg)(i) by reason of being the independent manager or director of a “special purpose entity” affiliated with Borrower shall not be disqualified from serving as an Independent Director of any Borrower or Parent if such individual is either (i) a Professional Independent Director or (ii) the fees that such individual earns from serving as Independent Director of Affiliates of any Borrower or Parent in any given year constitute in the aggregate less than five percent (5%) of such individual’s annual income for that year; or
(hh)    fail to be formed and organized as a limited liability company under the laws of the State of Delaware.



5


Exhibit D
Insurance
(a)    Property Insurance. For so long as any Obligation is outstanding, Borrower shall continuously maintain property insurance in accordance with the following provisions:
(i)    Special Perils Form/All Risk Property Coverage. Borrower shall maintain property insurance with respect to the Improvements, Fixtures and Personal Property insuring against any peril now or hereafter included within the classification “All Risks of Physical Loss,” including, without limitation, losses from fire, lightning, building collapse, debris removal, windstorm, hail, explosion, smoke, aircraft and vehicle damage, riot, vandalism and malicious mischief, falling objects, impact of vehicles and aircraft, weight of snow, ice or sleet, collapse, mudslide, sinkhole, subsidence, tsunami, water damage and sprinkler leakage, in amounts at all times sufficient to prevent Borrower or Agent from becoming a co-insurer within the terms of the applicable law, but in any event such insurance shall be maintained in an amount equal to the full replacement cost of the Improvements, Fixtures and Personal Property. The term “replacement cost” means the actual replacement cost (without taking into account any depreciation and exclusive of excavations, footings and foundation, landscaping and paving) determined annually by an insurer, a recognized independent insurance agent or broker or an independent appraiser selected and paid by Borrower. The policy shall include an agreed amount endorsement or a waiver of the coinsurance requirement and an inflation guard endorsement.
(ii)    Flood and Mudslide. Flood and mudslide insurance in amount equal to the lesser of (1) the amount required for one hundred percent (100%) of the full replacement value of the Improvements, Fixtures and Personal Property, with coinsurance clause if any, only as acceptable to Agent, or (2) the maximum limit of coverage available with respect to the Property under the Federal Flood Insurance Program; provided that such flood and mudslide insurance shall not be required if Borrower shall provide Agent with evidence satisfactory to Agent that the Property is not situated within an area identified by the Secretary of Housing and Urban Development (or any other appropriate governmental department, agency, bureau, board, or instrumentality) as an area having special flood or mudslide hazard, and that no flood or mudslide insurance is required on the Property by any regulations under which the Agent is governed;
(iii)    Boiler and Machinery Coverage. Borrower shall maintain broad form, replacement cost basis boiler and machinery insurance (without exclusion for explosion) covering all boilers or other pressure vessels, machinery, equipment and air conditioning or heating units located in, on or about the Property and insurance against physical loss, rental loss, extra expense, expediting loss and loss of occupancy or use arising from any breakdown in such amounts as are generally required by institutional lenders for properties comparable to the Property.
(iv)    Rent Loss/Business Interruption/Extra Expense. Borrower shall maintain business interruption and/or loss of “rental income” insurance in an amount

1

sufficient to avoid any co-insurance penalty and to provide proceeds that will cover a period of not less than twelve (12) months from the date of casualty or loss, the term “rental income” to mean the sum of (i) the total then ascertainable rents escalations and all other recurring sums payable under the leases affecting the subject property and (ii) the total ascertainable amount of all other amounts to be received by Borrower from third parties which are the legal obligation of the tenants, reduced to the extent such amounts would not be received because of operating expenses not incurred during a period of non-occupancy to that portion of the subject property then not being occupied. The policy shall include an agreed amount endorsement or a waiver of the coinsurance requirement.
(v)    Building Ordinance or Law. Borrower shall maintain building ordinance coverage in amount of the replacement cost.
(vi)    Builder’s Risk. Borrower shall maintain at all times during which structural construction, repair or alterations are being made with respect to the Property (1) reasonable liability insurance, to be determined by the scale and type of work being performed, to be required of all contractors involved in the work, to be primary and noncontributory to coverage provided by or under the terms or provisions of the commercial general liability insurance policy described in Section 5.12(b)(i) below, and (2) the insurance provided for in Section 5.12(a)(i) above written on a builder’s risk completed value form (a) on a non-reporting basis, (b) against all risks of physical loss, including earthquake and flood, (c) including permission to occupy the subject property, and (d) with an agreed amount endorsement (including soft costs), specifications, blueprints/models, demolition, increased cost of construction and rental interruption for delayed opening as pertinent, waiving co-insurance provisions.
(vii)    Terrorism Coverage. In the event that such coverage with respect to terrorist acts is not included as part of the insurance policy required by Section 5.12(a)(i) above, coverage against loss or damage by terrorist acts in an amount equal to one hundred percent (100%) of the full replacement value of the Improvements, Fixtures and Personal Property, with a co-insurance clause, if any, only as acceptable to Agent.
(b)    Liability Insurance. For so long as any Obligation is outstanding, Borrower shall continuously maintain liability insurance in accordance with the following provisions:
(i)    Commercial General Liability Insurance. Borrower shall maintain commercial general liability insurance, including bodily injury and property damage liability insurance against any and all claims, including all legal liability to the extent insurable and imposed upon Agent and all court costs and attorneys’ fees and expenses, arising out of or connected with the possession, use, leasing, operation, maintenance or condition of the subject property in the minimum amount of $5,000,000 per occurrence and annual aggregate. A combination of primary and umbrella/excess liability insurance policies can be obtained to satisfy these liability limits requirements. Such liability insurance must be occurrence-based coverage, rather than claims made coverage. This insurance must stand on its own with no shared participation or proration and be on a following form basis.

2

(ii)    Liquor Liability/Dram Shop. If alcoholic beverages are sold or served at the Property, by Borrower or tenants, Borrower shall maintain dram shop, host liquor liability of liquor liability coverage of at least Ten Million Dollars ($10,000,000) per occurrence and annual aggregate. The combination of primary and umbrella/excess liability policies can be obtained to satisfy these liability limits requirements.
(iii)    Automobile. Borrower shall maintain automobile liability insurance if over the road vehicles, whether owned, hired or non-owned, are operated in conjunction with the Property. The combination of the primary automobile liability and applicable umbrella/excess liability must equal a minimum of $1,000,000 combined single limit and $2,000,000 annual aggregate.
(iv)    Intentionally Omitted.
(c)    Additional Insurance. Borrower shall maintain such other insurance with respect to Borrower and the subject property against loss or damage of the kinds from time to time required by Agent loan class requirements to the extent such additional insurance is for perils and in amounts customarily required by institutional lenders for properties or commercial activities comparable to the Property or commercial activities and to the extent such other insurance is available at commercially reasonable rates.
(d)    Insurance Company Rating/Qualification. The insurance company or companies issuing the policies required hereunder (each a “Policy”, and collectively the “Policies”) each must be a U.S. domestic insurance standard stock company or nonparticipating mutual company that is a primary insurer and has a current general policy rating of A or better and a current financial size category of VIII or better by A.M. Best Company, Inc. All insurers must be licensed and in good standing in the state in which the Property is located and otherwise be acceptable to Agent.
(e)    Named Insured; Additional Insured; Loss Payable. All Policies shall name Borrower as the insured. Each Policy, except Workers Compensation, shall name Agent as an additional insured. Each Policy referred to in Section 5.12(a) must provide that all proceeds be payable to Agent and shall contain a deductible of not more than $25,000 (earth movement and flood will vary with the location of the Property and may exceed that limit) or as otherwise acceptable to Agent. Each Policy referred to in Section 5.12(b), except for Worker’s Compensation, must be written on an occurrence form basis.
(f)    Required Provisions. All Policies shall contain: (1) the agreement of the insurer to give Agent at least thirty (30) days notice prior to cancellation or expiration and at least ten (10) days notice on non-payment of premium; (2) a waiver of subrogation rights against Agent and, if available, Borrower; (3) an agreement that such Policies are primary and non-contributing with any insurance that may be carried by Agent; (4) a statement that the insurance shall not be invalidated should any insured waive in writing prior to a loss any or all right of recovery against any party for loss accruing to the property described in the Policy; and (5) if obtainable, a provision that no act or omission of Borrower shall affect or limit the obligation of the insurance carrier to pay the amount of any loss sustained. As of the date hereof, and subject to any changes in such

3

requirements which Agent may, in its sole discretion, make from time to time pursuant to its rights under this Section 5.12(f), each Policy shall contain a mortgagee’s Loss Payable endorsement, “Lender Clause”, or other non contributory mortgagee clause of similar form and substance acceptable to Agent in favor of Agent as a first mortgagee.



4


Exhibit E
Allocated Loan Amount


Hotel
Keys
Proposed Allocated Loan Amounts
HATP Spokane
400
$18,600,000
Salt Lake
393
$16,000,000
Port Angeles
186
$8,200,000
Pasco
279
$8,400,000
Eureka
175
$5,300,000
Richland
149
$4,695,000
Redding
192
$4,000,000
Coos Bay
145
$2,705,000
Bend
75
$2,700,000
Boise
182
$3,300,000
Post Falls
163
$2,000,000
Olympia
192
$4,100,000
Total
2,531
$80,000,000




1


Exhibit F
Property Improvement Plan and Budget
MUFASA - ESTIMATED CAPEX SPENDING SCHEDULE
25,154,734
2,754,521
2,449,972
9,301,618
12,056,139
25,154,734
10,648,623
Bucket 1
Bucket 2
Bucket 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Entity/
Property
Number
Name
Description
2015
Bucket 1
Bucket 2
Bucket 3
December
2014
January
2015
February
2015
March
2015
April
2015
May
2015
June
2015
July
2015
August
2015
September
2015
October
2015
November
2015
December
2015
January
2016
February
2016
March
2016
April
2016
804
HATP
PTAC - Guest Room
37,500
37,500
 
 
 
 
 
 
37,500
 
 
 
 
 
 
 
 
 
 
 
 
804
HATP
Elevator Car Refurbishment
104,700
62,820
41,880
 
 
 
62,820
 
13,960
 
13,960
 
 
13,960
 
 
 
 
 
 
 
804
HATP
400 New Telephones
50,354
50,354
 
 
 
 
 
 
50,354
 
 
 
 
 
 
 
 
 
 
 
 
804
HATP
Corridor Renovation - RL
420,000
 
231,000
189,000
 
 
 
 
105,000
 
 
 
63,000
63,000
63,000
63,000
63,000
 
 
 
 
804
HATP
Design
134,200
134,200
 
 
 
 
33,550
33,550
33,550
33,550
 
 
 
 
 
 
 
 
 
 
 
804
HATP
Room Remodel - RL
3,323,600
 
1,246,350
2,077,250
 
 
 
 
830,900
 
 
 
415,450
415,450
415,450
415,450
415,450
415,450
 
 
 
804
HATP
Restaurant and Lounge Remodel - RL
500,000
 
187,500
312,500
 
 
 
 
125,000
 
 
 
62,500
62,500
62,500
62,500
62,500
62,500
 
 
 
804
HATP
Lobby Renovation - RL
829,000
 
310,875
518,125
 
 
 
 
207,250
 
 
 
103,625
103,625
103,625
103,625
103,625
103,625
 
 
 
804
HATP
Lighting to Banquet prefunction area - chandeliers
18,000
18,000
 
 
 
 
18,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
804
HATP
Suites - Bathrooms & misc.
25,000
 
9,375
15,625
 
 
 
 
6,250
 
 
 
3,125
3,125
3,125
3,125
3,125
3,125
 
 
 
804
HATP
Glass replacement - broken seals
50,000
 
 
50,000
 
 
 
 
 
 
 
 
 
50,000
 
 
 
 
 
 
 
804
HATP
Restaurant Restroom Remodel
50,000
 
18,750
31,250
 
 
 
 
12,500
 
 
 
6,250
6,250
6,250
6,250
6,250
6,250
 
 
 
804
HATP
Atrium & Windows Roof 2015
150,000
 
150,000
 
 
 
 
 
75,000
18,750
18,750
18,750
18,750
 
 
 
 
 
 
 
 
804
HATP
Exterior improvements - RL
500,000
 
500,000
 
 
 
 
 
125,000
75,000
75,000
75,000
75,000
75,000
 
 
 
 
 
 
 
804
HATP
Updated Credit Card Terminals (PMS, POS)
7,755
7,755
 
 
 
 
7,755
 
 
 
 
 
 
 
 
 
 
 
 
 
 
804
HATP
Lobby Display Panels
15,250
15,250
 
 
 
 
15,250
 
 
 
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
Vacuum
2,300
2,300
 
 
 
 
2,300
 
 
 
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
Quarry Tile Flooring
21,424
21,424
 
 
 
 
21,424
 
 
 
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
Outdoor Furniture Allowance
10,200
10,200
 
 
 
 
 
 
10,200
 
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
"Newer Model" used pontoon boat as rental/ROI $2
25,000
25,000
 
 
 
 
 
 
25,000
 
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
Pool Furniture
5,606
5,606
 
 
 
 
 
 
5,606
 
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
Van Replacement
28,750
28,750
 
 
 
 
 
28,750
 
 
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
Commercial Ice machine - River Grill
7,300
7,300
 
 
 
 
7,300
 
 
 
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
River Grill upgrades
10,000
10,000
 
 
 
 
10,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
Guest Room & Rest. Broken window seal(s) replace
10,000
10,000
 
 
 
 
 
10,000
 
 
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
Paint Bldg Ext. \ Fix dry rot balconies & stairways
150,000
 
150,000
 
 
 
 
 
37,500
28,125
28,125
28,125
28,125
 
 
 
 
 
 
 
 
814
Templin's
Design
22,500
22,500
 
 
 
 
5,625
5,625
5,625
5,625
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
Bar/Lounge & Restaurant Renovation
150,000
 
37,500
112,500
 
 
 
 
37,500
 
 
 
 
22,500
22,500
22,500
22,500
22,500
 
 
 
814
Templin's
Corridor Renovation - Lighting upgrade
88,000
 
44,000
44,000
 
 
 
 
44,000
 
 
 
 
11,000
11,000
11,000
11,000
 
 
 
 
814
Templin's
Meeting Rooms Renovation
159,176
 
39,794
119,382
 
 
 
 
39,794
 
 
 
 
23,876
23,876
23,876
23,876
23,876
 
 
 
814
Templin's
Public Restroom Renovation
59,357
 
59,357
 
 
 
 
 
14,839
11,129
11,129
11,129
11,129
 
 
 
 
 
 
 
 
814
Templin's
Landscaping
50,000
 
50,000
 
 
 
 
 
 
50,000
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
Updated Credit Card Terminals (PMS, POS)
3,361
3,361
 
 
 
 
3,361
 
 
 
 
 
 
 
 
 
 
 
 
 
 
814
Templin's
Lobby Display Panels
13,625
13,625
 
 
 
 
13,625
 
 
 
 
 
 
 
 
 
 
 
 
 
 
816
Salt Lake
Vacuum - Housekeeping
1,438
1,438
 
 
 
 
1,438
 
 
 
 
 
 
 
 
 
 
 
 
 
 
816
Salt Lake
Van Replacement
40,000
40,000
 
 
 
 
 
40,000
 
 
 
 
 
 
 
 
 
 
 
 
 
816
Salt Lake
Carpet Shampooer
3,910
3,910
 
 
 
 
3,910
 
 
 
 
 
 
 
 
 
 
 
 
 
 
816
Salt Lake
Mechanical - Cooling Tower
57,500
57,500
 
 
 
 
 
34,500
11,500
11,500
 
 
 
 
 
 
 
 
 
 
 
816
Salt Lake
Kitchen Compactor
25,000
25,000
 
 
 
 
25,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
816
Salt Lake
Room Cart - Housekeeping
8,625
8,625
 
 
 
 
8,625
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        

1


Entity/
Property
Number
Name
Description
2015
Bucket 1
Bucket 2
Bucket 3
December
2014
January
2015
February
2015
March
2015
April
2015
May
2015
June
2015
July
2015
August
2015
September
2015
October
2015
November
2015
December
2015
January
2016
February
2016
March
2016
April
2016
816
Salt Lake
Guest Bathroom Remodel - Tower Rooms
150,000
 
37,500
112,500
 
 
 
 
37,500
 
 
 
 
18,750
18,750
18,750
18,750
18,750
18,750
 
 
816
Salt Lake
Room Remodel
1,585,372
 
396,343
1,189,029
 
 
 
 
396,343
 
 
 
 
198,172
198,172
198,172
198,172
198,172
198,172
 
 
816
Salt Lake
Design
115,000
115,000
 
 
 
 
28,750
28,750
28,750
28,750
 
 
 
 
 
 
 
 
 
 
 
816
Salt Lake
Lobby Remodel (limited scope) / Gift Shop area
175,000
 
109,375
65,625
 
 
 
 
43,750
 
21,875
21,875
21,875
21,875
21,875
21,875
 
 
 
 
 
816
Salt Lake
13th Floor Meeting Rooms Renovation
1,442,500
 
631,093
811,407
 
 
 
 
 
360,625
 
135,234
135,234
135,234
135,234
135,234
135,234
135,234
135,234
 
 
816
Salt Lake
Restaurant Renovation
170,392
 
106,495
63,897
 
 
 
 
42,598
 
21,299
21,299
21,299
21,299
21,299
21,299
 
 
 
 
 
816
Salt Lake
Sliding door replacement w/energy & comfort
200,000
200,000
 
 
 
 
 
50,000
25,000
25,000
25,000
25,000
25,000
25,000
 
 
 
 
 
 
 
816
Salt Lake
13th Floor chairs - 300
38,460
 
 
38,460
 
 
 
 
 
 
 
 
 
38,460
 
 
 
 
 
 
 
816
Salt Lake
13th Floor start up china/glass/silver, equip, ice
112,000
 
 
112,000
 
 
 
 
 
 
 
 
 
112,000
 
 
 
 
 
 
 
816
Salt Lake
Exterior Fence / Dr John Store
150,000
 
150,000
 
 
 
 
 
 
150,000
 
 
 
 
 
 
 
 
 
 
 
816
Salt Lake
Banquet prefunction area - ceiling
35,000
35,000
 
 
 
 
 
 
 
35,000
 
 
 
 
 
 
 
 
 
 
 
816
Salt Lake
Small meeting room renovation
25,000
 
25,000
 
 
 
 
 
6,250
6,250
6,250
6,250
 
 
 
 
 
 
 
 
 
816
Salt Lake
Landscaping
50,000
 
50,000
 
 
 
 
 
 
50,000
 
 
 
 
 
 
 
 
 
 
 
816
Salt Lake
Updated Credit Card Terminals (PMS, POS)
3,388
3,388
 
 
 
 
3,388
 
 
 
 
 
 
 
 
 
 
 
 
 
 
816
Salt Lake
Lobby Display Panels
13,625
13,625
 
 
 
 
13,625
 
 
 
 
 
 
 
 
 
 
 
 
 
 
821
Olympia
Banquets - Riser
9,200
9,200
 
 
 
 
9,200
 
 
 
 
 
 
 
 
 
 
 
 
 
 
821
Olympia
Corridor Artwork (installed)
2,400
 
1,200
1,200
 
 
 
 
600
 
 
 
600
300
300
300
300
 
 
 
 
821
Olympia
Corridor Light Sconces
5,616
 
2,808
2,808
 
 
 
 
1,404
 
 
 
1,404
702
702
702
702
 
 
 
 
821
Olympia
Corridor Vending Area Floor Tile
3,456
 
1,728
1,728
 
 
 
 
864
 
 
 
864
432
432
432
432
 
 
 
 
821
Olympia
Electrical Upgrades (GFI, additional outlet) & Dry
82,621
 
41,310
41,311
 
 
 
 
20,655
 
 
 
20,655
10,328
10,328
10,328
10,328
 
 
 
 
821
Olympia
3rd floor remodel - fitness/lift/Guest room conv.
449,000
 
224,500
224,500
 
 
 
 
112,250
 
 
 
112,250
56,125
56,125
56,125
56,125
 
 
 
 
821
Olympia
Hillside Restoration Project, Phases 2 & 3
140,000
 
70,000
70,000
 
 
 
 
 
 
 
70,000
 
 
 
70,000
 
 
 
 
 
821
Olympia
Room Remodel - Mod./ Lobby
1,345,504
 
672,752
672,752
 
 
 
 
336,376
 
 
 
336,376
168,188
168,188
168,188
168,188
 
 
 
 
821
Olympia
Design
101,000
101,000
 
 
 
 
25,250
25,250
25,250
25,250
 
 
 
 
 
 
 
 
 
 
 
821
Olympia
Lobby Televisions
5,000
5,000
 
 
 
 
 
5,000
 
 
 
 
 
 
 
 
 
 
 
 
 
821
Olympia
Meeting Rooms Renovation
391,792
 
195,896
195,896
 
 
 
 
 
97,948
 
 
97,948
48,974
48,974
48,974
48,974
 
 
 
 
821
Olympia
Van
43,000
43,000
 
 
 
 
 
43,000
 
 
 
 
 
 
 
 
 
 
 
 
 
821
Olympia
Stairwell carpet and vinyl
20,000
 
20,000
 
 
 
 
 
10,000
 
 
 
10,000
 
 
 
 
 
 
 
 
821
Olympia
Lighting - Cooridors
50,000
 
50,000
 
 
 
 
 
12,500
 
12,500
12,500
12,500
 
 
 
 
 
 
 
 
821
Olympia
Kitchen - ceiling tiles
5,000
5,000
 
 
 
 
5,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
821
Olympia
Glass replacement - broken seals
10,000
 
10,000
 
 
 
 
 
 
 
 
10,000
 
 
 
 
 
 
 
 
 
821
Olympia
Public Restroom Renovation
100,000
 
50,000
50,000
 
 
 
 
 
25,000
 
 
25,000
25,000
25,000
 
 
 
 
 
 
821
Olympia
Restaurant & Lounge Renovation
200,000
 
100,000
100,000
 
 
 
 
 
50,000
 
 
50,000
50,000
50,000
 
 
 
 
 
 
821
Olympia
Updated Credit Card Terminals (PMS, POS)
3,450
3,450
 
 
 
 
3,450
 
 
 
 
 
 
 
 
 
 
 
 
 
 
821
Olympia
Lobby Display Panels
13,625
13,625
 
 
 
 
13,625
 
 
 
 
 
 
 
 
 
 
 
 
 
 
831
Eureka
3rd Floor balcony beam header
30,000
 
30,000
 
 
 
 
 
15,000
5,000
5,000
5,000
 
 
 
 
 
 
 
 
 
831
Eureka
Parking Lot Updates (formerly General Landscapin
28,000
 
28,000
 
 
 
 
 
28,000
 
 
 
 
 
 
 
 
 
 
 
 
831
Eureka
Bar/Lounge Renovation
90,597
 
90,597
 
 
 
 
 
22,649
16,987
16,987
16,987
16,987
 
 
 
 
 
 
 
 
831
Eureka
Corridor Renovation
164,500
 
123,376
41,125
 
 
 
 
41,125
20,563
20,563
20,563
20,563
20,563
20,563
 
 
 
 
 
 
831
Eureka
Elevator - Modernization - Hydro
110,000
110,000
 
 
 
 
 
55,000
11,000
11,000
11,000
11,000
11,000
 
 
 
 
 
 
 
 
831
Eureka
Room Remodel - Mod.
422,500
 
105,625
316,875
 
 
 
 
 
105,625
 
 
 
63,375
63,375
63,375
63,375
63,375
 
 
 
831
Eureka
Design
40,500
40,500
 
 
 
 
10,125
10,125
10,125
10,125
 
 
 
 
 
 
 
 
 
 
 
831
Eureka
Meeting Rooms Renovation
133,700
 
33,425
100,275
 
 
 
 
 
33,425
 
 
 
20,055
20,055
20,055
20,055
20,055
 
 
 
831
Eureka
2" Asphalt Overlay (including preparation) (SqFt)
45,000
45,000
 
 
 
 
 
 
45,000
 
 
 
 
 
 
 
 
 
 
 
 
831
Eureka
Restripe Parking Spaces (SqFt)
9,779
9,779
 
 
 
 
 
 
9,779
 
 
 
 
 
 
 
 
 
 
 
 


2

Entity/
Property
Number
Name
Description
2015
Bucket 1
Bucket 2
Bucket 3
December
2014
January
2015
February
2015
March
2015
April
2015
May
2015
June
2015
July
2015
August
2015
September
2015
October
2015
November
2015
December
2015
January
2016
February
2016
March
2016
April
2016
831
Eureka
Public Restroom Renovation - Lobby
75,000
 
75,000
 
 
 
 
 
18,750
 
18,750
18,750
18,750
 
 
 
 
 
 
 
 
831
Eureka
Restaurant tables and chairs
10,000
10,000
 
 
 
 
 
10,000
 
 
 
 
 
 
 
 
 
 
 
 
 
831
Eureka
Guest room doors - refinish
30,000
 
 
30,000
 
 
 
 
 
 
 
 
 
 
30,000
 
 
 
 
 
 
831
Eureka
landscaping - sidewalk / trees
5,000
5,000
 
 
 
 
 
 
5,000
 
 
 
 
 
 
 
 
 
 
 
 
831
Eureka
Glass replacement - broken seals
10,000
 
10,000
 
 
 
 
 
10,000
 
 
 
 
 
 
 
 
 
 
 
 
831
Eureka
Updated Credit Card Terminals (PMS, POS)
3,433
3,433
 
 
 
 
3,433
 
 
 
 
 
 
 
 
 
 
 
 
 
 
831
Eureka
Lobby Display Panels
13,625
13,625
 
 
 
 
13,625
 
 
 
 
 
 
 
 
 
 
 
 
 
 
837
Pasco
Ice Machine
5,175
5,175
 
 
 
 
5,175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
837
Pasco
Faucet Replacement
42,000
 
21,000
21,000
 
 
 
 
10,500
 
 
 
10,500
5,250
5,250
5,250
5,250
 
 
 
 
837
Pasco
Shower Valve & Head, Tub Diverter, Tub Drain
61,380
 
30,690
30,690
 
 
 
 
15,345
 
 
 
15,345
7,673
7,673
7,673
7,673
 
 
 
 
837
Pasco
General Landscaping Allowance
30,000
 
30,000
 
 
 
 
 
 
30,000
 
 
 
 
 
 
 
 
 
 
 
837
Pasco
Restripe Parking Spaces (SqFt)
6,000
6,000
 
 
 
 
 
 
 
6,000
 
 
 
 
 
 
 
 
 
 
 
837
Pasco
Gable Roofing
38,000
38,000
 
 
 
 
 
 
 
38,000
 
 
 
 
 
 
 
 
 
 
 
837
Pasco
Bar/Lounge Renovation - Bin 20
154,276
 
154,276
 
 
 
 
 
38,569
23,141
23,141
23,141
23,141
23,141
 
 
 
 
 
 
 
837
Pasco
Corridor Renovation
279,000
 
139,500
139,500
 
 
 
 
69,750
 
 
 
69,750
34,875
34,875
34,875
34,875
 
 
 
 
837
Pasco
Design
57,500
57,500
 
 
 
 
14,375
14,375
14,375
14,375
 
 
 
 
 
 
 
 
 
 
 
837
Pasco
Room Remodel - Mod.
1,559,248
 
779,624
779,624
 
 
 
 
389,812
 
 
 
389,812
194,906
194,906
194,906
194,906
 
 
 
 
837
Pasco
Lobby Remodel
128,673
 
128,673
 
 
 
 
 
32,168
 
 
32,168
32,168
32,168
 
 
 
 
 
 
 
837
Pasco
2" Asphalt Overlay (including preparation) (SqFt)
112,500
112,500
 
 
 
 
 
 
 
112,500
 
 
 
 
 
 
 
 
 
 
 
837
Pasco
Automated Front Doors for Lobby
50,000
50,000
 
 
 
 
30,000
20,000
 
 
 
 
 
 
 
 
 
 
 
 
 
837
Pasco
Lighting - banquets
75,000
 
75,000
 
 
 
 
 
 
37,500
12,500
12,500
12,500
 
 
 
 
 
 
 
 
837
Pasco
Exterior improvements
380,000
 
380,000
 
 
 
 
 
 
95,000
57,000
57,000
57,000
57,000
57,000
 
 
 
 
 
 
837
Pasco
Lighting - Banquet prefunction area
25,000
 
25,000
 
 
 
 
 
 
12,500
4,167
4,167
4,167
 
 
 
 
 
 
 
 
837
Pasco
Updated Credit Card Terminals (PMS, POS)
7,318
7,318
 
 
 
 
7,318
 
 
 
 
 
 
 
 
 
 
 
 
 
 
837
Pasco
Lobby Display Panels
13,625
13,625
 
 
 
 
13,625
 
 
 
 
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
Podium
2,588
2,588
 
 
 
 
2,588
 
 
 
 
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
Crabhouse elevator Cab
13,538
13,538
 
 
 
 
6,769
1,354
1,354
1,354
1,354
1,354
 
 
 
 
 
 
 
 
 
839
Port Angeles
Trash Compactor
20,000
20,000
 
 
 
 
20,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
Exterior Paint
153,450
 
153,450
 
 
 
 
 
38,363
57,544
57,544
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
Public Restroom Renovation
90,000
 
90,000
 
 
 
 
 
22,500
 
33,750
16,875
16,875
 
 
 
 
 
 
 
 
839
Port Angeles
Pool Enclosure - Tent
145,000
 
145,000
 
 
 
 
58,000
 
29000
29,000
29,000
 
 
 
 
 
 
 
 
 
839
Port Angeles
Design
31,550
31,550
 
 
 
 
7,888
7,888
7,888
7,888
 
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
Patio fire pits and furniture
19,000
 
19,000
 
 
 
 
 
19,000
 
 
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
Hotel Landscaping
9,000
 
9,000
 
 
 
 
 
9,000
 
 
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
Lighting - Cooridors
35,000
 
35,000
 
 
 
 
 
8,750
13125
13,125
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
Glass replacement - broken seals
20,000
 
20,000
 
 
 
 
 
20,000
 
 
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
landscaping - hanging pots
10,000
 
10,000
 
 
 
 
 
10,000
 
 
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
Door Locks
58,000
58,000
 
 
 
 
 
 
29,000
14,500
14,500
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
Updated Credit Card Terminals (PMS, POS)
3,437
3,437
 
 
 
 
3,437
 
 
 
 
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
Lobby Display Panels
13,625
13,625
 
 
 
 
13,625
 
 
 
 
 
 
 
 
 
 
 
 
 
 
840
Redding
Structural Repair/Stucco Exterior Slump Stone
200,000
 
200,000
 
 
 
 
 
50,000
75,000
75,000
 
 
 
 
 
 
 
 
 
 
840
Redding
Laundry - Dryer
14,088
14,088
 
 
 
 
14,088
 
 
 
 
 
 
 
 
 
 
 
 
 
 
840
Redding
Washer
22,540
22,540
 
 
 
 
22,540
 
 
 
 
 
 
 
 
 
 
 
 
 
 
840
Redding
Chairs
10,000
10,000
 
 
 
 
10,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3


Entity/
Property
Number
Name
Description
2015
Bucket 1
Bucket 2
Bucket 3
December
2014
January
2015
February
2015
March
2015
April
2015
May
2015
June
2015
July
2015
August
2015
September
2015
October
2015
November
2015
December
2015
January
2016
February
2016
March
2016
April
2016
840
Redding
Cooling Towers (2)
45,000
45,000
 
 
 
 
 
13,500
15,750
15,750
 
 
 
 
 
 
 
 
 
 
 
840
Redding
Corridor Renovation
192,000
 
96,000
96,000
 
 
 
 
48,000
 
 
 
48,000
24,000
24,000
24,000
24,000
 
 
 
 
840
Redding
Design
25,000
25,000
 
 
 
 
6,250
6,250
6,250
6,250
 
 
 
 
 
 
 
 
 
 
 
840
Redding
Room Remodel - Mod.
774,280
 
387,140
387,140
 
 
 
 
193,570
 
 
 
193,570
96,785
96,785
96,785
96,785
 
 
 
 
840
Redding
Lobby Remodel
38,248
38,248
 
 
 
 
 
 
9,562
 
9,562
9,562
9,562
 
 
 
 
 
 
 
 
840
Redding
Restaurant Remodel
73,500
 
73,500
 
 
 
 
 
18,375
 
18,375
18,375
18,375
 
 
 
 
 
 
 
 
840
Redding
Marquis & Monument sign front entrance
25,000
 
25,000
 
 
 
 
 
15,000
10,000
 
 
 
 
 
 
 
 
 
 
 
840
Redding
Furniture - Patios and balconies
15,000
15,000
 
 
 
 
15,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
840
Redding
lighting - exterior building
10,000
 
10,000
 
 
 
 
 
10,000
 
 
 
 
 
 
 
 
 
 
 
 
840
Redding
Sunscreen between buildings & Firepits
30,000
 
30,000
 
 
 
 
 
30,000
 
 
 
 
 
 
 
 
 
 
 
 
840
Redding
landscaping
30,000
 
30,000
 
 
 
 
 
30,000
 
 
 
 
 
 
 
 
 
 
 
 
840
Redding
Glass replacement - broken seals
10,000
10,000
 
 
 
 
10,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
840
Redding
Lounge furniture
20,000
20,000
 
 
 
 
20,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
840
Redding
Updated Credit Card Terminals (PMS, POS)
3,835
3,835
 
 
 
 
3,835
 
 
 
 
 
 
 
 
 
 
 
 
 
 
840
Redding
Lobby Display Panels
13,625
13,625
 
 
 
 
13,625
 
 
 
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Roll a way - Housekeeping
2,300
2,300
 
 
 
 
2,300
 
 
 
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Foot Bridge clean up
9,000
 
9,000
 
 
 
 
 
 
9,000
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Convert cooling system from 2 pipe
80,000
 
80,000
 
 
 
 
40,000
40,000
 
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Repaint the building & upgrade façade
162,500
 
162,500
 
 
 
 
 
40,625
121,875
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Corridor Renovation
141,500
 
35,375
106,125
 
 
 
 
35,375
 
 
 
 
42,450
21,225
21,225
21,225
 
 
 
 
841
Richland
Design
45,000
45,000
 
 
 
 
11,250
11,250
11,250
11,250
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Room Remodel - Mod.
736,000
 
184,000
552,000
 
 
 
 
184,000
 
 
 
 
220,800
110,400
110,400
110,400
 
 
 
 
841
Richland
General Landscaping Allowance
61,600
 
61,600
 
 
 
 
 
36,960
24,640
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Outdoor Furniture Allowance
33,600
 
33,600
 
 
 
 
 
33,600
 
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Laundry - Dryer
7,046
7,046
 
 
 
 
7,046
 
 
 
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Washer
11,270
11,270
 
 
 
 
11,270
 
 
 
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Meeting Rooms Renovation
35,000
 
35,000
 
 
 
 
 
8,750
 
 
8,750
8,750
8,750
 
 
 
 
 
 
 
841
Richland
Restaurant Remodel
90,353
 
90,353
 
 
 
 
 
22,588
 
 
22,588
22,588
22,588
 
 
 
 
 
 
 
841
Richland
Glass replacement - broken seals
10,000
10,000
 
 
 
 
10,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Outdoor Lighting Allowance
75,000
 
75,000
 
 
 
 
18,750
28,125
28,125
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Updated Credit Card Terminals (PMS, POS)
2,576
2,576
 
 
 
 
2,576
 
 
 
 
 
 
 
 
 
 
 
 
 
 
841
Richland
Lobby Display Panels
13,625
13,625
 
 
 
 
13,625
 
 
 
 
 
 
 
 
 
 
 
 
 
 
847
Bend
Reroof west & north wings of hotel - 3 tab
50,000
50,000
 
 
 
 
 
 
 
50,000
 
 
 
 
 
 
 
 
 
 
 
847
Bend
Install Laundry Dumbwaiter
32,000
32,000
 
 
 
 
16,000
5,333
5,333
5,333
 
 
 
 
 
 
 
 
 
 
 
847
Bend
Signage (room numbers & directionals)
1,080
1,080
 
 
 
 
1,080
 
 
 
 
 
 
 
 
 
 
 
 
 
 
847
Bend
Exterior Lighting Improvements
14,000
 
14,000
 
 
 
 
 
 
14,000
 
 
 
 
 
 
 
 
 
 
 
847
Bend
General Landscaping Allowance
20,000
 
20,000
 
 
 
 
 
12,000
8,000
 
 
 
 
 
 
 
 
 
 
 
847
Bend
Lobby / Back office / breakfast area Remodel
39,331
 
39,331
 
 
 
9,833
9,833
9,833
9,833
 
 
 
 
 
 
 
 
 
 
 
847
Bend
Vinyl siding and metal roofing
248,000
 
248,000
 
 
 
 
 
62,000
93,000
93,000
 
 
 
 
 
 
 
 
 
 
847
Bend
Room Remodel
259,500
 
64,875
194,625
 
 
 
 
 
 
64,875
 
 
 
64,875
64,875
64,875
 
 
 
 
847
Bend
Design
6,000
6,000
 
 
 
 
1,500
1,500
1,500
1,500
 
 
 
 
 
 
 
 
 
 
 
847
Bend
Main Sign replacement - Inn & Suites
18,000
 
18,000
 
 
 
 
 
10,800
7,200
 
 
 
 
 
 
 
 
 
 
 
847
Bend
Updated Credit Card Terminals (PMS, POS)
1,189
1,189
 
 
 
 
1,189
 
 
 
 
 
 
 
 
 
 
 
 
 
 
847
Bend
Lobby Display Panels
13,625
13,625
 
 
 
 
13,625
 
 
 
 
 
 
 
 
 
 
 
 
 
 


4


Entity/
Property
Number
Name
Description
2015
Bucket 1
Bucket 2
Bucket 3
December
2014
January
2015
February
2015
March
2015
April
2015
May
2015
June
2015
July
2015
August
2015
September
2015
October
2015
November
2015
December
2015
January
2016
February
2016
March
2016
April
2016
848
Boise
Room Remodel - Mod.
877,900

 
351,160
526,740
 
 
 
 
219,475

 
 
 
131,685

131,685

131,685

131,685

131,685

 
 
 
 
848
Boise
Carpet Shampooer - Housekeeping
1,955

1,955
 
 
 
 
1,955

 
 
 
 
 
 
 
 
 
 
 
 
 
 
848
Boise
Linen Cart - Housekeeping
1,725

1,725
 
 
 
 
1,725

 
 
 
 
 
 
 
 
 
 
 
 
 
 
848
Boise
Van replacement
28,750

28,750
 
 
 
 
 
28,750

 
 
 
 
 
 
 
 
 
 
 
 
 
848
Boise
Bar/Lounge/Restaurant Remodel
124,170

 
124,170
 
 
 
 
 
31,042

23,282

23,282

23,282

23,282

 
 
 
 
 
 
 
 
848
Boise
Main Lobby Doors (automatic)
20,000

 
20,000
 
 
 
 
 
 
20,000

 
 
 
 
 
 
 
 
 
 
 
848
Boise
Corridor Renovation
173,600

 
69,440
104,160
 
 
 
 
43,400

 
 
 
26,040

26,040

26,040

26,040

26,040

 
 
 
 
848
Boise
Design
63,400

63,400
 
 
 
 
15,850

15,850

15,850

15,850

 
 
 
 
 
 
 
 
 
 
 
848
Boise
General Landscaping Allowance
30,000

 
30,000
 
 
 
 
 
18,000

12,000

 
 
 
 
 
 
 
 
 
 
 
848
Boise
Meeting Rooms Renovation
170,000

 
170,000
 
 
 
 
 
42,500

 
42,500

42,500

42,500

 
 
 
 
 
 
 
 
848
Boise
Pool Furniture
15,429

 
15,429
 
 
 
 
 
15,429

 
 
 
 
 
 
 
 
 
 
 
 
848
Boise
Resurface Pool Bottom & Deck, Signage
21,569

 
21,569
 
 
 
 
 
21,569

 
 
 
 
 
 
 
 
 
 
 
 
848
Boise
Public Restroom Update
50,394

 
50,394
 
 
 
 
 
12,599

 
12,599

12,599

12,599

 
 
 
 
 
 
 
 
848
Boise
Main Lobby lighting/paint/sound
37,500

 
37,500
 
 
 
 
 
22,500

15,000

 
 
 
 
 
 
 
 
 
 
 
848
Boise
Glass replacement - broken seals
10,000

 
10,000
 
 
 
 
 
10,000

 
 
 
 
 
 
 
 
 
 
 
 
848
Boise
Updated Credit Card Terminals (PMS, POS)
3,361

3,361
 
 
 
 
3,361

 
 
 
 
 
 
 
 
 
 
 
 
 
 
848
Boise
Lobby Display Panels
13,625

13,625
 
 
 
 
13,625

 
 
 
 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
PTAC - Guest Room
7,000

7,000
 
 
 
 
 
 
7,000

 
 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Banquet Risers / tables
7,590

7,590
 
 
 
 
7,590

 
 
 
 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Vacuum - Housekeeping
4,263

4,263
 
 
 
 
4,263

 
 
 
 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Banquets - Chairs
22,425

22,425
 
 
 
 
22,425

 
 
 
 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Exterior Paint
151,715

 
151,715
 
 
 
 
 
91,029

60,686

 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Room Cart - Housekeeping
18,975

18,975
 
 
 
 
18,975

 
 
 
 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Outdoor Lighting Allowance
15,000

 
15,000
 
 
 
 
 
15,000

 
 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Design
8,350

8,350
 
 
 
 
2,088

2,088

2,088

2,088

 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Landscaping around parking lot
30,000

 
30,000
 
 
 
 
 
18,000

12,000

 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Upgrade lighting on exterior corridiors
20,000

 
20,000
 
 
 
 
 
20,000

 
 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Meeting Rooms Renovation
38,441

 
38,441
 
 
 
 
 
19,221

 
19,221

 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Public Restrooms Remodel
9,794

 
9,794
 
 
 
 
 
 
9,794

 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Restaurant Remodel
32,636

 
32,636
 
 
 
 
 
 
16,318

16,318

 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Replace EIFS at main entrance
48,000

 
48,000
 
 
 
 
 
 
 
28,800

19,200

 
 
 
 
 
 
 
 
 
849
Coos Bay
Main Sign replacement - Inn & Suites
25,000

 
25,000
 
 
 
 
 
15,000

10,000

 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Updated Credit Card Terminals (PMS, POS)
1,982

1,982
 
 
 
 
1,982

 
 
 
 
 
 
 
 
 
 
 
 
 
 
849
Coos Bay
Lobby Display Panels
13,625

13,625
 
 
 
 
13,625

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Totals
25,154,734

2,449,972
12,056,139
10,648,623
-

-

818,349

634,270

5,515,667

2,470,427

955,799

840,523

2,893,468

2,813,229

2,375,411

2,262,848

2,149,674

1,072,912

352,156

-
-
 
 
Cumulative Capital Draw
 
 
 
 
 
 
818,349

1,452,619

6,968,286

9,438,713

10,394,512

11,235,035

14,128,503

16,941,731

19,317,142

21,579,991

23,729,665

24,802,577

25,154,733

 
 
-
 
Contingency
1,038,243

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingency as a % of Remaining Total
4.13
%
 
 
 
4.13
%
4.13
%
4.27
%
4.38
%
5.71
%
6.61
%
7.03
%
7.46
%
9.42
%
12.64
%
17.79
%
29.04
%
72.86
%
294.82
%
116329747.74
%
 
 
 
 
Grand Total
26,192,977

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Environmental Issues Funded by a different process
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
837
Pasco
Environmental Issue
90,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
839
Port Angeles
Environmental Issue
350,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
440,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


5


Exhibit 21


RED LION HOTELS CORPORATION
List of Subsidiaries of Red Lion Hotels Corporation as of March 8, 2019

 
 
 
Name
 
State of Organization
 
 
 
Red Lion Hotels Holdings, Inc. (1)
 
Delaware
Red Lion Hotels Franchising, Inc. (1)
 
Washington
Red Lion Hotels Canada Franchising, Inc. (1)
 
Washington
Red Lion Hotels Management, Inc. (1)
 
Washington
Red Lion Hotels Limited Partnership (1)
 
Delaware
RL Baltimore LLC (1)
 
Delaware
WestCoast Hotel Properties, Inc. (1)
 
Washington
Red Lion Anaheim, LLC (1)
 
Washington
RLabs, Inc. (1)
 
Washington
RL Venture LLC (2)
 
Delaware
RLS Atla Venture LLC (3)
 
Delaware
RLS DC Venture LLC (4)
 
Delaware

 
 
(1)
Each of these subsidiaries is directly or indirectly wholly owned by Red Lion Hotels Corporation.
 
 
(2)
Red Lion Hotels Corporation owns 55% of the member interests in this limited liability company, which wholly owns one Delaware limited liability company that wholly owns 2 Delaware limited liability companies, each of which holds one hotel property.
 
 
(3)
Red Lion Hotels Corporation owns 55% of the member interests in this limited liability company, which wholly owns one Delaware limited liability company that holds one hotel property.
 
 
(4)
Red Lion Hotels Corporation owns 55% of the member interests in this limited liability company, which wholly owns one Delaware limited liability company that holds one hotel property.
 
 





Exhibit 23




Consent of Independent Registered Public Accounting Firm

Red Lion Hotels Corporation
Denver, Colorado

We hereby consent to the incorporation by reference in the Registration Statement on Form S­3 (No. 33-133287) and Form S-8 (No. 333-135561, No. 333-151989, No. 333-160485 and No. 333-204646) of Red Lion Hotels Corporation of our reports dated March 8, 2019, relating to the consolidated financial statements, and the effectiveness of Red Lion Hotels Corporation’s internal control over financial reporting, which appear in this Form 10-K. Our report contains an explanatory paragraph regarding change in accounting method related to revenue.

BDO USA, LLP
Spokane, Washington

March 8, 2019

































Exhibit 31.1
RED LION HOTELS CORPORATION
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)
I, Gregory T. Mount, certify that:
1.
I have reviewed this annual report on Form 10-K of Red Lion Hotels Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 8, 2019

/s/ Gregory T. Mount
Gregory T. Mount
President and Chief Executive Officer
(Principal Executive Officer)




Exhibit 31.2
RED LION HOTELS CORPORATION
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)
I, Julie Shiflett, certify that:
1.
I have reviewed this annual report on Form 10-K of Red Lion Hotels Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 8, 2019

/s/ Julie Shiflett
Julie Shiflett
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)




Exhibit 32.1
RED LION HOTELS CORPORATION
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(b)
In connection with the annual report of Red Lion Hotels Corporation (the “Company”) on Form 10-K for the period ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory T. Mount, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

March 8, 2019
 
/s/ Gregory T. Mount
Gregory T. Mount
President and Chief Executive Officer
(Principal Executive Officer)




Exhibit 32.2
RED LION HOTELS CORPORATION
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(b)
In connection with the annual report of Red Lion Hotels Corporation (the “Company”) on Form 10-K for the period ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Julie Shiflett, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

March 8, 2019
 
/s/ Julie Shiflett
Julie Shiflett
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)